"Sir, I would say, "Old
World Order" to return.
To understand/explain better: A very easy way
to view this "order", would be to simply say that
the American Experience is reaching the end! As we know,
world war two left Europe and the world economy destroyed.
Many thinkers of that period thought that the world was about
to enter a decades long depression as it worked to rebuild real
assets lost in the conflict. It was this war that so impacted the
idea of looking positively toward the future. The past ideals of
building solid, enduring, long term wealth were lost in the
conception of a whole generation possibly doing without! In
these fertile grounds people escaped reality with the New Idea
of long term debt, being held as a money asset. Yes, here was
born the American Experience that comes to maturity today."
_________
In 1933, President Roosevelt issued Executive Order 6102 "forbidding
the hoarding of gold coin, gold bullion, and gold certificates within the
continental United States." That restriction stood for 41 years until it
was lifted in 1974 by an act of Congress "to permit United States
citizens to purchase, hold, sell, or otherwise deal with gold in the United
States or abroad."
In 1935, the United States Treasury had 9,000 tonnes of gold, 8,998 to be
exact. Then, in 1971, when President Nixon officially closed the gold window,
the US Treasury was back down to 9,000 tonnes, 9,070 to be exact. In the
middle of that 36-year span, US Treasury gold hit its peak at 20,663 tonnes.
![](http://www.24hgold.com/24hpmdata/articles/img/FOFOAFiat%2033-2014-06-27-002.gif)
![](../style/all/img/bouton/Zoom_in_6.png)
I know I haven't written a post in a while, but my plan right now is to write
a series of posts, this being the first, that will hopefully paint a nice big
picture for you of what Freegold is all about. I've had the idea for a while
now to write a post about what, precisely, constitutes the overvaluation of
the dollar today, as that relates directly to the deflation versus currency
collapse/hyperinflation debate.
In order to see how the dollar can collapse against the physical plane of
real goods and services, you must understand how and why it is overvalued
today, not just in the monetary plane with its monumental overhang of
"financial savings", but also in the very real physical plane of
production and trade. In the end, you might be surprised to discover how the
dollar would still collapse in value even if we could hypothetically erase,
block or sterilize the massive overhang of dollars and "financial
wealth" that has accumulated in the monetary plane from rushing out into
the physical plane.
As it turned out, this topic was much bigger in scope than I could possibly
tackle in one post. In fact, I believe it encompasses virtually everything
required for understanding what Freegold is truly about. And again, in the
end, I think you may be surprised to discover how simple it really is, but
it's going to take me a little while to get there.
I don't know how long or how many posts it will take me to explain what I
have in mind. I'm not working off an outline. But here's a bit of a spoiler
for those of you who are impatient, don't like to read, or don't care about
understanding it deeply and would rather just have an abstract that can be
easily dismissed so you can get back to tradable technical analysis.
Freegold is all about gradual, natural and automatic adjustment mechanisms in
the modern world of fiat currencies. An adjustment mechanism is quite simply
anything that periodically corrects physical plane imbalances. In economics,
the term adjustment mechanism is often used to describe the flow of gold
between different countries back when gold was used as base money in those
countries. But this is not at all what Freegold is about, so I am using the
term in a much broader context that applies at any scale, from the global
scale on down to the individual.
Whenever you buy a gold coin, or even a coffee at Starbucks for that matter,
that's a simple example of an adjustment mechanism at the individual level.
Monetary plane balances (like "financial wealth", the "idea of
long term debt being held as a money asset", or even cash in your
wallet) represent physical plane imbalances. Whenever monetary
balances are reduced, real world imbalances are reduced. Likewise, when
monetary balances are accumulated, physical plane imbalances increase. It's a simple concept and a
simple view.
![](http://www.24hgold.com/24hpmdata/articles/img/FOFOAFiat%2033-2014-06-27-003.gif)
![](../style/all/img/bouton/Zoom_in_6.png)
The flow of money within a common currency zone, like the United States for
example, is the most basic and automatic adjustment mechanism. Other
adjustment mechanisms include changes in wages and in the prices of various goods
and services in general and in different locales, and the movement of people
and capital from one location to another.
Wherever multiple currencies interact, like on planet Earth for example,
changes in the exchange rate between them are the primary adjustment
mechanism. Fixing, pegging or otherwise manipulating the exchange rate of
different currencies does, in fact, preclude other adjustment mechanisms and
causes imbalances to accumulate, often to the point that abrupt adjustment
becomes unavoidable, economically disruptive and financially destructive, in
other words, painful.
Currency collapse and hyperinflation are natural but not gradual adjustment
mechanisms, as are controlled devaluations. Floating exchange rates are a
more gradual adjustment mechanism between different currency zones.
