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Report to the Congress
of the
Commission on the Role of Gold
in the
Domestic and International Monetary Systems
March 1982
Contents of the Commission's Permanent Record
Volume 3

Written Submissions from the Public in Response to
Commission Invitation

°tC 9


Barlow, Wallace, International Institute for Resource
Economics, November 30, 1981.

— Blain, Robert R. "The Necessary Characteristics of a
Monetary Standard," November 24, 1981.
— Braun, Conrad Jules, "The Unique American Path,"
November 12, 1981.
— Browning, George L., "Rescuing America from False Money
Concepts which are producing Social Unrest, Violence and
Crime instead of Social and Economic Health," October 15, 1981.
— Cobb, Joe, U.S. Choice in Currency Commission,
November 12, 1981.
— Dessaur, John P., "Returning the U.S. to the Gold Standard,"
November 1981.
— Dockstader, C.F., "Tender and the U.S. Constitution,"
November 1981.
— Durell, Edward, "Mr. President, Where is Our Gold?,"
November 1981.
— Firth, Brian, "Why Not Bell the Cat?," November 1981.
— Green's Commodity Market Comments Vol XVI No 18,
September 23, 1981; Vol XVI No 20, October 21, 1981;
Vol XVI No 21, November 4, 1981.
— Groseclose, Elgin, Institute for Monetary Research, Inc.,
November 18, 1981.
— Harris, John H., "As Good as Gold," December 7, 1981.

Hasson, Joseph A.,


Hazlit, Henry, "The Gold Standard Misdefined," November 1981.

"Some Neglected Aspects of the Gold Standard."

— Holt, Thomas J., "The Holt Economic Analysis: Too Early
for Gold," November 1981.
**• Johns, Richard, Foundation for the American Economic Council,
November 1981.
— Larson, Martin, Liberty Lobby, "The Role of Gold in Monetary
Systems," November 27, 1981.
— Lurio, Mitchell, "A Permissive Way to Achieve a Gold Standard
Without Prior Fixing of the Dollar Price of Gold,"
November 14, 1981.
— Mallin, Tony, Chicago, 111., November 24, 1981.


Mann, Phillip H., Miami, Florida, November 3, 1981.

— Mason, Will E., "The Gold Standard: Retrospect and Prospect,"
November 27, 1981.
— National Democratic Policy Committee, "A Gold Policy to Stop
Depression," September 22, 1981.
— New York Gold and Silver Futures Exchange, October 22, 1981.
— Nordt, Paul W., North Caldwell, New Jersey, November 12, 1981.
— North, Gary, "The Moral Issue of Honest Money," November 1981.
— Ockert, Carl E., "Flexible Gold Convertibility,"
November 6, 1981.
— Popp, Edward E. "The Coinage and Use of Full Bodied Gold
and Silver Coins," October 24, 1981; "To Stop Increasing
the U.S. Government's Interest Bearing Debts,"
October 29, 1981.
— Puffer, K. Hart, "The Most Successful Money System,"
November 1981.
— Racz, Andrew, "The Gold Standard," September 17, 1981,
"Silver and Gold-Indexed Bonds, a .New Era," February 21, 1981.
— Reisman, George, "Gold: The Solution to Our Monetary Dilemma,"
November 1981.
— Russell, Jim, B. L. Rhodes Company, Chardon, Ohio,
November 9, 19 81.
— Russell, Robert R., "The Fallacies of Monetarism,"
January 8, 1982.
— Scharlach, Harry, Hoopeston, 111., November 16, 1981.
— Sennholz, Hans, "The World Needs Honest Money," November 1981.
— Silox, John, Bank of Hanover & Trust Co., Hanover, Pa.,
November 4, 1981.
— Solyom, Richard L., Sound Dollar Committee, January 22, 1982.
— Syms, Steven, U.S. Senator from Idaho, November 12, 1981.
— Thomas, Harold, Gold Standard Review, November 27, 1981.
— Van Buren, Weston I, Los Alamitos, Calif., December 11, 1981.
**. von des Porten, Herbert P., "GRAMDOR: A Proposal to
Establish a Resilient Gold Currency", June 1981.


Welker, Ernest P., "Why Gold?," September 1981.

— Whelply, James, ISI Corporation, Oakland, Calif.,
November 13, 1981.
— Wrisley, John, Columbia, S.C., November 10, 1981.
** Missing

Telephone: (301) 229-6066

Wallace D. Barlow, P.E., Director


Managers of International
Commodity Agreements

6210 Massachusetts Avenue
Washington, D. C. 20016

November 30th, 1981
Statement for the U.S. Gold Commission:
In 1974 I made a speech to the Men's Republican Club of Montgomery County,
Maryland. It expressed the views of the International Institute for Resource Economics
at that time. I believe it is still relevant. Here it is:
"Since 1971 the dollar has been convertible only into an unspecified
quantity of an unknown commodity. Since that date, only fools have chosen to
hold dollars rather than goods. This must continue, until the dollar is again
convertible into a specific quantity of a known commodity.
Which commodity? This decision can be left to the technicians.
High unit value and ease of identification are considerations.
The decision to close the gold window, rather than to change the
price in accordance with the increased cost of production was dictated by
idiots. They were concerned with minor advantages that might accrue to the
Soviet Union and South Africa. They predicted a price of $6 as the free
market price of gold. Most important of all, they ignored the fact that the
convertibility of the dollar into gold, as agreed to at Bretton Woods, had
become the cornerstone of civilization on this planet.
When the International Monetary Fund met to vote on "Paper Gold";
I was there. What was I doing? I was giving away rubber yardsticks. On
each yardstick, in ten languages, was the warning; "Never Trust a Politician"'
My organization deplores the efforts of the enemies of convertibility to
complicate this issue. It is brutally simple. There are two kinds of money; HONEST
and DISHONEST. History teaches us that honest money has a batting average of 1000;
dishonest money a batting average of ZERO.
Very truly yours,

Wallace D. Barlow, P.E., Director

r\ General Theory of Hunjaif Progress
, _





World Community

Time Money













Reward +

Mechanical + Bureaucracy -f Hierarchy +














Developed by Professor Robert R. Blain, P h D , Southern Illinois University, Edwardsville, Illinois 62026, September, 1980


T iPxu
° U m a n P r °S r e s s ' k n ° w n to its developer as The ICL (Information Chain
Length) Theory, is a statement of probable causal correlations observable in the evidence of past and
present h u m a n societies. The evidence appears to show that h u m a n groups have prospered to the
degree that they have attained high levels of development with respect to each of the six independent
variables of the ICL theory, namely, large numbers of people, commitment motivation, electrical
technologies scientific and democratic methods of codification, high levels of population density
and meaningful and stable writing systems including those of numbers and money. These conditions
m a k e it possible for the members of h u m a n groups to communicate information m a x i m u m distances
in minimum volumes. Conversely, the evidence appears to show that h u m a n groups have suffered
hardship to the degree that they have remained at or regressed to low levels of development with
respect to each of the six independent variables of the ICL theory, namely, small numbers of people
widespread use of coercion, manual technologies, traditional methods of codification, low levels of
population density, and a spoken language unsupported by written symbol systems including those
of numbers and money.

