The Unseen Hand - Ralph Epperson

Money and Gold

The Bible teaches that the love of money is the root of all evil. Money by itself is not the root It is the love of money, defined as greed, that motivates certain members of society to acquire large quantities of money.

It becomes important, then, for the members of the middle class to understand what money is and how it works. Money is defined as: "anything that people will accept in exchange for goods or services in a belief that they may in turn exchange it for other goods and services."

Money becomes a Capital Good. It is used to acquire Consumption Goods (and other Capital Goods as well.) Money also becomes a method of work avoidance. Money can work for its possessor: "When money was put to work, it worked twenty-four hours a day, seven days a week, three hundred and sixty five days a year, and stopped for no holidays."

So the desire to acquire money to reduce a need to work became the motive of many individuals in the society.

The first man was self-sufficient. He produced what he wanted and stored what he needed for those times when he was unable to produce. He had no need for money until other humans appeared and joined him in the acquisition of Consumption Goods. As populations grew, specialization grew, and certain individuals produced Capital Goods instead of Consumption Goods. Man soon discovered that he needed something as a store of value to enable him to purchase Capital Goods when he was not producing Consumption Goods.

Durable commodities, those that didn't spoil with the passage of time, slowly became that store of value, and in time the most durable, a metal, became the money of society. The ultimate metal, gold, became the final store of value for a variety of reasons:

  1. Gold was universally accepted;
  2. it was malleable, and had the capacity to be minted into small quantities;
  3. it was in short supply and difficult to locate: the quantity of gold couldn't be increased rapidly, thereby reducing its ability to be inflated;
  4. because of its scarcity, it soon acquired a high value per unit;
  5. it was easily portable;
  6. gold also had other uses. It could be used in jewelry, in art, and in industry;
  7. lastly, gold was extremely beautiful.

But as the producer of gold saw the need to set this money aside for future use, problems arose as to how and where it should be stored. Since gold had a high value in what it could purchase in both Capital Goods and Consumption Goods, it became a temptation to those who were willing to take it from the owner by force. This led the owner of gold to take means to safeguard his holdings. Certain individuals, already experienced in the storage of non-durable goods, wheat for instance, soon became the storage facility for gold as well.

These warehouses would take the gold and issue the gold owner a warehouse receipt, certifying that the owner had a given quantity of gold in storage at the warehouse. These gold receipts could be transferred from one person to another, usually by writing on the back of the receipt that the owner was transferring his claim on the gold in the warehouse to another person. These receipts soon became money themselves as men accepted the receipts rather than the gold they represented.

Since gold is scarce and the quantity is limited, it was impossible to make counterfeit money. It was only when the warehouseman realized that he could issue more gold receipts than there was gold in the warehouse that he could become a counterfeiter. He had the ability to inflate the money supply, and the warehouseman frequently did this. But this activity only acted temporarily because as the quantity of gold receipts in circulation increased, because of the economic law known as inflation, the prices would rise. The receipt holders would start to lose confidence in their receipts and return to the warehouseman to claim their gold. When more receipt holders showed up than there was gold in the warehouse, the warehouseman had to go bankrupt, and frequently he was prosecuted for fraud. When more receipt holders ask for their gold than there is gold in the warehouse, it is called a "run," and is caused because the people have lost faith in their paper money and have demanded that the society return to the gold standard where gold becomes the money supply.

The people's check on the warehouseman, i.e. their ability to keep the warehouseman honest by constantly being able to redeem their gold receipts, acted as a restraint to the inflation of the gold supply. This limited the greed of the counterfeiters and forced them into looking for alternative methods of increasing their wealth. The next step was for the counterfeiter to ask the government to make the gold receipts "Legal Tender" and also prohibit the receipt holder from redeeming the receipt into gold. This made the paper receipt the only money able to be circulated. Gold could no longer be used as money.

But this posed an additional problem for the counterfeiter. He now had to include the government in his scheme to increase his personal wealth. The greedy leader of the government, when approached by the counterfeiter with this scheme, often decided to eliminate the warehouseman altogether ("off with his head") and operate the scheme himself. This was the final problem for the counterfeiter. He had to replace the leader with someone he felt he could trust and who would not use government to remove the counterfeiter from the plot. This process was costly and extremely risky, but the enormity of the long-term wealth that could be accumulated by this method was worth all the extra hazards.

A classic example of this entire scheme occurred between the years of 1716 and 1721 in France. These events were set in motion with the death of King Louis XIV in 1715. France was bankrupt with a large national debt of over 3 billion livres. A seedy character by the name of John Law, a convicted murderer who had escaped from Scotland to the continent, saw the plight of the French government and arranged with the newly crowned King to save his country. His plan was simple. He wanted control of a central bank with an exclusive monopoly to print money.

