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Not practicing what one preaches
I inadvertently opened a can of
worms in writing the essay "Myth
of the American Gold Standard". I suggested that the reason the
dollar has remained the world's reserve currency in spite of horrendous trade
deficits, and in the face of increasing reluctance of foreign central banks
to absorb more of it, is Mr. Greenspan's steadfast
refusal to authorize the sale of U.S. gold. I went on prophesying that as
soon as Mr. Bernanke does authorize it, the dollar
will ignominiously fall from its high perch.
My critics fall into two broad
categories: First, those readers who think that the Fed cannot authorize the
sale in any manner, shape, or form as title to the
gold is vested in the Treasury. Second, those readers who think that the gold
stored at Fort Knox is long since gone: it has been sold or leased
clandestinely. In answering the first group I can point out that, while it is
true that the title belongs to the Treasury, the gold is encumbered by gold
certificates held as an asset in the balance sheet of the Fed. The Fed was
given them in exchange for gold fraudulently and unconstitutionally
confiscated in 1933. To this extent the gold cannot be disposed of without
explicit concurrence of the Fed. Mr. Greenspan
demurred. He even went public with his demurral saying that the U.S. would be
foolish to give up gold, hypocrisy of not practicing what it preaches
notwithstanding.
Pulling the rug out from under the
dollar
The Treasury would not comment on rumors about the sale of gold in use as backing for
Federal Reserve notes. Such a clandestine way of disposing of the patrimony
of the American people would be a disgraceful piece of business. It would
show the moral bankruptcy of the government that lacks courage to inform the
electorate about plans to pull the rug out from under the value of the dollar
in selling the monetary asset securing it, the only asset which is not at the
same time a liability in the balance sheet of others, and is therefore not
subject to default and debasement: gold.
Not as if it would be
unprecedented. It would't. During World War II
silver was sold from under silver certificates. Because of this precedent it
is not unthinkable that gold has been sold from under gold certificates in
the balance sheet of the Federal Reserve banks. Gold may have been used to
bribe governments to join American military adventures on foreign soil, for
example. Such duplicity may be justified by a new twist in the interpretation
of the word "globalization" to cover both military and monetary
mischief.
Silver charade
Let me relate the little-known
episode of the Treasury Department lending silver to the War Department under
Lend-Lease during World War II. The silver was promptly built into warships
and sent into harm's way. The upshot was that silver certificates were backed
by unrecoverable silver in the form of bearing and wiring aboard warships
exposed to enemy fire.(At that time all the $1 and
$5 bills in circulation were silver certificates, to the exclusion of Federal
Reserve notes.) Nobody in authority batted an eyelid upon turning the legend
into a cruel joke on the face of every one dollar bill, sporting a portrait
of George Washington: "This certifies that there is on deposit in the
Treasury of the United States of America one dollar in silver payable to
bearer on demand." Come to think of it, what better way could there be
in wartime to protect silver belonging to the creditors of the U.S.
government than "storing" it aboard fully armed aircraft carriers?
Creditors might sleep undisturbed: the value of the dollar was safe, the silver backing of the dollar was safe,
regardless of the war. If the "storehouse" came under enemy fire
and the silver was sent to the bottom of the ocean before the Treasury could
perform on its promise to pay it to bearer on demand, well, that's too bad.
At any rate, excuse would be readily available: "war is no picnic, you
know."
No matter how you torture the
facts, the truth of the matter remains: the silver backing the dollar was
deliberately exposed to annihilation, rendering the legend on paper money
utterly mendacious and dishonest.
"Quod licet Iovi,
non licet bovi"
The Latin proverb translates into
English as saying: "What Jupiter May, Oxen May Not" Lest my story
of the silver charade be dismissed as a product of fantasy, I wish to
document it. For background I turn to an editorial in the August 4, 1942,
issue of The New York Times.
"One of the strangest
episodes of the war is government hoarding of silver. That metal has suddenly
come into great demand. It is needed as a substitute for copper, zinc, and
nickel. It is also needed for a wide variety of new war purposes. The use of
silver bearings in airplanes, for example, makes possible increased speed and
greater ability to withstand shock and vibration. Silver and its alloys go
into the manufacture of shells, bombs, tanks, torpedoes, trucks, and ships.