flje Basic Paradigip

Amount of

The Scale of Cooperation
(Information Chain Length)
The explanation for these correlations is to be found in the Basic Paradigm of the ICL Theory. In
general, as information is communicated from person to person to person (forming an information
chain), there is a tendency for information to become distorted, to undergo entropy. The six
independent variables of the ICL theory vary systematically in their effects upon this rate of entropy.
Similarly, these six variables affect the volume of information that it is necessary to process through
the social system to bring about effective cooperation. High volumes of information create problems
of information overload and congestion, making low volumes of information preferable for efficient
In brief, the ICL Theory states that h u m a n progress depends upon the accurate and efficient
communication of information the longest necessary social distances to support the largest scale of
cooperation and thus the greatest potential for h u m a n fulfillment and actualization.

The Necessary Characteristics of a Monetary Standard
Robert R. Blain, PhD
Professor of Sociology
Southern Illinois University at Edwardsville

Presented to

The Gold Commission
Washington D. C.

November 24, 1981

The Necessary Characteristics of a Monetary Standard
Robert R. Blain, PhD
Professor of Sociology
Southern Illinois University at Edwardsville

Any standard of weight or measure, including money, must possess
certain characteristics. It is relatively easy to identify what these
characteristics must be because we already have a large number of such
standards including standards of length, weight, temperature, barometric
pressure, volume, and time. Each of these standards has now been in use
for many years and has proven itself in practice to work very well in
providing its users with the means to effectively and efficiently, without
government intervention, exchange goods involving their use. The only
mechanism of economic cooperation and exchange that now fails to work
adequately is money, hence the need to compare money to each of the
characteristics that any standard must possess.
The characteristics that all successful standards possess are the
1. They are real. That is, they have an existence outside
the minds of their users. None is purely subjective. All are
tangible in some way. Length can be seen, weight can be measured on
a scale, temperature can be felt and sensed by a thermometer, speed
can be observed and measured with a speedometer, atmospheric pressure
can be measured with a barometer. Objective existence is a necessary
characteristic of any standard because only an objective standard can
serve as an arbiter of a dispute between exchange partners. Were a
standard of length, for example, only subjective, two people who

disagreed over the dimensions of a plot of land could never resolve
their disagreement with mutual certainty.
2. All successful standards are stable. The function of
a standard is to facilitate the cooperation and coordination of
economic activities that take place among persons dispersed over
wide geographic regions and over long periods of time. Any standard
that itself changed dimensions from place to place or from time to
time could not perform this function. The critical importance of
stability is implied by the standard for yard as defined in 1854:
"the distance between two lines crossing two gold studs set in a
certain bar of platinum kept in London, the measurement being made
when the temperature is 62 degrees Farenheit and the barometric
pressure is 30 inches" (Funk and Wagnalls, 1950: 13,060).
3. All successful standards are system-wide. In order for
a standard to facilitate the coordination of all parts of an economic
system, all persons in the system must have access to that standard.
Early measurement systems, such as the Roman,based on the human foot,
the hand, or the distance from the nose to the end of the outstretched
arm; involved measurement errors because these varied from person to
person. Standardization meant establishing one and only one foot,
hand, or arm as the standard to be used by everyone in the system.
4. All successful standards are appropriate. A standard
must possess the quality that is being measured. A standard of length
must have length, a standard of weight must have weight, a standard of
temperature must vary with changes in temperature, etc. It would be
inappropriate to use a weight as a standard of length, or a weight as
a standard of time, etc.


Having identified the four characteristics that are in fact possessed
by all known successful standards of weight and measure, we can test the
validity of using gold as a monetary standard by seeing if gold possesses
each and every of these characteristics. When this test is made, we find that
gold meets in full only the first characteristic, that of being real.
1. Is gold real? Yes, gold is real. Gold has an observable,
tangible existence. People can see it. Indeed, it is the reality of
gold that recommends it as a monetary standard. By tying the value
of money to a quantity of gold, it is thought that the money supply
will be made objectively determinable.
2. Is gold stable? If we consider a particular piece of gold
we must say that gold is stable. A piece of gold will remain exactly
what it is over generations of time - assuming that it is not purposely
altered by man. Gold, of course, deteriorates at the atomic level but
at too slow a rate to be relevant to human economic relations.
If we consider the total supply of gold, however, we find
that its quantity is not stable. As gold is mined,the supply increases.
As gold is used for industrial and cosmetic purposes, the supply
decreases. Since gold is relatively rare, the rate of change is much
slower than the rate for commodities such as wheat and corn. In this
sense, gold is more stable than certain other things and a money system
based on gold would be only relatively stable.
When we consider the value of gold, we find it to be highly
variable. The judgment of value tends to be highly subjective,
dependent upon the person and the use made of it. Some persons place
a high value on gold jewelry while others regard such a use as wasteful.

Therefore, we must conclude that gold does not meet the criterion of
3. Is^ gold system-wide? Gold is system-wide only in the
sense that everyone has heard of gold. Gold £s not system-wide in
the sense that very few people possess any gold, very few people
can identify gold and unfailingly distinguish it from pyrite,
virtually noone knows how to measure "karats11 of gold. People
could weigh a piece of gold, but an expert would have to certify
the metal as gold and would have to assess its purity.
4» .Is gold appropriate? Gold is measured by weight.
The function of a monetary standard is to measure price. Is it
appropriate to measure the price of a good or service by its
weight? If it were, then the heaviest things would have the
highest prices and the lightest things would have the lowest
prices. Houses would sell for more than diamonds, iron ore
would sell for more than precision surgical instruments, and
all services - having no weight at all - would be free. Gold,
clearly, fails to meet the test of appropriateness.

Therefore, when gold is judged by the characteristics possessed by
all successful standards of weight and measure it fails to meet three out
of four. Gold is real but it is not stable, it is not system-wide, and it is
not appropriate. Given this almost total failure of gold to measure up to
the characteristics needed by a monetary standard, we might pause to ask
Why has gold been so prominent as a candidate for a monetary standard? The
answer lies in the history of the evolution of money.