France at the time was under the control of the private bankers who controlled the money supply. However, France was on the gold standard, and the private bankers were unable to inflate the money supply through the issuance of more gold receipts than there was gold.

John Law was granted his wish by the desperate king. He was granted the exclusive monopoly and the king decreed that it was illegal to own gold. John Law then could proceed with the inflation of the money supply and the people couldn't redeem their decreasingly worthless paper money for gold. There was a short term prosperity, and John Law was hailed as an economic hero. The French debt was being paid off, necessarily with paper money of decreasing value, but that was the cost of the short term prosperity. And the French people probably didn't understand that it was John Law who was causing the loss in the value of their money.

However, the king and John Law got greedy and the number of receipts increased too rapidly. The economy nearly collapsed with the increasing prices, and the desperate people demanded an economic reform. John Law fled for his life, and France stopped the printing of worthless paper money.

This printing of paper money, unbacked by gold, is not the only method utilized by the counterfeiters. Another method is more visible than the paper method and is therefore less popular with the counterfeiters. It is called Coin Clipping. Gold is monetized by the bank's minting of the gold into coins. This process involves the melting of the gold into small, uniform quantities of the metal. As long as the coins made are pure gold and all gold in circulation is minted into coins the only method of inflating the gold coinage is to either locate additional supplies of gold (that is, as discussed earlier, difficult, especially as the amount of gold available to the miner is decreasing) or by calling in all of the gold coins, melting them down, and then increasing their number by adding a less precious metal into each coin. This enables the counterfeiter to increase the number of coins by adding a less expensive metal to each coin. Each newly minted coin is then put back into circulation with the same markings as the previous coins. The public is expected to use the coin exactly as before, except that there are now more coins in circulation than before, and as surely as economic law, the increase in the money supply causes inflation, and prices rise.

The early Roman Empire practiced this coin clipping in what has become a classic example of the coin clipping method. Early Roman coins contained 66 grains of pure silver, but, due to the practice of coin clipping, in less than sixty years their coins contained only a trace of silver. Coins clipped of their value by the addition of less precious metals soon drove out the silver coins that remained, in keeping with another economic law, called Gresham's Law, which states: "Bad money drives out good."

As an illustration of this law, the clipped coins minted during the middle 1960's and placed in circulation by President Lyndon Johnson's administration have forced the silver coins out of circulation.

America's founding fathers were concerned with the practice of coin clipping and tried to keep this power out of the hands of the counterfeiters. Unfortunately, they did not completely restrict the government's ability to clip the coins when they wrote the following Congressional power into the Constitution:

"Article 1, Section 8: Congress shall have the power. . . to coin money, regulate the value thereof, and fix the standards of weights and measures."

There are several interesting thoughts contained in that simple sentence.

First, the only power Congress has in creating money is in the coining of it. Congress has no power to print money, only to coin it.

In addition, Congress was to set the value of money, and the power to coin money was placed together in the same sentence as the power to set the standard of weights and measures. It was their intent to set the value of money just as they set the length of a 12 inch foot, or the capacity of an ounce or a quart. The purpose of this power was to set constant values so that all citizens could rely on the fact that a foot in California was the same as a foot in New York.

A third way to inflate the gold standard consists in calling in all of the gold or silver coins and replacing them with coins made of a more plentiful metal, such as copper or aluminum. The most recent example of this activity, called "coin substitution," occurred during the administration of Lyndon Johnson when the government replaced silver coins with ones made of strange combinations of more plentiful, and therefore less expensive, metals.

For the counterfeiter who finds such methods less than perfect, the surest course to the acquisition of great wealth through inflation, is for him to get the government off the gold standard altogether. Under this method, the gold standard (the requirement that the government issue only gold coins, or paper directly issued on a one-for-one basis to gold as money) is eliminated, and money is printed without any backing, with the official sanction of the government making it legal.

By dictionary definition, such a money is called Fiat Money: paper money of government issue which is legal tender by fiat or law, does not represent nor is it based upon gold and contains no promise of redemption.

One can see the transformation of America's gold standard into the fiat standard by reading the printing on a one dollar bill.

The early American money carried the simple promise that the government would redeem each gold certificate with gold simply by the surrender of the certificate at the treasury. The Series of 1928 dollar had changed this promise on the front of the bill to: "Redeemable in gold on demand at the U.S. Treasury or in good or lawful money at any Federal Reserve Bank." There are those who question the true nature of this dollar if its holder can redeem it for "lawful money" at a Reserve Bank. Does it mean that what the holder was trading in was "unlawful money?"