These adjustment mechanisms have always been with us, so the real change in
Freegold is the "gradual, natural and automatic" part. Gradual (or
ongoing) is self-explanatory, but what I mean by "natural and automatic"
is that these ongoing adjustments will be allowed to happen or made by
choice, not forced or induced by a central bank, because such ongoing
adjustments will be in the self-interest of anyone in a position to choose,
on any scale.
I know that some of you are skeptical about what I am saying. You're probably
thinking that Freegold relies somehow on gold and whether or not it is
embraced by the masses. But here's another thing that will probably surprise
you in the end. Gold has little to do with "Freegold the monetary
system"! Gold is not a key part of the monetary adjustment mechanisms in
Freegold. The price and physical movements of gold won't even matter to the
monetary system. Any movements of gold in price, ownership or location will
be irrelevant to the monetary system of the future.
Freegold is the true unshackling of gold from the monetary system. In
Freegold, a properly functioning monetary system requires nothing of
gold. In Freegold, the international monetary system won't require gold to
change price or location in order for it (the new IMFS) to function. That's
why it's called Freegold. Gold is finally and truly set free from its
shackles to the monetary system.
There is an idea floating around that, because gold and money used to be directly
linked, that Freegold essentially means the opposite, an inverse link
between gold and money, such that an oscillating price of gold will have a
damping or stabilizing effect on the monetary system. But Freegold is neither
a direct nor inverse link, it is the complete severance of gold from its
former duties as part of the monetary system.
To understand the complete severance of gold, it is helpful to understand how
gold interacted with the monetary system in the past. Before WWI, gold was
base money in the monetary system. That is, it was commercial bank reserves.
And as such, the flow of gold worked as an adjustment mechanism even between
different countries without changing the exchange rate of different
currencies.
It worked like this. Say you have one country with a strong economy that is
running a trade surplus with another country that has a weaker economy. Some
surplus amount of goods and services flows from the stronger to the weaker,
and net monetary payments flow from the weaker to the stronger economy. Gold
was a hard base money that couldn't be created at will, so the flow described
led to a surplus in the base money stock and thereby an increase in the
effective money supply—the effective money supply is the aggregate of
commercial bank liabilities (credit money) and base money circulating outside
of the commercial banking system—of the stronger economy, and a deficit in
the effective money supply of the weaker economy.
Changes in the money supply corresponded to demand for goods and services
from each country, so eventually the trade flow reversed and the imbalance
corrected. It didn't matter that the two countries used different credit
money currencies because the base money was the same currency, gold. So as
money flowed, even across different currency zones, change in the local
effective money supply and its corollary—demand—was the adjustment mechanism.
That was before WWI. After WWII, it was quite different. Gold was no longer
base money reserves in the commercial banking system. Instead, it was
reserves in the central banking system, and central bank liabilities
were base money reserves in the commercial banking system. This was a big
difference in terms of adjustment mechanisms between different currency
zones. Gold still flowed, but its flow had the exact opposite effect—it
effectively blocked the adjustment mechanism from working on the economies in
different currency zones because its flow was a de facto manipulation of the
exchange rates of the currencies.
This was deliberate, and it's what Another was talking about in the quote at
the top of the post. Following WWII, productive capacity in Europe had been
devastated and needed to be rebuilt. The Bretton Woods monetary system was
the first fully negotiated international system of fixed and/or pegged
exchange rates between various currencies. This new monetary system (in
concert with the World Bank and the subsequent Marshall Plan) effectively provided support for Europe while it rebuilt its
productive capacity such that, as Another put it, a whole generation of
Europeans wouldn't have to "do without" during the reconstruction
process.
American productive capacity was in good shape following the war. After all,
other than Pearl Harbor and a few minor attacks, the theaters of destruction
were not on US soil. So, by fixing the exchange rates of European currencies
to the dollar, Europe was able to maintain a standard of living that its
devastated economy would otherwise have been unable to provide.
The only way this was possible was for Europe to run a trade deficit with the
US while it rebuilt its own productive capacity following the war, and the
agreement between the Allies, signed in Bretton Woods a year before the end
of the war, created the mechanism that made this possible. Understand that
there is no difference between "fixing" and
"manipulating" when we're talking about exchange rates.
"Fixing" and "pegging" are euphemisms for
"manipulating". We often think of "exchange rate
manipulation" as a unilateral act to gain some perceived advantage, but
there is no effective difference whether it is unilateral or a bilateral or
multilateral agreement. Bretton Woods was a coordinated system of manipulated
exchange rates.
As I already mentioned above, there is a fundamental difference between gold
being the reserve in the commercial banking system and gold being a
reserve at the central bank level. The difference is the effect caused by the
flow of gold. Gold did flow this way and that during the Bretton Woods years,
but it wasn't an effective adjustment mechanism nor was it physical plane
settlement. It was actually an anti-adjustment mechanism and a mere
monetary plane operation to effect the desired exchange rate manipulation.