Since the members of the Gold Commission are undoubtedly familiar with
the evolution of money, I will not bore you with a lot of detail. In capsule
form, the evolution of money progressed through the following stages:
1. Barter - goods and services directly exchanged.
2. Favorite commodity systems - where a third commodity
mediated exchange. The commodities that emerged as
favorites were mainly copper, silver, and gold.
These metals did not rust, hence were goods "stores of
value", they could be moved from place to place, and
they could be added to or subtracted from so that
items of unequal value could be exchanged.
3. Paper receipt systems - the commodity money was held
in a safe place and paper receipts circulated in their
stead. In this way, the paper came to be thought of as
standing for the silver or gold "on reserve."
4. Fractional reserve systems - loans were made based on
money on deposit so that the total money supply was
expanded beyond the amount on deposit. Gradually the
reserves ceased to be in gold or silver and we advanced
to completely paper money systems, the situation we are
in at present.
Why, then, is gold popular as a candidate for the monetary standard?
Because in the past it served as such a standard and, in the context of primitive
money systems, it worked tolerably better than anything else. However, does
this mean that we should go back to gold? The question is somewhat like
asking Should we go back to favorite commodity systems or back to barter?
Should we turn back the clock of monetary evolution? The supply of gold in

the world and particularly the distribution of that gold among the countries
of the world does not correspond with the supply and distribution of economic
activities in the world. Therefore, to tie the money supply to the gold
supply would contort, confound, and confuse economic relationships.
What we need is not to go back to gold; what we need is to go forward to yet
another stage in the evolution of money. What we need is to find something
that meets the four conditions that must be met by a monetary standard,
something real, stable, universal, and common to all occupations and goods
and services worldwide. Such a thing does exist. Unfortunately, the
contortions that an unstandardized monetary system has already created will
make the adoption of that "thing" difficult. Nonetheless, I believe it is
the duty of our generation to face the truth as clearly and as squarely as
our minds permit. We admire our forefathers for the special courage they
manifested in fighting for our political independence; let them serve as
models for us as we face the economic challenge of our time - identifying
and adopting a monetary standard that logic and the facts impose upon us.
The "thing" that meets all four necessary characteristics of a
monetary standard is time.
1. Is time real? Yes, time is real. Time is based on
the rotation of the earth (hours and days) and the orbit of the
earth around the sun (days, weeks, and years). The reality of
time is not in the same form, for example, as the reality of a
weight. The reality of time is more akin to the reality of
speed. Time is measured by movement. We sense time by the
rising and setting of the sun and by the change of the seasons.
The modern understanding of time is relatively new, being at least

2# ll time stable? Time is as stable as the rotation of
the earth on its axis and the orbit of the earth around the sun. As
far as human economic activities are concerned, time is probably the
most stable thing of all. Indeed, we measure the deterioration of
atoms by time - their half-lives. Time is clearly more stable than
3. Ijs time system-wide? Time is worldwide. All peoples
all over the world keep time records. And the 24 hour day is universal.
Clocks can be found in all but the most primitive cultures and even
the latter have some form of clocks.
4» Ijs time appropriate as a monetary standard? There is a
great deal of evidence that time is appropriate. The first body of
evidence consists of all the ways we presently use time to organize and
regulate our economic activities. We define the length of the working
day in hours; we define the length of the work week in days; we define
the length of the work year in weeks; we define the work career in years.
We govern entry into the labor force by age; we govern exit from the
work force by age. Apartment rent is charged by the month; interest is
charged by the month and year; taxes come due annually. Depreciation
allowances are defined by time; education is organized by age and
years; economic planning is often done in man-hours. People are paid
by the hour, by the week, by the month, and by the year. Seniority is
a matter of time. Ironically, we measure inflation with time! If time
were not appropriate as a standard for organizing economic activities,
it would be difficult to explain its universal use.
Another kind of evidence for the appropriateness of time

as a monetary standard is people who have proposed its use as
such. These include Benjamin Franklin who proposed in 1729 that
time-in-production be used to set prices; the residents of New
Harmony, Indiana who used time to set prices in their store;
Josiah Warren of Ohio who proposed the use of time for prices in
the nineteenth century; and the frequent use of man-hours by the
government to compare the real cost of commodities over time.
Another kind of evidence for the Use of time as a
monetary standard is the universal language habit of linking
time and money. In their daily conversations, in advertisements,
and in public declarations, we constantly hear the phrases
"spending time and spending money," "saving time and saving money,"
"investing time and investing money." The constant association of
time and money suggests that the two have a great deal in
common. Both time and money have a powerful disciplining effect
on human activity.

Therefore, we have identified the four characteristics that all
successful standards have in common and we have found that, where gold fails
to meet these conditions, time meets them all.
How might time be instituted as the monetary standard? There is a
relatively simple and reasonable method for adopting time as the monetary
standard; namely, to divide the Gross National Product by the total number
of hours worked by the labor force to produce that GNP. Since the GNP is
in dollars and work time is in hours, the division would yield dollars per
hour, the ratio for defining dollars in units of time.

For 1980, the calculation would have been as follows.

The 1980

Gross National Product for the United States was $2,626 billion. The
labor force in 1980 numbered 97.3 million persons. I do not know how
many hours the labor force worked, so an assumption is introduced here
to complete the illustration. Let us assume that everyone in the labor
force worked 40\aweek for 50 weeks, probably an overestimate, but useful
for the present purpose. By that assumption the labor force worked
97.3m(40 X 50) . 97.3m(2000) = 194.66 billion hours.
Gross National Product $2,626 b „,0 /n
Total Hours Worked
194.66 b







This equation defines the ratio of dollars to hours by which the present
dollars could be replaced by new Hour Dollars and the entire economy placed
on the Time Standard.
The conversion equation has the advantage of being applicable to
any nation in the world and of being adoptable at any time. Such a conversion
could place international monetary relations on a stable and rational basis.
International comparisons would reveal cases of price inequities and
prevent such price abuses as the price increases of the OPEC cartel as
the understanding spread that prices should reflect the time required to
produce goods and services.
Money on the time standard would greatly simplify economic theory
and economic practice. The setting of prices would become a matter of
simple adminstrative routine. Inflation would be ended, for price increases
would imply that more time is required for production, a dubious assumption in
most cases.
Perhaps the greatest benefit of money on the time standard would be
its effect on the relationship between government and the market. Today we

see an unprecedented involvement of government in economic affairs. This
involvement has been made necessary by the economic chaos caused by money
that has no real, stable, universal, and appropriate standard. In the
absence of a monetary standard, the setting of prices has been a matter
of trial and error, inflation has continued for generations, and economic
planning for all units of the economy has had perverse and unpredictable
results. The market cannot work with a money system that leaves everyone
to guess what a dollar is worth. The free market can be free and work
only where each person in the system has a known and reasonable yardstick
for deciding how much to charge and how to pay for particular goods and
The question that naturally arises when the proposal to go on the
time standard is made is Will everyone be paid the same amount of money per
hour? Would, for example, everyone be paid the equivalent of $13.49 per hour?
Note, first of all, that a wage rate of $13.49 per hour, if received
by everyone, would be a good living. At such a rate a large part of our taxes
would already be paid. Such a rate provides for the payment of all government
employees (they are included in the labor force), all public and private
school teachers, police and firemen, etc. - everyone in the labor force would
be paid. The only taxes that would be necessary would be transfer payments
to support children, the disabled, and the retired. Each worker would need
to support him or herself plus 1 and 1/3 other people. We produced enough in
the United States in 1980 to provide an income of $11,619 per person in the
society. (I am ignoring capital depreciation allowances partly because it is
difficult to assess their accuracy - but if included they would not significan
reduce the per capita figure.)

