REAL MONEY

REF:"A New Magna Carta for Our Time" by Hugo Salinas Price 9.24.09

". . . You can see that all the trade in the world proceeded in an orderly fashion, under Bretton Woods, established in 1944 as the basis for the post-World War II monetary system, up to 1971.

Under Bretton Woods, gold, and in lieu of gold, dollars, were deemed to be the means of “Settlement” of trade imbalances. The system worked well, although the seed of its final destruction had been sown, in the form of “in lieu of gold, dollars”.

That left open the door for the US to expand credit, import more than it sold abroad, and pay for the trade deficit it incurred in doing so, by means of tendering dollars. We can say that the US “leveraged” its gold holdings – an enormous 20,000 (more than that, but I have not the exact amount) tons of gold – by paying for its trade deficit in dollars and holding on to the gold.

As the US tried to hold on to its gold and honor its commitment to deliver gold to Central Banks, at their request, at the rate of one ounce of gold for every $35 dollars tendered for redemption into gold, the world’s economy evolved pretty smoothly. US credit expansion was relatively modest, in view of the Bretton Woods commitment. Trade deficits and trade surpluses were held down by the need to settles debts and credits in gold, or in dollars which were taken to be “as good as gold”. There were no chronic and exaggerated “imbalances” in world trade, as they are called today – chronic trade deficits on the part of some countries like the US and now, the European Union; and chronic trade surpluses on the part of some exporting countries, like China and other Asian countries. Trade deficits had to be “settled” that is to say, paid for.

So this is why we see a practically flat line representing International Reserves in the Central Banks of the world, up to 1971.

[The following paragraphs significantly explains what led up to Nixon's move to go off the Gold Standard and let the dollar value float. Many author's blame Nixon solely, yet the truth was we did not have enough gold to meet the creditor demands]

However, some years before 1971, as seen in the graph, the US began to leverage its gold holdings quite excessively. It sent too many IOU’s (dollars) to the world as it expanded credit to pay for the Vietnam war and the Great Society of LBJ.

In 1968, France objected to holding more and more of these IOU’s (dollars) and asked for its gold. Rumblings of devaluation of the US dollar in terms of gold began to circulate. France wanted settlement of US debt; and the only way to settle US debt was by – collecting gold for its dollars. Dollars were not settlement!

The crisis exploded on August 15, 1971, when Nixon, quite unexpectedly, decided to renege on the Bretton Woods Treaty and refused to redeem dollars held by Central Banks for gold. The expected decision was a devaluation of the dollar – down to $70 dollars for an ounce of gold – but that was not what the world got. By refusing to devalue and just shutting down “the gold window”, the whole world was thrown into a world of exclusively fiat money.

Since that fatal day, there has been no settlement at all of international debts.

. . Reserves have exploded because there was no need to “settle” trade imbalances. Since the world accepted Nixon’s decision not to settle with gold, but to accept dollars in supposed “payment” of Trade Deficits, a complete disorder set in. So-called “Reserves” are huge - $7.2 Trillion – and yet nothing goes right. All these “Reserves” are debts owed, principally by the US.

Up to 2007, this was a wonderful period for the US: it was able to behave like an adolescent come into a vast fortune: dollars in huge quantities, manufactured at will by the US Fed and Treasury, were spent buying up everything under the Sun for the enjoyment of the US consumer. Unlimited credit expansion!

We are led to believe that payment in dollars constitutes settlement, but that is a total fallacy. There is no settlement except settlement in gold. The proof is that when Central Banks receive dollars, they exchange them for US Treasury Bonds and other American securities deemed credit worthy. (The Euro is now in on this game, also). The debt created by Trade Deficits is not extinguished in today’s world. It remains on the books of Central Banks as Reserves, in the form of Bonds, which are debt instruments."

An economic lesson that needs our attention.

With Love and Kindness,

THE HATMAN