Here's a tough concept which I'll explain in greater detail later. At the
central bank level, any change, up or down, in "foreign reserves
including gold" is essentially a currency exchange rate manipulation.
"Foreign reserves including gold" can be simply called
"reserves" as opposed to "domestic assets" on any central
bank's balance sheet. The asset side of every central bank's balance sheet
contains two things, reserves and assets. "Assets" are denominated
in the CB's own currency, and "reserves" are not. That's the
critical difference between reserves and assets.
Any time the asset side of a CB's balance sheet increases or decreases
through purchases or sales, its liabilities increase or decrease as well.
This is simple accounting. So any time a CB purchases or sells reserves, it
is effectively manipulating the exchange rate between its own liabilities and
one or more foreign currencies including gold. Manipulating exchange rates is
the sole purpose of CB reserves. It's a bold statement, I know, but I'll show
you that it's true.
In Freegold, CB reserves will not change much if at all, just as you'd expect
in an unmanipulated (clean) floating exchange rate regime. CB reserves will
just sit there, unchanged, static, with a sign on them that reads "break
glass in case of emergency." Below a prudent amount, CBs do need to
accumulate reserves by weakening their currency (manipulating it lower) so
that they have them later to strengthen (manipulate higher) their currency's
exchange rate in case of an emergency. But beyond that prudent amount, CB
reserves are not necessary, and any change in a CB's reserves will signal to
all others that the CB is manipulating its currency's exchange rate one way
or the other.
WWII was just such an emergency. We can tell, simply by looking at the gold
flow during the Bretton Woods years, how long it took Europe to get back on
its feet after the war.
"Fiat 33"
"Fiat 33" was a term that FOA used to describe the bifurcated
dollar system after 1933. Inside the United States, the economy that
represented the dollar, gold was no longer an option as a money asset for net
producers. Executive Order 6102 criminalized the possession of monetary gold
by any individual, partnership, association or corporation. Thus, fixing the
exchange rate of European currencies to the dollar was ideal for "the
New Idea of long term debt, being held as a money asset."
"As we know, world war two left Europe and the world economy
destroyed. Many thinkers of that period thought that the world was about to
enter a decades long depression as it worked to rebuild real assets lost in
the conflict. It was this war that so impacted the idea of looking positively
toward the future. The past ideals of building solid, enduring, long term
wealth were lost in the conception of a whole generation possibly doing
without! In these fertile grounds people escaped reality with the New Idea
of long term debt, being held as a money asset. Yes, here was born the
American Experience that comes to maturity today."
Bretton Woods was a negotiated, coordinated, multilateral exchange rate fix.
America was the strongest economy at that time and it therefore had the
strongest currency. A currency reflects its economy, and an economy that's
capable of running a trade surplus (producing more than it consumes) is going
to have a strong currency that will rise in its exchange rate with other
weaker currencies. An economy that is not capable of producing more than it
consumes will have a weak currency relative to stronger economies and its
exchange rate will decline. By fixing the exchange rates of all weak European
currencies to the strong American dollar, this adjustment mechanism was
neutralized.
We tend to think of the dollar as "fixing" its exchange rate with
gold during this time. But, in fact, that was not precisely the case. The
dollar was actually defined as 1/35th of an ounce of gold, and the
gold price was in fact fixed in London in pound sterling. The London gold fix
was generally a simple reflection, via arbitrage, of the exchange rate
between the pound and the dollar. So the dollar wasn't technically
"fixed" to gold, it was simply defined as a certain weight in gold.
So the European currencies fixed their exchange rate with the dollar, which
was defined as a certain weight in gold, and London fixed the exchange rate
of its pound sterling to the price of "street gold" (another term
favored by FOA which refers to the non-monetary physical gold marketplace).
Now, the way you fix (manipulate) an exchange rate is to supplement either
supply or demand so that supply equals demand at your desired price.
In the case of Bretton Woods, that meant either supplementing the supply of
dollars and/or the demand for European currencies wherever dollars and the
various European currencies were exchanged. This is exactly what happened.
Theoretically, the US could have simply printed dollars and bought up 40
different foreign currencies to supplement dollar supply and foreign currency
demand, or it could simply buy gold. Alternatively, the European CBs could
have bought up their own currencies with their dollar reserves.
Well, the European central banks didn't have enough dollar reserves, but they
did have gold! So the US printed dollars which it used to buy gold from the
European CB who then used those dollars purchased with their gold reserves to
supplement the supply of dollars and demand for their own currencies at the
currency exchanges keeping their exchange rates locked at the desired level.
This exchange rate manipulation gave Europeans and their currencies the same
purchasing power as the strong dollar, even though their economies were
war-torn and needed to be rebuilt.