The second point to be noted with respect to the question Will everyone
be paid the same amount of money per hour? is this. The adoption of the
time standard does not change anyone's income. It leaves the distribution of
money unchanged. The only immediate effect is to give the money numbers a
meaning that they presently lack. The people making a million dollars a
year would continue to make the same amount of money relative to everyone
else. The only change would be that the income would be expressed in hours
and years.
If $13.49 equals one hour, a year is equal to 2000 times $13.49 or
$26,980. One year equals $26,980. A million dollars, then, equals
$1.000,000 -7

37 years.

The millionnaire's income would be expressed as 37 years.
The benefits of money on the time standard would begin to occur as
people throughout the economy gained a new and real understanding of how
much money they were receiving. They could then make their economic decisions
accordingly. The millionnaire, for example, might decide to retire after
a few years, having earned enough to last more than a lifetime. The adoption
of the time standard is meant to make the free market work; it is not meant
to replace that market. Today the market is in chaos; the time standard would
straighten it out through voluntary and gradual adjustments.
What is the alternative? Socialism is on the rise in the world
because capitalism appears to be destroying itself. Free market cooperation
can be saved only by adopting a rational yardstick of economic price. Gold
fails to meet the necessary criteria; time meets all of them. Cur intuition
tells us repeatedly that time and money go together. Is it not interesting
that the solution to inflation may be just a matter of time?
November 24, 1981

by Conrad Jules Braun

The following testimony was presented to
the U.S. Cold Commission which held its public hearings on November 12 and 13, 1981.

I am from Kansas. And in Kansas there are
some wide open spaces and a favorite sport is
sky-diving. It's supposed to be safe, at least that
is what one of m y sky-diving friends told m e
until that fateful day he' stepped out of an
airplane and pulled his ripcord and nothing
happened. Nothing happened!
Fortunately, he knew what to do next. H e cut
away the main chute and pulled the emergency
chute. Again, nothing happened! N o w m y
friend was becoming a little concerned as he
plummeted towards earth, w h e n he spied a
gentleman w h o was coming up from the opposite direction! Not knowing what to do in his
predicament and nearly completely beside himself my friend asked this gentleman, " D o you
know anything about sky-diving?"
The gentleman replied, " N o ! D o you know
anything about Coleman stoves?"

Gentlemen, Mr. Chairman, M e m b e r s of Congress, Distinguished Commissioners this is the
predicament our nation faces today. W e are at a
brink of a precipice and don't k n o w which way
to jump.
As noble laureate F. A. Hayek puts it w e can no
longer afford a system that subjects the entire
nation to the recurring bouts of acute inflation
and deflation that have become accentuated
during the past 60 years. To paraphrase Lewis

Lehrman, Socialists, Communists, and
Monetarists — m e n of all persuasion — have
n o w agreed that the end of this predicament is at
least an important, if not the preeminent goal
that w e all affirm.
The Members of this Commission and the nation as a whole agree on the problem. W e disagree only on the solution.
S o m e members of this Commission have attributed great importance to the precise amount
that the federal government should expand the
money supply, others point to the level of the
federal deficit, still others refer to a role of gold
in the nation's purchasing media and still others
point to the importance that gold play no role in
m o n e y at all. S o m e have even presented a
combination of these ideas and ideas that I have
not mentioned here.
Clearly it is evident that no two Members of
this Commission can agree on what role gold
should or should not play in the monetary
realm. As Shakespeare put it, "There seems
m u c h ado about nothing." The Members of this
Commission and the American public perceives
that something is fundamentally wrong with our
economy, yet no two citizens can agree on just
what path this nation should embark.
Gentlemen, I submit that y o u — the Members
of this Commission — are truly representative of
our Republic and I want to take this m o m e n t to
c o m m e n d all of you for your diligence and

thoroughness in this monumental task. I only
pray that our predicament is not so bad as that of
our friends w h o met in mid-air or this historical
event will wither into an academic footnote.
Are you familiar with the "little crackpot in the
basement" theory of the future? In a nutshell the
theory works like this: Forget the "great m e n " of
our time — the statesmen, the presidents, generals, and kings. Instead watch for "the little
crackpot in the basement" — the unknown, unheralded, hitherto "loser", w h o will suddenly
pull a rabbit out of the hat and change the world.
A mediocre civil servant n a m e d Einstein altered our concept of the universe. A down-atthe-heels handyman n a m e d Edison changed the
w a y w e live our daily lives. A pair of dropout
brothers gave up repairing bicycles and gave
mankind wings to fly. Then there was Henry
Heinz, Clarence Birdseye, Gail Borden, Eli
Whitney, Henry Ford — w e could go on and on.
It is no mere coincidence that the tremendous
advances during the past two hundred years
evolved in the Western World instead of India,
Africa, or South America. And the environment
which m a d e such spontaneous advances possible did not aJways exist. Only two hundred years
before Edison, Galileo was considered a heretic
and countless thousands of other dissidents
were regularly burned at the stake.
M y purpose is not to review the great history
of American Freedom. Although I love to tell the
story I a m sure you equally appreciate our
unique heritage. M y point is that while historical
evidence suggests that "the little crackpot in the
basement" theory works, it can do so only in the
context of a free society.
Throughout our history freedom has been this
nation's saving grace. Freedom unleashes America's most powerful and reliable force that has
always worked in a tight spot — good old American know-how.
The issue is not a gold standard. The issue is
freedom. If gold is indeed a better monetary unit
then w e must not be afraid to subject it to the
test of the marketplace. It must emerge by its
o w n merits.
The obstacles w e face are two-fold.
T h e first obstacle is the superstition that
m o n e y is a function of government. This superstition is similar in nature to the concept of the
divine right of kings held centuries ago.
The second obstacle is a very powerful bank-