So great is the present demand for the metal that the War Production Board
has just issued orders severely rationing the amount of silver available for
industrial purposes. And all this time the
Government of the U.S. has in its vaults more than 3 billion ounces of unused
silver - sixty times an average year's production - of which it is making no
use whatsoever.
"This remarkable situation is
the result of the adoption by Congress of the Silver Purchase Act of 1934,
which compelled the Treasury to buy silver - both domestic and foreign -
until the monetary stocks of the U.S. consisted of one-third silver and
two-thirds gold. The theoretical purpose of this law was "to provide a
wider backing" for American currency. Its actual purpose was, of course,
to line the pockets of the Silver States. For eight years - and in recent
years over its own protest - the Treasury has been forced to buy and store
underground gigantic quantities of an unneeded metal at prices far above the
current market price. Now the unneeded metal suddenly has become immensely
useful - not as a "backing" for our currency but for purposes of
war. And the obviously sensible thing to do would be to release from the
Treasury the vast stocks of metal held for "monetary" purposes
which is a sham. But the Silver Senators say no.
"So we arrive at a situation
in which the same government that urges a patriotic public not to hoard
sugar, not to hoard rubber, not to hoard gasoline, not to hoard useful goods
of any kind, itself hoards a metal which is needed for planes and shells and
tanks and ships. It is a fantastic situation..."
Three months later, on October 31,
in another editorial the same paper noted that President Roosevelt has
expressed his displeasure over the existence of very large hoards of critical
material that owners refuse to sell at fair prices. The paper continued:
"We know there is a very
large hoard, virtually a monopoly, of an important metal needed in war work.
This hoard amounts all told to nearly 3 billion ounces. The owner acquired it
at average prices of less than 50 cents an ounce, but will not sell it for
less than $1.29 an ounce, although the market price until recently has been
only 35 cents an ounce. Meanwhile this metal is needed in the manufacture of
ships, airplanes, tanks, trucks, guns, shells, bombs, torpedoes, and other
war equipment. It is needed as a substitute for copper, tin, and other metals
now scarce. It is used to make airplane bearings, photographic films,
surgical materials, and pharmaceutical products.
"This metal is silver. The
hoarder is the United States Government."
Yes, indeed. Quod licet Iovi, non licet bovi.
The miracle of silver present at
two different places at the same time
No fewer than eleven bills dealing
with silver, and how Treasury stocks of it might be made available to help
the war effort, had been introduced in Congress. The lucky one that
eventually made it after the Senate passed it on June 18, the House on July
5, and the president signed it into law on July 12, 1943, was the Green
Silver bill S. 35. It did not provide for retirement of any silver
certificates as silver held or owned by the U.S. was being released for war
purposes. It was designed to let the same silver to be present in two
different places at the same time. The actual wording, somewhat ambiguous,
was that "at all times the ownership and the possession or control of an
amount of silver of a monetary value equal to the face amount of all
outstanding silver certificates heretofore or hereafter issued by the
Secretary of the Treasury shall be maintained by the Treasury." Senator
Green, in answering questions about the meaning of these and other words in
the bill, said that "under the provisions of the bill it will be
possible for the Treasury to take silver now retained for silver certificates,
and which cannot be used for any other purpose, and use it for
non-consumptive purposes." (Hearings of October 14, 1942, as
reported in the Minutes, p. 11.) Senator Green went on to say that "It
will make it possible to use silver now buried and used solely as security
for silver certificates, and to transfer it from underground, where it serves
no other purpose, to places where it will serve non-consumptive purposes... I
cannot see where it would be any less security for the silver dollar if it is
in a government-controlled electrical establishment than if it is underground
at West Point." (Ibid. p 14.)
Dishonest and phony promises
It seems clear from this that the
Green Bill proposed the use of the silver held against silver certificates
for non-consumptive purposes and at the same time for "security"
behind silver certificates. Under this arrangement the silver certificates
were not redeemable into silver. They became dishonest and "phony"
in every respect. If silver busbars in electrical
plants (used as conductors to withstand very great electrical current) can
serve as reserves of silver certificates, then so can unmined
silver in the mines, including mines in the Moon. So can silver held in
vaults abroad. For good measure, so can silver that has been sold to foreign
governments. Since the government has engaged in this type of currency
manipulation, to issue paper money carrying promises that cannot possibly be
fulfilled, it has created a precedent which can be used in the future to
issue obligations that the Treasury has neither the means nor the intention
to fulfill. Legislators have sunk to a new low
level of degradation in dealing with the public.