FOA made the distinction between "fiat 33 cash" and "the more
golden foreign cash." On the surface, the distinction seems quite
simple. Dollars within the United States were not redeemable in gold after
1933, but dollars held by foreigners were. Still, your average foreign
exporter couldn't send his surplus dollars to the Fed in exchange for gold.
That official exchange window was only open to foreign CBs. But foreigners
could exchange their dollars for their local European currency—at the fixed
exchange rate—and then buy gold on the open market in Europe where it was
still legal to do so, and where London did its best to keep the price of
"street gold" fixed to the pound which was fixed to the dollar
which was defined as a certain weight in gold. Is your head spinning yet?
The thing is, this wasn't even an issue until the European economy got back
on its feet and was finally able to start running a surplus (producing more
than it consumes) once again. That was around 1958.
![](http://www.24hgold.com/24hpmdata/articles/img/FOFOAFiat%2033-2014-06-27-002.gif)
![](../style/all/img/bouton/Zoom_in_6.png)
The numbers above tell a story. A lot of European gold was moved to London
and the US for safekeeping during the war, and the incomplete accounting of
the time shows it as belonging to the Bank of England and the US Treasury. As
you can see, perhaps close to 10,000 tonnes were moved to New York and Fort
Knox by 1940. Following the war, the US number drops a bit, but the numbers
that I think tell the real story are 1935, 1952, 1957 and 1971.
In 1935, US gold is at about 9,000 tonnes. In 1952 it peaks at over 20,000
tonnes and sort of plateaus for five years through 1957. Then it begins a
dramatic 14-year decline back to 9,000 tonnes at which point the Bretton
Woods gold exchange system abruptly ends. Notice that the US Treasury is
listed as having almost the same amount of gold in both 1940 and 1956, about
20,000 tonnes. The difference is that, in 1940, the US was holding half of
that gold for safekeeping on Europe's behalf, but by 1957, the US owned it
all.
The numbers tell me that Europe must have run a significant trade deficit
with the US from 1945 until about 1952. Then, from 1952 through 1957, trade
between Europe and the US was roughly balanced, requiring only minimal
exchange rate intervention. But by 1958, Europe was back on its feet and
running a surplus.
This meant the opposite of the previous situation. The European CBs now had
to supplement the supply of European currencies and the demand for dollars in
order to keep the exchange rates fixed at their established levels. This
meant printing European currencies and using them to buy dollars from their
European exporters.
It wasn't clear at that time that this US deficit situation would carry on
indefinitely, so it sufficed perfectly well for exchange rate manipulation
purposes for those European CBs to just accumulate dollars. In fact,
according to the agreement at Bretton Woods, dollars and gold were equal. But
the agreement also required, under specified circumstances, the repurchase of
foreign-held balances if requested by the CB holding the balance.
The CB being asked to repurchase its own currency had the option "to pay
either in the currency of the member making the request or in gold." The
IMF worked kind of like a multilateral "currency swap" facilitator,
and with the IMF, such repurchases of one's own currency above a specified
amount were obligatory, and usually had to be paid for in gold. This
repurchase of one's own currency as it built up abroad was a good practice
which kept the aggregate monetary base from exploding. Every bilateral
repurchase reduced the monetary base—and therefore the balance sheets—of both
CBs.
I think it's a fair assumption that the initial transfers of gold from the US
Treasury back to the ownership of European CBs in the late 50s were
essentially a bookkeeping exercise to keep the dollar monetary base at a
reasonable level. After all, the gold didn't physically move, only its
allocation at the Fed depository changed. But something else quickly changed
that situation. That something else was the reality underlying FOA's
"fiat 33" concept.
1945-1957
There wasn't much pressure in the West on the price of "street
gold" fixed in London at about £12.4 per troy ounce which was equal to
$35 during these years. The reason is that Europe as a whole was
net-consuming and therefore not saving, and in America saving in gold was
prohibited—American net producers earned "fiat 33" and it worked
out spectacularly for them.
There are stories of gold trading as high as double the London price in
certain places in India and China during the 40s, and of some Saudis taking
advantage of this arbitrage opportunity. But much of the gold flowing to the
Saudis at $35 per ounce came out of the US gold stockpile via Saudi Aramco
rather than from the London "street gold" market.
So what we have during these years are two major players running surpluses in
the West, America and Saudi Arabia. American net producers earned "fiat
33" and grew accustomed to "the New Idea of long term debt being
held as a money asset," while the Saudis received a little bit of
Europe's gold via official channels that passed through the US Treasury. But
this situation changed once Europe was back on its feet and started net
producing in 1958.
1958-1971
The purpose of this post is to give you a new perspective on the Bretton
Woods gold flow, the transformation of the dollar, and the early years of
"the American Experience that comes to maturity today." There are
often many different ways to view an event, none of which is necessarily more
correct than another.