ing establishment w h o will not willingly relinquish its special privileged monopoly to citizens.
The First Principle of America is individual
rights and freedom of choice. This is the essence
of a free market e c o n o m y and a free society.
Freedom of h u m a n will is the basic principle of
our religion — G o d put m a n on earth to choose
G o o d over Evil. Yet in a real sense anyone who
wishes to express monetary ideas in a unit other
than dollars is a modern-day American dissident.
To illustrate m y point I have reprinted an advertisement that appeared in the January 25,
1963 issue of LIFE magazine (see page 3). I am
certain m a n y of you on this Commission rem e m b e r this series of advertisements. I was 13
years old at the time and remember vividly how
enthralled I was that such a program could exist.
In 1963 you could "relax in Florida without
financial worry" o n $300 per month. But today
$300 will not even pay the rent.
Please don't misunderstand m e . I a m not faulting the insurance company. I have chosen this
advertisement for illustration purposes only.
There is no reason to doubt that the insurance
company is living up to its fiduciary obligation
and is paying a $300 per month benefit.
Rather it is our government m o n e y managers
that have failed in their fiduciary obligations.
The dollar promises m a d e in 1963 are not the
same promises received in 1981.
N o w let us examine the results had this insurance program been denominated in gold. At
that time gold was $35 per ounce making the
monthly benefit approximately 8.5 ounces of
gold. Today 8.5 ounces of gold is about $3,000
per month — enough to assure the very comfortable retirement promised in 1963.
The problem is that this couple did not have
the freedom to choose between a dollar based
or gold based insurance program. And we still
d o not have this freedom of choice today. This
lack of choice leads us to ask if it is wise for a
nation to allow itself to be at the mercy of
monopolistic m o n e y managers? Is it not prudent
,- to have alternatives that could prevent an entire
nation from falling victim to such monetary
disasters caused by s o m e bureaucratic miscalculation? In no other area is it considered
prudent to put all your eggs in one basket, yet
this is exactly what w e d o with money.
Earlier I suggested that in a real sense anyone

w h o wishes to express monetary ideas in a unit
other than paper dollars is a modern-day American dissident. The legalization of gold ownership in 1975 corrected this situation to s o m e
degree in that a primitive 100 percent gold standard has been free to evolve in competition with
the paper dollar model. But while gold bullion
storage, gold certificates, and gold coins have
blossomed during the past five years, this success can not be attributed to the merit of a 100
percent gold standard but rather is due to an
increasing failure of the paper dollar model.
Under present conditions the best reform that
can be achieved is limited to the better of the
two competing models and any improvements
are limited to the w h i m s of our m o n e y managers. While such a choice is better than no
choice a constellation of gold based money,
credit, banking, and financial services must be
allowed to emerge in order to facilitate the flood
of products to be marketed in a modern industrial society. Gold based insurance, sound
commercial gold banking, gold based savings
and loans, and other gold based financial
arrangements are not allowed to emerge because by law all reserves for such services must
be held in dollars.
The legalization of gold ownership without
the freedom to develop its use in the infinite
array of financial matters is m u c h like the
Catch-22 predicament of a Russian dissident
w h o is granted an emigration pass to exit but
then is arrested for not having a pass for domestic travel.
Today, w e are the most technologically advanced civilization in the history of mankind, yet
our money is based on superstition from the
middle ages. W e must begin to ask — what undreamed of discoveries lie ahead in the event of
a 20th Century Free M o n e y Movement?
Imagine for a m o m e n t a midwestern farmer
with the freedom to choose between a gold
standard, silver standard, wholesale commodities, or various other m o n e y and credit alternatives that could develop in the years ahead. By
prudent diversification it would be possible to
spread monetary risks a m o n g several managers.
Already multinational corporations and large
investors do this with national currencies issued
by central banks. But unfortunately, the global
monopoly of m o n e y has relieved the need for
governments to keep expenditures within revenues and this has precipitated spectacular

Wond'i.*! wl»at w o u k l I. <l'|" '•»" I •• '
ii I died Hist I w o n m l -.1 — »•*« !<>• '1 -

"How we
In 15 years
with 9300
a month

WIM-I. I'd bas. to q o M

--win./ awl

ojy Uuiruf- ssonkl st.iii
"All <A a sudden, (••>•ta«*edu • <
and idtsttYirptori m \ frtumlUM
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OIMIIII i. ad o n


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il.iiiy years »ii!l ..l.«..'l "I »» V a n .
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W w b i i l n - r w e w ori to •» not Ai*l I
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nonn-tl.Mig MIXMII (I

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bt-art. but wt-'ll get \W& ••> tins beating life. Tliere are kits tt\ d u n g s we're
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[.-.-ping brte, * « k u > K « P W «»n»l'i""
every d a y a n d doing H V tilings »«•
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r«»l of our Uvea.
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due If it h a d n t IK-^I f«r Jane, * *
mud.I (till lie shivering M P north inM< a<l of rt-tuwng l-f- in n o r * la
"It w a s back u\ '47, o n m > fortieth
birthday W e b a d s o m e friend* over
lor a tittle celebration T h e r e * a kit*
of p A i n g and fun alwrni m y hitting
the forty m a r k (Stuck Russell presented m e with a catse a n d rcataiivcd,
*WefJ, eld m a n , ! guesw you'll b e ueedingthts « n o n r
It w a s g o o d ior a laugh at t h e
time, but a l e w nights lalit. as Jtusc
a n d I tat nailing, bit r e m a r k ran
through roy m i n d a n d tin* turn- M
wasn't very fiuiny I h e g a n to Imagine
w h a t it w o u l d b e bk« to b r n W a n d
hclple**.-dependent u p o n chant >. I


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Business VtMs-Tw

depreciation in all national currencies over the
last 30 years. As a result international diversification is presently limited to the "lessor" of the
evils and is akin to climbing the b o w of a sinking
ship. In addition, actual use of the various national currencies is limited to within the
boundaries of the host countries. Eliminating
government monopolies would greatly reduce
barriers between international boundaries,
thereby facilitating trade by reducing m a n y
costly middleman operations and foreign exchange risks. The midwestern farmer will have a
unit of trade c o m m o n with the consumer in Europe. Heretofore undreamed of avenues of
international trade could flourish.
I submit that there is a uniquely American
path, a path above petty squabbles over the correct monetary/fiscal/gold "mix" of government
policy. Here is the neglected path of a genuine
free market in gold.
With freedom of choice w e can begin to transform economics from a priesthood to a science
in that m o n e y managers will n o longer be
selected by their ability to align themselves with
politicians, but will be selected by their perform a n c e in the marketplace.

W e are all too familiar with the alternative. The
chance of politicians to pass a workable formula
is very slim and the possibility bureaucrats could
carry it out is nil. This alternative is not only
unscientific but contrary to our heritage.
President Reagan has let it be k n o w n that the
restoration of gold deserves consideration. The
Administration is interested in n e w options. At
the same time the Administration recognizes
that gold is not a panacea and w e have to earn
our way back to gold. Freedom of choice provides the avenue for the American people to do
just that!
For centuries mankind held the belief that the
world was flat and if one strayed too far from
port he would sail into a vast abyss. This was
reinforced w h e n reckless m e n strayed too far
and were never seen again. Yet Christopher
Columbus secured provisions, used the wisdom
of ages for his navigation, and set sail to discover
a N e w World. W e must n o w develop the vision,
courage, wisdom and strength to again set sail
on this unique American path.
W h a t undreamed of discoveries lie ahead? I
do not claim the wisdom to know. But it is only
with freedom that w e are allowed to find out.