In any event, by 1934, the one-dollar bill read:

"This note is legal tender for all debts, public and private and is redeemed in lawful money at the Treasury or at any Federal Reserve Bank."

And in 1963, this wording had again changed to: "This note is legal tender for all debts, public and private." This bill was no longer redeemable in "lawful money" so the question of whether the previous money was "unlawful money" is now moot. But even more importantly, the bill was now a "note." This meant that this dollar had been borrowed from those who have an exclusive monopoly on printing paper money, and the ability to lend it to the U.S. government. The bill identifies the source of the borrowed money: The Federal Reserve System (the top line of the bill reads "Federal Reserve Note.")

America was on the gold standard until April, 1935, when President Franklin Roosevelt ordered all Americans to turn their gold bullion and gold coins into the banking system. For their gold, the American people were given irredeemable paper currency (Fiat Money) by the banks who turned the gold over to the Federal Reserve System. President Roosevelt called in America's gold without benefit of a law passed by Congress by using an unconstitutional Presidential Executive Order. In other words, he did not ask Congress to pass a law giving him the authority to call in America's privately owned gold; he took the law into his own hands and ordered the gold turned in.

The President, as the Chief of the Executive Branch of the government, does not have the power to make laws, as this power constitutionally belongs to the Legislative Branch. But the American people were told by the President that this was a step to end the "national emergency" brought about by the Great Depression of 1929, and they voluntarily turned in the majority of the country's gold. The President included in his Executive Order the terms of the punishment if this order was not complied with. The American people were told to turn in their gold before the end of April, 1933, or suffer a penalty of a fine of $10,000 or imprisonment of not more than 10 years, or both.

Once the majority of the gold was turned in, President Roosevelt on October 22, 1933, announced his decision to devalue the dollar by announcing that government would buy gold at an increased price. This meant that the paper money that the Americans had just received for their gold was worth less per dollar. One dollar was now worth one thirty-fifth of an ounce of gold rather than approximately one twentieth as it had been prior to the devaluation.

Roosevelt, when he announced this move, made the following statement in an attempt to explain his action:

"My aim in taking this step is to establish and maintain continuous control . . . We are thus continuing to move towards a managed currency." (It is rather ironic, and also extremely revealing, that Democratic candidate Roosevelt ran on a 1932 Democratic platform that supported the Gold Standard!)

However, not all of the American gold was turned in: "By February 19, gold withdrawals from banks increased from 5 to 15 million dollars a day. In two weeks, $114,000,000 of gold was taken from banks for export and another $150,000,000 was withdrawn to go into hiding."

The gold was being called in at $20.67 an ounce and anyone who could hold their gold in a foreign bank only had to wait until the price was raised by the government to $35.00 an ounce and then sell it to the government at a rather substantial profit of approximately 75%.

A similar profit was made by a Roosevelt supporter, Bernard Baruch, who invested heavily in silver. In a book entitled FDR, My Exploited Father In-Law, author Curtis Dali, Roosevelt's son-in-law, recalls a chance meeting with Mr. Baruch in which Baruch told Mr. Dali that he had options on 5/16ths of the world's known silver supply. A few months later, to "help the western miners," President Roosevelt doubled the price of silver. A tidy profit! (It pays to support the right people!)

There were some, however, who saw the sinister purposes behind these maneuvers. Congressman Louis McFadden, Chairman of the House Banking Committee, charged that the seizure of gold was "an operation run for the benefit of the international bankers." McFadden was powerful enough to ruin the whole deal "and was preparing to break the whole deal when he collapsed at a banquet and died. As two assassination attempts had already been made against him, many suspected poisoning."

A giant step in the direction of remedying this dilemma, of returning to a gold standard, occurred in May of 1974, when legislation was signed by the President allowing the American people to once again legally own gold. This legislation did not put the United States back on the gold standard, but at least it afforded those concerned about inflation an opportunity to own gold should they choose to do so.

However, those who purchase gold have two generally unknown problems. One is the fact that the price of gold is not set by the free market, where two parties get together and arrive at a mutually satisfactory price. It is set:

". . . twice a day on the London gold market by five of Britain's leading dealers in bullion. They meet in the offices of N.M. Rothschild & Sons, the City Bank, and agree upon the price at which all are prepared to trade in the metal that day." So the price of gold is not set by the free activity of buyer and seller but by five bullion traders.

Even though the purchaser of gold still thinks that the gold he purchased belongs to him, the American government still may call it in. There is a little known provision of the Federal Reserve Act that reads:

"Whenever in the judgment of the Secretary of the Treasury such action is necessary to protect the currency system of the United States, the Secretary. . . in his discretion, may require any or all individuals . . . to pay and deliver to the Treasurer of the United States any or all gold coins, gold bullion, and gold certificates owned by such individuals."