For example, the transfer of gold ownership to the US Treasury following WWII
could be viewed as the United States printing dollars and buying European
currencies (which Europe then had to repurchase with gold) in order to
support the weaker European currencies while weakening its own. Or it could
be viewed as the European CBs buying dollars from the US with their gold
reserves in order to flood the exchange with easy dollars. Or it could be
viewed as a necessary concession for the $13B in loans and grants the US gave
to Europe between 1948 and 1951.
In any case, 1948 through 1952 was the fastest period of growth in European
history. Industrial goods production increased by 35%, and agricultural
production surpassed pre-war levels. The poverty and starvation in Europe at
the end of the war quickly ended, and Europe entered what the French called "Thirty
Glorious Years" of economic growth. 1952 also marked the absolute peak
in US gold, and 1958 marked the beginning of its decline.
Sometimes viewing something in a new light reveals a deeper truth about what
actually transpired. There is debate about how much of Europe's quick
recovery should be credited to the Marshall Plan loans and grant. I say it
doesn't matter. Perhaps it gave Europe's economy a turbo boost, but Europe
was rebuilding regardless. What matters is that the fixed (manipulated)
exchange rates agreed upon in Bretton Woods elevated the European standard of
living above what its economy was capable of producing during those early
post-war years.
It is precisely the same mechanism, official exchange rate manipulation, aka
structural support, that later elevated America's standard of living above
what its economy was otherwise producing. The big difference, and why
no one ever called it an "exorbitant privilege" for Europe in the
late 40s and early 50s, was that Europe was in a state of emergency, poverty
and starvation when it began for them, and America, on the other hand, was
the strongest economy in the world when Europe began supporting the dollar's
exchange rate in 1958.
Another different perspective I want to share with you is that FOA's
"fiat 33" concept has less to do with the official convertibility
of the dollar than you probably thought. It has much more to do with
"street gold" than with the official flows of "monetary
gold" held by the CBs.
Buying gold with your surplus income is a choice and a preference. That's
what it's really about. Practically speaking, there's no difference between
an America where it's illegal to buy gold and an America where no one wants
to buy gold.
As I said, the European CBs technically could have hoarded just dollars, not
gold, and the Bretton Woods exchange rate manipulation scheme could have gone
on indefinitely. But something else happened after 1958, after Europeans
started net producing and saving once again in aggregate. Suddenly there was
upward pressure on the price of "street gold" in London.
To manipulate the exchange rate between pound sterling and gold meant, as
with currencies, to supplement the supply and/or demand of each such that
they were equal at the desired price. And for the London gold fix, this
suddenly meant supplying official gold reserves from the Bank of England
(BOE).
Throughout the first decade and a half of Bretton Woods, the price of gold in
London rarely moved more than a penny or two a day, and was easily kept within
its desired range of about $35 to $35.20 without any problem. Then, on one
day in 1960, the price of gold in London jumped $5 to $40 per ounce.
The irony of this situation was that the European CBs had to sell gold to the
US Treasury during the early years of Bretton Woods while Europe was running
a trade deficit, and now that Europe was back on its feet running a surplus,
they had to sell gold to their own public (as well as to the Saudis who were
no longer receiving official shipments via Saudi Aramco). But notice that the
gold being purchased by net producers in Europe was not being purchased in
dollars. It was being purchased in the local currencies wherever gold was
sold, but those local currencies had the same purchasing power as dollars due
to the fixed exchange rate regime.
The point here is that the distinction between FOA's "fiat 33 cash"
and "the more golden foreign cash" is not so much about the dollar
and its official convertibility at the central bank level (the gold window)
as it is about the preference, choice and ability of individual net producers
who want to buy "street gold" with their surplus income. As I said,
the CBs would have been fine just buying dollars in terms of the agreed-upon
exchange rate manipulation scheme, but because of the preference of
non-American individuals for gold, the European CBs found themselves in a
position of selling their gold reserves whether their economy was running a
deficit or a surplus. So gold had to flow, and it had to flow from the US
Treasury which still had almost half of all the CB "monetary gold"
in the world.
That was the beginning of the London Gold Pool. The way the pool was to work
was that the BOE would supplement the supply of physical gold as needed in
the public "street gold" marketplace whenever the price started to
rise. The BOE would then be reimbursed its gold from the pool according to
each member's agreed percentage. The pool started with 240 tonnes of gold,
and the contribution percentages were as follows:
US - 50% (120t)
Germany - 11% (27t)
England - 9% (22t)
Italy - 9% (22t)
France - 9% (22t)
Switzerland - 4% (9t)
Netherlands - 4% (9t)
Belgium - 4% (9t)
The gold pool started out with 240 tonnes in 1961. On its final day in 1968,
the fix required 225 tonnes from the pool. The day before, 175 tonnes. The
day after, they declared a bank holiday and closed the London gold market for
two weeks.