Conrad J. Braun is president of Gold Standard Corporation and editor of Gold Standard News. Gold Standard
Corporation was organized in 1976 shortly after the legalization of gold ownership and originally offered a g
bullion storage service. In 1978, GSC, at the request of its depositors, began minting gold coins and introduce
concept of a decimilized troy ounce unit of weight The concept was so successful that the South African
government dropped its Baby-Rand program and adopted a similar format subsidizing domestic dealers to the
tune of over $20 million to launch the idea.
The coins produced by GSC include the Harwood Gold, Silver and Platinum Ounce bearing the inscription,
the Hayek Gold and Silver Half Ounce bearing the inscription,
the Hazlitt Gold and Silver Quarter bearing the inscription FREE
the Adam Smith TENPIECE
bearing the inscription, WEALTH
and the Deak FIVEPIECE
bearing the inscription, INTERNATIONALIZATION
MONEY. Today
Gold Standard Corporation is the largest private mint in the United States with over 500,000 coins in circulatio

which are producing
instead of


14329 Chandler Blvd.
Van Nuys, CA 91401

October 15, 1981


The United States of America is a very sick nation. She is
socially sick. She is economically sick.
In America almost eight million citizens who are able and
willing to work are unemployed and cannot find jobs. This is true
even though this nation has neglected and undone work projects
which could beneficially use the labors of additional workers
double the number of the unemployed. Unemployment, maldistribution
of wealth and a lack of youth training are the rewards available
for moral conduct — these are dangerously stimulating the growth
of social unrest, rebellion against authority, violence and crime.
The former security protecting our families and properties is
rapidly diminishing.
Until two decades ago, the American dollar was the king of
all international monies. The dollar's ability to provide a
dependable measuring stick for value, a safe storage house for
funds or an acceptable worldwide medium of exchange was unquest. oned.
Today, in every way, the dollar is becoming more debased. It is
losing value hourly.
Just a few years ago the United States was the major monetary
gold holder of the World. Over half of the monetary gold recently
held has been lost to other nations. America, until the last few
years, was the most powerful creditor nation in the World. Today
this nation is not producing and exporting enough goods and services

-2to pay for needed imports. Soon, America may be the largest debtor
nation in the World.
In recent years the heads of our government have been preaching
to the World the need for the protection of human rights. At the
same time our government was engaging in practices which were
robbing tens of millions of American citizens of "THEIR HUMAN RIGHTS
These citizens who have been robbed, believed words coming out
of Washington which stated that inflation was being brought under
control; that the dollar was sound, and that government and other
bonds and savings accounts were safe and profitable investments.
Believing these unjustified statements, tens of millions of American
citizens placed their earnings and accumulated wealth in fixeddollar-value investments. These investments now amount to over
three thousand billion dollars ($3,000,000,000,000.00).
These fixed-dollar-value investments exist in the forms of
currency, bank and savings deposits, government and other bonds,
insurance policy equities, annuities, trusts, mortgages and other
evidences of debt. These investments have no value, whatsoever,
above whatever purchasing power the dollars received may have when
the investments are converted into spending money and the money is
The Board of Governors of the Federal Reserve System provides
us with statistics which clearly show that if all dollars having
claims on the material wealth (goods and services) in the nation
immediately exercised those claims, it would be impossible for

-3each dollar to have a purchasing power greater than the purchasing
power now possessed by one or two dimes.
These statistics reveal the facts that in 1933 the United
States had in its money supply only $42.0 billion; that at the end
of last year, 1980, that money supply had been inflated to $2,377.4
billion. This is a sum of dollars five thousand five hundred percent (5,500%) greater than the total dollars America possessed in
1933. Any quantity of dollars, exercising their claims on wealth,
can never purchase more than the total quantity of wealth available
for purchase. Since 1933, America's quantity of material wealth
has been increased nearly 100 percent, but no more. The population
has almost, but not quite, doubled. So has the quantity of consumable wealth. While acreage of land has not been increased, the
physical quantity of structures and improvements on the land
probably has been increased 100 percent. In sum total, there is
no more than a 100% increase in physical quantity of material wealth
to give value to a 5,500 percent increase in the quantity of dollars
which has claims on that wealth.
The question arises: How then, has the dollar, up to this
time, been able to retain so much purchasing power? The answer is
simple. No money can bring about employment or production of
wealth until it circulates. No dollars can cause price inflation
until they circulate, until they make demands on material wealth.
The Fed reports that at the end of 1980, out of the $2,377.4 billion
in the nation's money supply, only $415.6 billion was fully active.
These were in the forms of currency and demand deposits. The report

-4shows $1,916.8 billion rested in the forms of savings or time

It is shown that demand deposits had an annual average

turnover during 1980 of 201.6 times per year, while savings deposits
turned over, on the average, only 4.2 times per year.


percent of the dollars are largely responsible for present price
The history of money quantity inflation in other countries
discloses the fact that when the general public becomes aware of
the fact that their money is doomed to ultimate death, all money
goes into the spending field, circulating rapidly.

The money is

not consumed, but the spending reduces the relative quantity of
material wealth available to give value to money.

As a result,

price inflation is higher and higher.
In 1923 I was in Germany studying the effects of money quantity
inflation and price inflation.

I was sponsored in my studies by

the then Secretary of State, Charles Evan Hughes, Secretary of the
Treasury, Andrew W. Mellon, and by Senator Robert L. Owen, the real
father of the Federal Reserve System.

Their documents, which I

carried, opened doors to me which otherwise would have been closed.
A personal experience of mine will illustrate what happens to the
value of money which has been over-inflated.
In Germany I gave a dinner party for five.
bottles of good wine.

We had three

I was liberal with my tips.

The overall

cost to me was over one hundred thousand German marks (about
$20,000.00 had the marks been purchased in pre-inflation days).
The people furnishing the dinner evaluated the mark by past

-5purchasing power, just as American citizens are now evaluating the
dollar. I bought my marks on the morning of the dinner on the
international money market. There the mark was being evaluated by
its prospects just ahead. For the over one hundred thousand marks,
which paid for a dinner for five, I paid only ninety-eight American
pennies. The dinner for five, and all the trimmings, cost me less
than one American dollar. A few weeks after the dinner, the then
German mark was put to death and a new money system was brought
into existence. It was my privilege to study with the great German
economist, Dr. Hjalmar Schacht, the man who largely designed the
new money system which enabled Germany to recover and to gain a
position of economic eminence.
America's sickness; the destruction of the integrity of the
dollar money system; the waste of the nation's manpower and
material resources through unemployment; the promotion of social
unrest, violence and crime — these things are 'not due to any
evil intent or wicked design on the part of any leader in government or in business. The sickness is entirely due to two false
concepts. These false concepts invaded, captured and dominated
the minds of America's economic managers during the past few
decades - especially during the past two decades.
The first false concept attributes to money quantity powers
which money quantity does not possess. This false money concept
fails to recognize the laws which determine what is required to
constitute good money. It is blind to the laws which control the
proper uses of money in the economies of nations.

