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Monetary Sins of the West
The
monetary system of the West, which is indeed the monetary system of the world
that the West has foisted upon East and South as well, was born out of sin:
sin of lies, thefts, and fraud. The original lie was that the government
needed the people's gold in order to make the people's money stronger. The
people responded to the call out of patriotism and faith in upright dealings,
and turned in their gold in exchange for paper money. But no sooner did they
do it than the government confiscated their gold held in trust and wrote up
its value. Rather than making it stronger, the government has made the
people's money "safe for devaluations and depreciation". The new
monetary regime was bolstered by Draconian measures: ownership of gold was
made a criminal offence. In a nutshell, it was lies, highway robbery, and
deliberate fraud, epitomized in the United States by Franklin Delano
Roosevelt's monetary legislative record; in other countries the form might
have been somewhat different but the substance was certainly the same. It
goes without saying that these measures were unconstitutional as they
involved retroactive laws, confiscation of property without due process, and
power-aggrandizement by a constitutionally limited government. But the
perpetrators knew how to twist the legal system to prevent people from taking
their grievance to court, or from getting satisfaction if they could. It was
nothing short of an unscrupulous confidence game aiming at disenfranchising
the people.
To
this day the government has not been able to muster up sufficient moral
fortitude to propose an amendment to the Constitution that would make its
paper money, essentially a crib with an unwritten legend 'IOU nothing', to
conform to its Covenant with the people. Later on the people succeeded in
forcing the government to decriminalize ownership of gold. But this
indulgence is still on a 24-hour basis subject to revoke, and there is no
question of allowing the monetary unit with the unwritten legend 'IOU
nothing' to be displaced by one with a written legend 'IOU gold' - on which
our ancestors laid the foundations of Western civilization and the prosperity
of the world in the 18th century.
The Best Money in the World
There
is hardly any university in the world today that would tolerate a professor
publicly saying that gold still has a monetary role to play. Rather,
professors are regimented and forced to parrot the propaganda line, such as
Lie Number One, asserting that gold is a barren asset as it is not capable of
earning a return to capital, quite unlike 'productive' paper currencies that
earn interest when put out on loan. I must resist the temptation to develop
the theme why it is ill-advised to limit the freedom of professors to say the
truth as they see it in their professional capacity, even if it may not be
pleasing to the ears of the powers that be. The task of a professor is to
search for and to disseminate truth - rather than trumpeting government
propaganda.
The
statement that gold is an asset incapable of earning a return is a shameless
lie. Facts speak for themselves: gold has been and is still being put out on
loan for a consideration to all credit-worthy borrowers. There has been no
interruption in this human activity throughout recorded history, not during
the usury-witch-hunts, not during the World Wars, not during the revolutions,
not during the gold embargoes, not during the gold prohibitions.
Not
only has gold retained its monetary function of being lent and borrowed at
interest, but gold is still a challenge to all paper currencies in a keen
competition with one another for the title "The Best Money of the
World". In point of fact, gold wins hands down: on most days the rate of
interest on gold loans is well below the rate of interest on loans of paper
currencies of any stripe or color. Even the Japanese yen which, thanks to the
frugality of the Japanese people, has an eye-popping low rate of interest,
comes out second to gold when loan contracts of similar duration are
compared.*
Governments
find themselves in a very uncomfortable, not to say dangerous, position. It
is bad enough that gold gives the lie to sycophantic professors and other
government apologists as they are pushing and peddling the virtues of paper
money even as it is losing value at an alarming, if well-hidden, rate. (One
of the best-kept secrets of history is that Dollar Almighty lost over 90
percent of its purchasing power during the 20th century, most of it in the
fourth quarter after its link to gold was unilaterally severed by executive
order). Worse still is the danger that people may start asking embarrassing
questions: "If gold is the best money in the world as demonstrated by
the lowest rate of interest on gold loans, then why can't we, citizens of
this proud country, have it? Wouldn't it help producers in industry and
agriculture, to say nothing of home-makers, if they could once more raise
capital at 2 or 3 percent interest per annum, as they once did in the 'bad
old days' of the gold standard?"
*
It may be argued that the yen rate of interest is now lower than the gold
lease rate. However, this is an aberration. The gold lease rate and the yen
rate of interest are presently distorted (the former upwards, the latter
downwards) by bond speculation and by the gold-carry trade. There is
obviously a substantial exchange risk involved in holding yens, and so there
is a depreciation premium incorporated in the yen rate of interest, making
the theoretical yen rate higher than the gold rate of interest.
Lend or lease?