All told, the gold pool reportedly lost 3,000 tonnes of CB gold to "the
street". On paper, the US Treasury covered 50% of it, but in reality, it
all came out of the US stockpile because the US owed gold to the other pool
members due to the Bretton Woods fixed exchange rate regime. Gold rarely
moves physical locations—it just changes ownership—but in this case the US
actually had to fly several planeloads of gold over to London to cover its
debt.
That was the end of the dollar—and all other fiat currencies by proxy—being
defined as a certain weight in street gold. When the London gold market
reopened, the price quickly rose from $35 to $44 per ounce. But even more
significantly than that, in my opinion, is that when it reopened the London
gold fix had switched from pound sterling to dollars. What better way to
telegraph to the world that the dollar was no longer defined as a
weight in gold? This switch of the gold fix from pounds to dollars is worth a
little extra thought. It was quite remarkable, even if it was hardly noticed.
If you define the dollar as a certain weight and fineness of gold, then how
can you even price gold in dollars? That would be like pricing dollars in
quarters, in a public market with a daily fix. "Today the dollar is
worth four quarters. Thank you, and we'll be back tomorrow with another daily
fix." Switching the fix to dollars at the collapse of the gold pool was quite
significant!
Of course not every individual net producer chooses to buy gold with all or
even part of his or her own surplus earnings. All that matters is that gold
is available for those who choose to buy it. The "fiat 33"
distinction meant that gold demand did not stress the dollar within its own
economy. But again, there's no practical difference between people not being
allowed to buy gold and them no longer wanting to buy (or even thinking about
buying) real physical gold.
"Fiat 33" laid the groundwork for a global monetary system that
would not be stressed by gold demand from net producers. It worked until
1958.
Here's a question to ponder. Did "fiat 33" end in 1974 when E.O.
6102 was repealed? Or did the "fiat 33 distinction" end in 1971 when
Nixon officially closed the gold window making all dollars
irredeemable in gold? Is everyone in the world using "fiat 33"
today, or is nobody using it since gold is now legally tradable
everywhere?
There are at least two ways to look at it, aren't there?
"Freegold the monetary system" was a concept born from lessons
learned during the Bretton Woods years. But I'd like to point out a couple of
simple observations. First, notice that closing the gold window and
essentially locking all CB gold in place, ending its flow, did not end the
trade imbalance. The US deficit not only continued to this day, it expanded.
Second, since 1971, 85,000 tonnes of new gold has been mined, yet the world's
central banks today hold 15% less monetary gold than they did
in 1971. In 1971, the seven European former members of the London Gold Pool
held a combined 15,660 tonnes. Today they hold a third less, 10,465 tonnes.
Even Saudi Arabia's official gold reserves have increased by only 227 tonnes
since 1971. So where did 90,000 tonnes of gold go, if not into the monetary
system?
Yes, Freegold was a concept born from lessons learned during the Bretton
Woods years, but from a monetary system perspective, it has little to do with
gold. It's far more about something else. Freegold is about gradual, natural
and automatic adjustment mechanisms in the modern world of fiat currencies,
and in the international monetary system that means a clean, floating
exchange rate regime, the opposite of Bretton Woods.
![](http://www.24hgold.com/24hpmdata/articles/img/FOFOAFiat%2033-2014-06-27-005.gif)
![](../style/all/img/bouton/Zoom_in_6.png)
Agreement 44
I think that Bretton Woods was an honest, timely and noble effort. I think
that each participating nation negotiated with honor and the best of
intentions, each protecting its own interests while also pushing toward an
agreement that took only 22 days to reach but lasted for 27 years. To get a
real sense of the atmosphere at the end of the 22-day negotiation between 730
delegates representing 45 nations, please read Henry Morgenthau's closing
address:
"I am gratified to announce that the Conference
at Bretton Woods has completed successfully the task before it.
It was, as we knew when we began, a difficult task, involving complicated
technical problems. We came to work out methods which would do away with the
economic evils-the competitive currency devaluation and destructive
impediments to trade-which preceded the present war. We have succeeded in
that effort.
The actual details of a financial and monetary agreement may seem mysterious
to the general public. Yet at the heart of it lie the most elementary bread
and butter realities of daily life. What we have done here in Bretton Woods
is to devise machinery by which men and women everywhere can exchange freely,
on a fair and stable basis, the goods which they produce through fair labor.
And we have taken the initial step through which the nations of the world
will be able to help one another in economic development to their mutual
advantage and for the enrichment of all.
The representatives of the forty-five nations faced differences of opinion
frankly, and reached an agreement which is rooted in genuine understanding.
None of the nations represented here has had altogether its own way. We have
had to yield to one another not in respect to principles or essentials but in
respect to methods and procedural details. The fact that we have done it in a
spirit of good will and mutual trust, is, I believe, one of the hopeful and
heartening portents of our time. Here is a sign blazoned upon the horizon,
written large upon the threshold of the future-a sign for men in battle, for
men at work in mines, and mills, and in the fields, and a sign for women whose
hearts have been burdened and anxious lest the cancer of war assail yet
another generation-a sign that the people of the earth are learning how to
join hands and work in unity.