-6The second false concept dangerously distorts the commands of
the United States Constitution regarding what powers and responsibilities are allotted to the Government and what powers and responsibilities are allotted to the private sector of the economy. This
false economic concept permits the Government to escape carrying
out responsibilities placed on the Government by the Constitution.
Free Private Enterprise is expected to perform those duties, even
though the terms of the Constitution makes it impossible for private
enterprise to do so, legally. Later it will be shown why the
Government is responsible for full employment; for maximum production of wealth, and for an equitable distribution of what is
produced. It will be demonstrated what the Government must do to
induce private enterprise to do its part. It will be detailed how
full employment, maximum production, and economic health for all
citizens can be achieved without economic cost to the nation.
That economic health can be achieved with enormous gains for the
government and for all citizens. But first, the money situation
must be examined.
Money, per se, is not wealth. Money, per se, cannot create
wealth. That which is used as money may have, or may not have, a
commodity value. Gold and silver coins have a commodity value.
Paper currency and bank checks have no commodity value.
Money is merely a mental thing. Money is based on faith —
faith that the next fellow will accept that which is proffered as
money in exchange for his goods or services. In the absence of
that faith, not even gold would serve as good money.

-7Money's power for good or evil exists in its circulation.
Aristotle, thousands of years ago, said "MONEY HOARDED AND NOT

One trillion billion

dollars locked up in a vault or in a time or savings deposit,
without circulation, could not cause employment, wealth production
or wealth distribution.
When money is circulated in the home economy, (not exported
to a foreign economy), that circulation, that spending, consumes
no money.

No money is wasted and the money supply of the nation

is not reduced one iota.

This is true whether the purpose of the

spending is constructive or destructive.

Bad spending may waste

precious manpower and material resources; it may impoverish the
nation in material wealth, but it does not waste money.


politicians state otherwise, they are evidencing money use
Money will not circulate without some force to propel it.
When the Government fills large reservoirs with money, and then
provides no means to force that money to flow into the dry, undernourished parts of the economy

they are demonstrating an intelli-

gence on par with Farmer Retardo's intelligence.

Retardo filled

large reservoirs with water but did not provide any irrigation
ditches or overhead sprinkling system to carry the water to those
spots where the water was needed to give life.
During the past few decades the Government and the economic
managers of the United States have ignored the fundamental laws of
money and money uses.

They have resorted to money quantity


They have foolishly, unthinkingly, trusted the newly

created dollars to find their own way to the undernourished and
starved parts of the economy.
A brief review of the money quantity history of this nation
shows different money concepts among national leaders.


Washington, Adams, and others, strongly believed that sound money
and good credit were imperative if the nation was to successfully

They prevailed over Jefferson, Madison. Gallatin and

others who believed that larger and larger quantities of money,
freely issued by banks, would best serve to propel the new nation
Holding to a sound money program, this commonwealth was
quickly elevated from thirteen impoverished colonies to the position of the most powerful and wealthiest nation in the World.
In 1913, when Senator Owen and Congressman Carter Glass, with
great wisdom and understanding of money's nature^ led the fight
which brought the Federal Reserve Banking System into existence


then the total money supply of the nation was only about $19.0

The nation's wealth and commerce had outgrown the money
More money was needed.

The Federal Reserve Act provided

excellent means for the manufacturing of new credit dollars, and
each of those dollars was marvelously well protected in value by
the discipline of gold reserves.
By 1929 America's money quantity had expanded to $55.7 billion.
The rapid expansion in credit dollars had consumed that monetary
gold in the nation which was available for reserves to back further

-9dollar quantity expansion.

The Board of Governors of the Federal

Reserve could have acted to stabilize the nation's money quantity
at the then level and to stimulate the circulation of money.
Instead the Board determined and acted to deflate the nation's
money supply.

This they did.

In four short years the nation's

money supply was deflated approximately twenty-five percent - from
$55.7 billion in 1929 to $42.0 billion in 1933.
This money deflation brought on the panic and stock market
crash of 1929.

By 1933 the loss of confidence in the economy's

future brought about a condition of money hoarding.
of the money still existing was cut about half.


This money defla-

tion was the direct cause of the Great Depression of the 1930's.
In 1933 Franklin Roosevelt became President, promising to
rescue America from its punishing depression.
economic physicians were called in for advice.

The World's greatest
The great economist,

Lord Keynes of England, and others, pointed out to President
Roosevelt that the depression had been caused by money quantity
deflation and by the slowing down of the circulation of the
remaining money.

They advised the use of a strong economic stimu-

lant in the forms of new money and forced money circulation.
Roosevelt took the advice and did rescue the United States from
the depression.
One tragic failure was made by President Roosevelt and his

They failed to warn oncoming generations that the money

quantity inflation, which they had used to stimulate the depressed
economy, was a dangerous, narcotic, addictive drug.

That drug,

-10if long used, could do more harm than could be done by the
It is astounding to see to what extent present day economic
managers have accepted the dangerous drug as a nourishing and
beneficial food. After Roosevelt, the money inflation drug was
continued in use, but for years not to the extent it has been fed
to the American people during the past two decades. Following
statistics reveal to what extent the United States increased its
addiction during each presidential term, beginning with Roosevelt
and ending with Carter.
The average annual dollar quantity increase during each
presidential term in office was: Roosevelt, $9.7 billion per year;
Truman, $11.1 billion per year; Eisenhower, $12.3 billion per year;
Kennedy, $23.2 billion per year; Johnson, $34.4 billion per year;
Nixon, $95.2 billion per year; Ford, $75.9 billion per year;
Carter (HOLD YOUR HAT), $212.5 billion per year. During the past
four years, on the average, the United States has increased its
money supply, through the use of credit paper, almost as many
dollars each month as the total quantity of dollars possessed by
America in 1913 when the Federal Reserve System was created. It
now takes only a little over two months for this nation, through
the use of credit paper, to add to its money supply as many dollars
as this nation created and accumulated through the efficient use
of manpower and material resources in 137 years.
On June 12, 1965, Congress passed a law which cut the last
cords which tied the American dollar deposit money to the

-11restraining hitching post of gold reserves.

Then on March 18,

1968, Congress cut the cords which tied the dollar bank note
currency to the gold discipline.