To
deal with this contradiction between the teachings of officially approved
economic doctrine and facts as demonstrated by the market, and to silence
trouble-makers who dare ask silly questions about the possible merits of gold
money, public relation managers decided to play a little semantic game. They
launched Lie Number Two: gold is not lent, it is leased! "You say gold
loans command the lowest possible rate of interest? Arrant nonsense! There is
no such thing in our enlightened century as gold generating an interest
income. Only paper money is capable to bring this miracle about. Gold may be leased,
and an applicable lease rate paid, but that is a different matter
altogether."
Here
we have another shameless lie, one which a self-respecting public servant
such as Federal Reserve Chairman Alan Greenspan who does know better, should
not help propagate. It is a lie because, while it is true that there is a
difference between loan and lease, a transfer of gold with no change in
ownership unquestionably falls into the former category. The same gold is
hardly ever returned to the lender, only its equivalent. Likewise, when money
is lent, an equivalent amount is returned at the end of the loan period. By
contrast, when a car is leased, exactly the same car, and not merely an
equivalent, must be returned at the end of the lease period. For certain
things quality control may be exceedingly difficult. We even have a word in
the English language to reflect this fact: things that are not fungible
cannot be loaned and so they must be leased. A large part of the reason why
gold has been so successful in its bid to become the monetary metal par
excellence has to do with the fact that gold is the most fungible substance
on earth. Every ounce of it, 999 fine, is a perfect substitute for any other
ounce, 999 fine, - regardless of which continent has produced it in which millennium.
Depreciation premium
The
New York Times broke its silence on gold on March 11, 2001. In its Sunday
edition it published an article under the signature of one Jonathan
Fürbringer. Apart from its patronizing title A Stirring in the Long
Suffering Gold Market, the article tries to be objective in explaining the
technicalities of gold leasing. But then it goes on to pontificate on the
question why gold can be borrowed at such a remarkably low rate as 1 percent
per annum most of the time, and puts forth Lie Number Three: "The lease
rate [on gold] is normally very low because the world's central banks have a
lot to lend (sic)." For the third time, this is a lie. Gold commands a
rate of interest lower than that payable on paper money loans because you know
exactly what will be returned to you. In case of a paper money loan you
don't. The only thing certain about a paper money loan is that it will be
retired in depreciated units. Paper shrinks. Paper spoils. Paper is open to
all sorts of destruction. You can protect it against fire, water, and theft,
but there is absolutely no protection against the deterioration of good faith
behind it. The only thing creditors can do is to demand a 'depreciation
premium' to compensate for that loss. That premium (along with others such as
a risk premium in case of a less than perfect credit rating) is added to the
net rate of interest, making the market rate that much higher. There is no
depreciation premium for gold loans. None whatever. One ounce of gold will
always be one ounce of gold. Gold does not shrink. Gold does not spoil. Gold
is indestructible. No faith or credit is involved in accepting it: you can
test it with scales and acids if you don't trust the agency that has stamped
it.
The
low lease rate on gold is not controlled by central bankers. They are not the
only ones lending gold. As a matter of fact, they are a newcomer to this
business - evidencing that theirs is a concerted action with a hidden agenda.
Gold: Public Enemy Number One
To
understand this hidden agenda fully we must grasp the fact that Western
governments by covenant are supposed to be a government of limited power.
Powers not enumerated explicitly in their Constitution or Charter are
reserved for the people. Central banking was the device used to contravene
this Covenant and to bring back unlimited government power from the Dark Ages
through the back door. A government that arrogates itself the power to issue
promises in exchange for real goods and real services, while having no
intention whatsoever to meet the obligation but will issue a new promise
every time an old one is presented at maturity, is not a limited government.
It is a government of unlimited power. Banker Rothschild of Waterloo fame put it most eloquently,
albeit somewhat cynically, when he said: "Give me the power to print
money, and I don't care who makes the laws." An executive branch that
has institutionalized money-printing is making a mockery of the legislative
and judiciary branches - whether the latter realize it or not. It is making a
mockery of free markets as well. Since all goods are encumbered with a
first-refusal claim by the government, the markets trading those goods aren't
free. Nor is the labor market, as laborers are coerced into selling their
services for irredeemable promises. Labor contracts are pretty nearly
meaningless as they are made in monetary units of uncertain value subject to
depreciation and debasement. Central banking is but a front used to cover up
this chicanery.
Of
course, to a government and central bank that can stoop so low as to issue
irredeemable promises to pay, gold is not just anathema. It is more. It is
public enemy number one. Gold offers eternal challenge to government
arbitrariness and coercion. Gold money is not dead, in spite of premature obituaries
in the media. But if not dead, gold must be totally discredited, not just in
words, but in deeds as well. And this is where central bank leasing of gold
enters the stage.