There is a curious notion that the protection of national interest and development
of international cooperation are conflicting philosophies-that somehow or
other men of different nations cannot work together without sacrificing the
interests of their particular nation. There has been talk of this sort-and
from people who ought to know better-concerning the international cooperative
nature of the undertaking just completed at Bretton Woods. I am perfectly
certain that no delegation to this Conference has lost sight for a moment of
the particular national interest it was sent here to represent. The American
delegation which I have the honor of leading has been, at all times,
conscious of its primary obligation-the protection of American interests. And
the other representatives here have been no less loyal or devoted to the welfare
of their own people.
Yet none of us has found any incompatibility between devotion to our own
country and joint action. Indeed, we have found on the contrary that the only
genuine safeguard for our national interests lies in international
cooperation. We have to recognize that the wisest and most effective way to
protect our national interests is through international cooperation-that is
to say, through united effort for the attainment of common goals. This has
been the great lesson taught by the war, and is, I think, the great lesson of
contemporary life-that the people of the earth are inseparably linked to one
another by a deep, underlying community of purpose. This community of purpose
is no less real and vital in peace than in war, and cooperation is no less
essential to its fulfillment.
To seek the achievement of our aims separately through the planless,
senseless rivalry that divided us in the past, or through the outright
economic aggression which turned neighbors into enemies would be to invite
ruin again upon us all. Worse, it would be once more to start our steps
irretraceably down the steep, disastrous road to war. That sort of extreme
nationalism belongs to an era that is dead.
Today the only enlightened form of national self-interest lies in
international accord. At Bretton Woods we have taken practical steps toward
putting this lesson into practice in monetary and economic fields.
I take it as an axiom that this war is ended; no people-therefore no
government of the people-will again tolerate prolonged or wide-spread
unemployment. A revival of international trade is indispensable if full
employment is to be achieved in a peaceful world and with standards of living
which will permit the realization of man's reasonable hopes.
What are the fundamental conditions under which the commerce among nations
can once more flourish?
First, there must be a reasonable stable standard of international exchange
to which all countries can adhere without sacrificing the freedom of action
necessary to meet their internal economic problems.
This is the alternative to the desperate tactics of the past-competitive
currency depreciation, excessive tariff barriers, uneconomic barter deals,
multiple currency practices, and unnecessary exchange restrictions-by which
governments vainly sought to maintain employment and uphold living standards.
In the final analysis, these tactics only succeeded in contributing to
world-wide depression and even war. The International Monetary Fund agreed
upon at Bretton Woods will help remedy this situation.
Second, long-term financial aid must be made available at reasonable rates to
those countries whose industry and agriculture have been destroyed by the
ruthless torch of an invader or by the heroic scorched earth policy of their
defenders.
Long-term funds must be made available also to promote sound industry and
increase industrial and agricultural production in nations whose economic
potentialities have not yet been developed. It is essential to us all that
these nations play their full part in the exchange of goods throughout the
world.
They must be enabled to produce and to sell if they are to be able to
purchase and consume. The International Bank for Reconstruction and
Development is designed to meet this need.
Objections to this Bank have been raised by some bankers and a few
economists. The institution proposed by the Bretton Woods Conference would
indeed limit the control which certain private bankers have in the past
exercised over international finance. It would by no means restrict the
investment sphere in which bankers could engage. On the contrary, it would
expand greatly this sphere by enlarging the volume of international
investment and would act as an enormously effective stabilizer and guarantor
of loans which they might make. The chief purpose of the International Bank
for Reconstruction and Development is to guarantee private loans made through
the usual investment channels. It would make loans only when these could not
be floated through the normal channels at reasonable rates. The effect would
be to provide capital for those who need it at lower interest rates than in
the past, and to drive only the usurious money lenders from the temple of
international finance. For my own part, I cannot look upon the outcome with
any sense of dismay. Capital, like any other commodity, should be free from
monopoly control and available upon reasonable terms to those who would put
it to use for the general welfare.
The delegates and technical staff at Bretton Woods have completed their
portion of their job. They have sat down together and talked as friends, and
have perfected plans to cope with the international monetary and financial
problems which all their countries face in common. These proposals now must
be submitted to the legislatures and the peoples of the participating
nations. They will pass upon what has been accomplished here.
The results will be of vital importance to everyone in every country. In the
last analysis, it will help determine whether or not people will have jobs
and the amount of money they are to find in their weekly pay envelope. More
important still, it concerns the kind of world in which our children are to
grow to maturity. It concerns the opportunities which will await millions of
young men when at last they can take off their uniforms and can come home to
civilian jobs.