So if the government wants to recall the gold of the American citizen, it has but to use this law and the force of government, and it will be called in. And the only options the gold owner has to surrender his gold or face the penalties of the judicial system.

But the government also has the power to call in paper money by destroying its value through a rapid increase in the money supply. This process is called "hyper-inflation."

Perhaps the classic example of this method of calling in the paper money occurred after World War I when Germany destroyed the value of the German mark by printing large quantities of nearly worthless new marks.

After the end of World War I, the peace treaty signed by the belligerents, called the Treaty of Versailles, required that the defeated German nation pay war reparations to the victors. The Treaty: "had fixed the amount that Germany must pay in reparations at two hundred and sixty nine billion gold marks, to be paid in forty-two annual installments.

The entire process was initially set into motion when the Reichsbank suspended the redeemability of its notes in gold with the outbreak of the war in 1914. This meant that the German government could pay for their involvement in the war by printing fiat money, and by 1918, the amount of money in circulation increased fourfold. The inflation continued through the end of 1923. By November of that year, the Reichsbank was issuing millions of marks each day.

In fact, by November 15, 1923, the bank had issued the incredible sum of 92,800,000,000,000,000,000 (quintillion) paper marks. This astronomical inflation of the money supply had a predictable effect upon prices: they rose in an equally predictable manner. For instance, prices of three representative household commodities rose as follows: (in marks):

Commodity Price in 1918 Price in 1923
lb. potatoes .12 50,000,000,000
one egg .25 80,000,000,000
pound of butter 3.00 6,000,000,000,000

The value of the German mark fell from a value of twenty to the English pound to 20,000,000,000 to the pound by December, 1923, nearly destroying trade between the two countries. It is apparent that Germany decided to print their way out of the war reparations rather than tax their people for the costs of the war for several reasons. Obviously, taxing the people is a very open and visible method of paying for the war debt, and certainly is not very popular. The result of the printing press is not visible in that the people can always be told that the price rises are the result of the shortages of goods caused by the war, rather than the increase in the money supply. Secondly, those candidates for high office in government who promise to end the inflation if and when elected are capable of doing so because the government controls the printing presses. So the middle class, who suffered the greatest during this inflation, looks for solutions and will frequently seek the nearest candidate who promises a solution. One such candidate was Adolf Hitler:

"It is extremely doubtful whether Hitler could ever have come to power in Germany had not the inflation of the German currency first destroyed the middle class."

Hitler certainly was given an issue to attack the German government with. He could blame the current government for the hyper-inflation and all German citizens could know what he was saying, because the price rise affected nearly all of the German people.

Even more thought provoking is the possibility that there were those who actually wanted Hitler, or someone like him, to come to power, and who structured the Treaty of Versailles in such a manner as to force Germany to turn on the printing presses to pay for the costs of the reparations. Once these conditions were created and the printing of large quantities of paper money began, it was possible for a Hitler to promise that he'd never allow such a travesty to occur under his administration should he be given the power of government.

As John Maynard Keynes pointed out in his book The Economic Consequences of the Peace, there are those who benefit by hyper-inflation, and these individuals are the ones most likely to benefit by the rise to power of a Hitler who attacked the government for allowing such a thing to occur no matter what the cause. Those who controlled the money supply could purchase Capital Goods at a reduced price (measured in pre-inflation marks) because they had unlimited access to unlimited quantities of money. Once they had acquired as many Capital Goods as they desired, it would be to their advantage to have the economic situation return to normal. They could turn off the printing presses.

Those who sold property prior to the hyper-inflation were the greatest losers, for they were paid in marks worth far less than when they created the mortgage. A mortgagee could not go into the market place and buy a similar piece of property for the price of the mortgage just paid up. The only ones able to continue buying property were those who controlled the printing presses.

Is it possible that the German hyper-inflation was intentionally caused to eliminate the middle class? That certainly was the result of the printing press money, according to Dr. Carroll Quigley, the noted historian, who wrote: "by 1924, the middle classes were largely destroyed."

Some economists understand this damaging process and have taken pains to point it out. Professor Ludwig von Mises, for one, lived in Germany during the hyper-inflation and wrote:

"Inflationism is not a variety of economic policy. It is an instrument of destruction; if not stopped very soon, it destroys the market entirely.

"Inflationism cannot last; if not radically stopped in time, it destroys the market entirely.

"It is an instrument of destruction; if not stopped very soon, it destroys the market entirely.

"It is an expedient of people who do not care a whit for the future of their nation and its civilization."