"We'll make your virtue destroy
you!"
Central
bank gold is ill-gotten gold. It has been taken from the people fraudulently,
by appealing to their patriotic feeling and faith in government. The fraud
did not weaken people's trust in gold, on the contrary, as could be expected,
strengthened it. The task given to central banks is to destroy that trust, by
hook or crook, once and for all. A third-rate precious metal, palladium, is
allowed to go up in price fifty-fold, and trade over $1000 an ounce, but
everybody who touches gold must be taught a lesson. He must be made to burn
his finger right to the armpit. The diabolic plot is to use the very virtue
of gold that makes it the best money known to man commanding the lowest rate
of interest, to destroy people's trust in gold. Through their greed
unscrupulous bullion bankers and others can be enticed to take the gold at
the low lease rate, sell it, and put the proceeds in high-yield government
bonds. The sale will crush the price of gold. Should it still show signs of
lingering life, it can be clubbed down again and again, with more and more
leasing. (This bit of intelligence is through courtesy of Alan Greenspan.)
Clearly, if it did not have the virtue of commanding the lowest rate of
interest, then this stratagem to destroy people's faith in gold could not
work.
Paper clips in the balance sheet
Central
bankers are on the horns of a dilemma. On the one horn, they would love to
use their gold in a dumping campaign to punish all those who trust their
savings to gold. On the other horn, their gut-feeling tells them that
outright sale may not be a good idea after all. They would give up the best
kind of monetary asset that is nobody's liability, and replace it with the
worst kind, namely, irredeemable promises of devaluation-happy governments.
They would substitute a default-prone asset for a default-proof asset. Such a
course could undermine the strength of their balance sheet, perhaps fatally,
with incalculable consequences to the value of their banknotes.
Those
central bankers who still read history may know that in the 1931 episode of
the devaluation of the British pound the directors of the Bank of France were
scurrying around the building to find overlooked assets, and they put not
only the value of the building, but also the desks in the building, and the
paper clips on the desks, into the balance sheet in the forlorn hope to cover
up the losses that the bank had suffered due to the devaluation of the pound.
Forty years later, in the 1971 episode of the devaluation of the dollar, the
techniques of damage-control were more 'advanced' if also more disingenuous.
The French government printed up special non-marketable obligations and
ordered the Bank to put them in the balance sheet to cover up the hole
created by the dollar default. Luckily for them, the cost of damage-control
does not have to come out of the hide of the central bankers. It comes out of
the hide of "you know who".
Even
so, too big a loss may incur the wrath of the government. In 1971 the loss on
the dollar assets was partly compensated by the gains on gold assets. But what
if those gold assets are gone?
Have their cake and eat it
Central
bankers have found a neat way out of their dilemma. They did something that
nobody had ever done before, not as if it was for lack of trying: to have
their cake and eat it. They leased their gold knowing that it would promptly
be sold in the open market by the borrower, which could not fail to have the
same effect on the gold price as outright dumping would. But, at the same
time, they would still have the gold, well, after a fashion: if not in their
vaults, then at least in their balance sheet. Central bankers do not care
that through their gold leasing policy they are forking out obscene profits
to the bullion banks. They let them borrow at the minuscule lease rate while
pocketing a hugely inflated interest income drawn from high-yield government
bonds in which the proceeds from the sale of leased gold have been invested.
Well, that's just the cost of doing business. That's just the going rate of
hiring the hit-man. But why worry? The obscene profits do not come out of the
pockets of central bankers. They come out of the pocket of "you know
who".
This
is adding insult, and more injury, to injury. After the gold has been
forcibly and fraudulently taken from them, the people are now made to pay the
cost of the campaign to discredit it as a monetary asset.
Paper-gold alchemy
This
is the plot. Will it work? Time will only tell. Gold has the habit of leaving
the place where it is not appreciated, and going where it is. Clearly,
leaders in the West neither appreciate gold nor would they know what to do
with it if they did. So gold is taking leave of them and will end up in
private hands. When it does and the government is out of gold, then the
people will get their franchise back and will decide on the future of gold.
There is no question that the restoration of gold money will be an option,
with a good chance of being adopted.
Meanwhile,
here is a more troubling question confronting the world, one that will keep
haunting it until the gold saga comes to rest. Can a monetary system built on
lies, confidence games, fraud, and coercion, long endure? The garbage heap of
history is littered with defunct and discarded irredeemable promises issued
by past governments that also tried their hand at making the paper-gold
alchemy work. There is more room, no doubt, in that heap, awaiting more
recent discards.
11 July 2001
Dr.
Antal E. Fekete
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