This monetary agreement is but one step, of course, in the broad program of
international action necessary for the shaping of a free future. But it is an
indispensable step in the vital test of our intentions. We are at a
crossroad, and we must go one way or the other. The Conference at Bretton
Woods has erected a signpost pointing down a highway broad enough for all men
to walk in step and side by side. If they will set out together, there is
nothing on earth that need stop them."
I also suggest reading and familiarizing yourself with the original Articles
of Agreement of the IMF agreed upon in 1944. Here's the original document, and I recommend reading pages 11 – 59 of the pdf, or at least
Articles IV (par values of currencies) and XVII (how to make amendments). XIX
(explanation of terms like "reserves") and Schedule A (the specific
quotas) are also worth a peek. Later, I'll be taking a closer look at one
amendment in particular.
The goal of Bretton Woods was twofold. It was to establish an international
monetary system that would foster growth and free trade, and to assist in the
post-war reconstruction of Europe. The International Bank for Reconstruction
and Development (World Bank) was created for the latter, and the IMF for the
former.
The pre-war Depression-era years were marked by competitive currency
devaluations and defensive trade restrictions like tariffs, both of which
reduced international trade, inhibited growth, and even contributed to
international tensions going into the war. The IMF Articles of Agreement were
a reaction to the protectionist tactics of the 30s.
Fixed exchange rates were the most significant outcome of the Bretton Woods
conference, and they were a direct response to the exchange rate
manipulations (competitive devaluations) of the 30s. But I want you to take
note of the fact that the solution they came up with for the problem of
uncoordinated exchange rate manipulation was coordinated exchange rate
manipulation.
From "A brief post on competitive
devaluation" in The Economist:
"When the Depression struck, this gold standard
became a noose around the necks of struggling economies. Economies with
overvalued currencies struggled to compete in export markets and ran trade
deficits which led to gold outflows."
Uncoordinated (competitive) devaluations overvalue your trading partner's
currency which, unless he devalues in response (a currency war), eventually
lead him to trade deficits and gold outflows. The Bretton Woods solution had
the same effect. First it overvalued the European currencies which led to
gold outflows while allowing them to run a trade deficit during
reconstruction, and then it overvalued the US dollar beginning around 1958
which led to gold outflows and a trade deficit which continues to this day.
Yes, the dollar has been overvalued because its exchange rate has been
supported by Europe and others since at least 1958. This has had a profound
effect on America. It has transformed the US economy from what it was in the
50s into what it is today. This is the American experience that comes to
maturity today.
FOA:
"Using an overvalued dollar makes one feel as there is no
inflation, even though there has been massive dollar currency inflation over
the last twenty years (the real cause of price increases is when the exchange
rate is allowed to balance a negative trade deficit)." (9/22/98)
"The exchange rates, almost like gold, block their path. However… the
dollar of present operates in a world currency system without gold, that
allows this currency to be exported without restraint… The result is a dirty
float of exchange rates in that most Central Banks artificially keep the
dollar flowing out of the US… Using this line of reasoning, we can see how a
massive inflation of dollars over many years has built up. When something
does come along that blocks that outflow of dollars and even causes it to
reverse, the dollar will plunge on exchange rates and bring home all of the
past buildup of price inflation." (10/20/98)
"Under such a system, world trade and exchange rates will balance more
fairly… Let us see if this great economy can stand on its own feet with the
yoke of paying its debts from "real production"? We may indeed get
an answer to this dilemma." (8/2/99)
"The US became wealthier by importing things and paying for them with an
exchange rate that is "out of whack"." (12/10/99)
"This is how the "dollar reserve process" inflates the money
supply world wide as we (USA) run a trade deficit for our benifit. It keeps
the dollar exchange rate higher than it would naturally be thus allowing a US
citizen to buy goods at a cheaper price…" (2/26/00)
"We, America, promote the value of our dollar in and of itself. Mostly
pointing to our goods, services and assets that dollars can buy. Of course,
if you have followed this for long, you know the dollar and near dollar
supply has shot to the nearest star and will never actually convert into
these products in total. At least not at current exchange rates or internal
price levels in the US.
So,,, we promote the dollar using a different format, by saying that
foreigners can invest here, not buy, and find the best returns. This works as
long as foreign CBs support our dollar as a reserve by saving it themselves.
Making for a stable exchange rate… Their real reasons [for doing this] have
been our topic for years now.
Eventually, as the dollar works its way toward becoming just a regular money,
its exchange rate will tumble. Vastly aggravated by our world class trade
deficit. A deficit, I might add, that has become structural to the function
of our economy..." (2/15/01)
To be continued…
Sincerely,
FOFOA
"A very easy way to view
this… would be to simply
say that the American Experience is reaching the end!
Yes, here was born the American Experience
that comes to maturity today."