The manner in which the issue of
dishonesty was avoided in passing the Green Bill was peculiar and disturbing.
It suggested that there was an intent "to put over a fast one" on
the American people. It has since become a regular feature of monetary
legislation in the United States. As a result, the once mighty dollar was
reduced from a definite promise to pay a definite quantity of monetary metal
of definite quality, first, to a phony promise that was impossible to fulfill. From there it was only a short step to reduce
the dollar further to a scrap of paper promising, as a Federal Reserve note
does, to pay nothing. And this is exactly what it will be worth in the
fullness of times.
Moral bankruptcy
We must see the Green Silver Act
for what it is: the first step on the way to hell. It is a disgraceful piece
of legislation, opening the way toward moral bankruptcy in the administration
of the nation's currency. This lack of respect for the importance of
maintaining the integrity of government promises where the people's money is
concerned fully exhausts the meaning of dishonesty, fraud, and chicanery. It
is tantamount to the rape of the American Constitution.
Not a single voice was raised in
Congress or in Administration circles against this sorry piece of business.
When a government begins to write false promises on the people's money it is
notifying the world in unmistakable terms of the extent to which it is marked
by the rot of moral bankruptcy. Soon enough, financial bankruptcy may follow.
For over sixty years after the
Green Silver Act, America has been fortunate enough to escape that fate. This
should not give it comfort. America has never been closer to fully-fledged
financial bankruptcy than it is right now, an event for which the banks,
businesses, and the people at large are ill prepared, making the coming shock
even more devastating. The economists' and financial journalists' profession
bears responsibility for failure to forewarn and forearm the public. Short of
a miracle, America cannot avoid its fate: credit collapse, the vanishing of
the value of dollar and all dollar-denominated assets such as bank notes, deposits,
bonds, insurance policies, and pension rights.
"Help yourself to fire and
brimstone"
My critics set great store by the
openness in the administration of the currency. They point out that the
debates about the wisdom of selling or leasing silver encumbered by silver
certificates in support of the war effort was carried out in the light of
full publicity. Opponents were given full opportunity to argue their case
against the measure.
Unfortunately, soon enough,
currency management was to become top secret. I close my essay with another
quotation, this one from the October 28, 1945, issue of The New York
Herald Tribune.
"In making the atomic bomb,
the Army needed silver for giant current carriers known as busbars. The Treasury had a lot of silver it wasn't
using, so the Army borrowed 400 million troy ounces.
"The Treasury puts out a
daily statement about where its silver is, and prides itself on its honesty.
The necessity for Army secrecy posed a problem. Fortunately, silver also was
being leased to the Office of Defense Plants and
other agencies. So the daily Treasury report stated the number of ounces
'held by the Office of Defense Plants, the
Reconstruction Finance Corporation, etc.'
"The little word 'etc.' was
big enough to cover the atomic bomb. Luckily, nobody asked the Treasury what
it meant."
Fancy bearers of silver certificates turning up at
the Treasury and demanding delivery of silver. Fancy they
being taken to Los Alamos, shown a pile of radioactive debris, and told:
"Help yourself!"
Antal E. Fekete
Professor Emeritus
Memorial University of Newfoundland
St.Johns, CANADA A1C 5S7
Copyright © 2005 by A. E. Fekete
Antal E. Fekete is
Professor Emeritus at Memorial University in St. Johns, Newfoundland. Born
and educated in Hungary, he emigrated to Canada
after the Hungarian Revolution in 1956 and taught for 35 years in the field
of mathematics. Over the years, he has been a visiting professor or Fellow at
Columbia University, Princeton University, and Trinity College of Dublin. He
worked in the Washington office of Congressman W.E. Dannemeyer
on monetary and fiscal reform for five years in the nineties; and in 1996, he
won first prize in the prestigious International Currency Essay contest
sponsored by Bank Lips Ltd. of Switzerland. He is the author of Gold and
Interest and Monetary Economics 101. In addition, his scholarly
articles have appeared on numerous Internet sites throughout America.
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