These Congressional acts freed

the dollar xo-run wild toward that suicidal cliff over which the
overinflated German mark went to death in 1923; over which the
overinflated French Assignat went to its death in the early years
of the last century, and over which so many other overinflated
currencies have found death.
No money system securely tied to gold through adequate gold
reserve requirements has ever lost its virtue or value.
value in money systems is purely psychological.


As previously

pointed out, money is merely a mental thing, based on faith in
its continued purchasing power.
While gold is a beautiful and enduring metal, much desired
throughout thousands of years, its great monetary strength lies
in the fact that the production of gold has never far exceeded
the production of material wealth in physical quantity.
There is no need for gold to circulate in private hands in
the form of money.

As reserves, gold fully performs its monetary

All monetary gold should be retained in the hands of

the government or governmental agencies and used for reserve
purposes or for international trade purposes.
The first great American leader to show hostility to the gold
discipline in money affairs was William Jennings Bryan.
remembered will be the firey speech in which he said:


-12Compared to some of today's leaders, Bryan's gold hostility
was very mild. He only wanted free coinage of silver on a basis
of sixteen ounces of silver to one ounce of gold. Had his plan
been adopted, the nation's money supply would not have been
increased over ten or fifteen percent; certainly not the five
thousand five hundred percent brought on by our present-day gold
In money affairs the Board of Governors of the-^ederal Reserve
System is as powerful in the United States as the Supreme Court is
powerful in the legal field. In my opinion two Chairmen of that
Board have done more to destroy the integrity of the American
Dollar and to bring chaos to the social and economic life of this
nation than has been done by any other two men. The damage is the
end product of their gold discipline hostility and hatred.
Both of these men have established a reputation for personal
integrity and devotion to the nation's good, as they see it. They
are rightfully recognized as belonging in the top echelon of
national patriots. However, I do assert that their words and
actions evidence a serious false concept of gold's power and benefits when that gold is used as a discipline, restraining credit
money from engaging in runaway inflation.
The first economist and the former Chairman of the Board of
Governors of the Federal Reserve System is the Honorable William
MoChesney Martin. Mr. Martin headed the Federal Reserve for many

-13Chairman Martin's hostility toward the discipline of gold in
money matters, and his faith in large quantities of money to provide economic health in a nation, are amply demonstrated in one of
his speeches. I shall quote from that speech.
Chairman Martin addressed the Financial Council of the
National Industrial Conference Board on February 14, 1968 at the
Waldorf Astoria in New York City. Two quotes from that address
are here given.
Chairman Martin's power and great influence is revealed by
the act of the United States Congress just one month after the
date of Mr. Martin's address. On March 18, 1968, the Congress
passed a law cutting the final cords which tied the American Dollar
to the discipline of gold.
The gold discipline no longer can restrain the manufacturing
of dollars out of credit papers. The only restraints left are the
whims of politicians and money managers in power. The public still
believes that dollars represent economic wealth. People constantly
seek more dollars. Politicians want to stay in office. More
dollars are suj=*plied to voters.

-14The Honorable Paul A. Volcker, the present Chairman of the
Board of Governors of the Federal Reserve System, seems to be even
more hostile toward the discipline of gold in money matters than
the hostility displayed by Chairman Martin.
Chairman Volcker today, and since he has been in office, has
turned to "HIGH INTEREST RATES" as a disciplinary force to combat
both money quantity inflation and price inflation. High interest
rates have been as effective in putting out the fires of inflation
as gasoline poured on a burning fire would be effective in putting
out the flames. During last year, 1980, interest rates averaged
higher than during any other year in America's history. Last year
$227.3 billion new dollars were manufactured out of credit paper
and further inflated the nation's already over-inflated prices and
money quantity.
What did high interest rates accomplish? High interest rates
prevented the building of homes which otherwise would have been
built. High interest rates prevented the buying of much needed
homes. Manufacturing plans were unable to expand. Wealth production was far below normal. Thousands of employees lost their jobs.
Unemployment increased welfare costs. Social unrest, violence,
crime and money quantity were the only things to be increased.
I ask you; which is better, to have our money quantity to be
enslaved and kept in bounds by the discipline of gold or to be
left free to devour the economic security of all of those who
have trusted dollar investments to protect their economic

-15Three things are required to return the United States of
America to a condition of good social and economic health and to
the road of ascendancy.

A new money system of high integrity must be created.

Further dollar quantity inflation must be brought to an

immediate end.

The present dollar must be assured a continued

life ranging from twenty to thirty years.

This is to provide

present fixed-dollar-value investors some opportunities to escape
that loss which would be theirs if the dollar's life was brought
to an end now.


The nation's present economic machinery

which was designed for a simple agricultural economy must be
restructured and perfected to where it can carry the load of the
most complex, congested, rapidly moving industrial economy known
to the mind of man.
Each of these objectives can be achieved by this nation without any cost to the national economy.

It can be done in a manner

to gain enormous economic and social benefits.

The following pro-

posals tell how this can be done.
It is proposed that the Congress of the United States, by
proper legislation create a new money system along the following

The standard unit of money of the new system shall be

called "GOLDER".

One hundred Golders shall have a value equal to

one ounce of fine gold.

Gold reserves against golder notes and

golder deposits shall be the same as that required for dollar
notes and dollar deposits prior to the Act of Congress of March 3,

This a«t changed gold reserve requirements against dollars.

-16Each Federal Reserve Bank and all banks and financial institutions
in the United States handling deposit accounts shall be required
to comply with reserve requirements.
accounts and dollar accounts.

They shall carry both golder

For many years this nation has

comingled gold coins and silver coins without difficulty.


same can be done with golder money and dollar money.
For the Government to attempt to give the dollar a fixed value
in gold or in golders would be an exercise in economic futility.
The enormous disparity between present dollar quantity and gold
quantity and purchasable wealth quantity would doom that attempt
to failure.
The dollar's value in golders must be established in the international money markets where other nations' currencies find their
gold value.

If, on the international money market, it takes four

hundred dollars to buy one ounce of gold, then it will take four
dollars to buy one golder.

If it takes eight hundred dollars to

buy one ounce of gold, then it will take eight dollars to buy one
To establish the new golder money system it will require no
new governmental or private institutions.
cally nothing.

Costs would be practi-

While this nation has lost to other nations about

half of the monetary gold recently held, America still has ample
gold to back all the golders needed for domestic or foreign trade.
All America needs is a little more brains and guts.
All banks and financial institutions in America handling
deposit accounts and creating credit money through the extension

-17of loans - they must come under the supervision of the Federal
Reserve Board of Governors.

Otherwise, the nation will drift

back into money quantity inflation.
The program to give the dollar an extended life of twenty to
thirty years should include the following provisions.

No bank or

financial institution carrying dollar deposit accounts shall make
a dollar loan which would increase the total dollar loans existing
in that institution on the day the new law becomes effective.


will bring to an immediate end dollar quantity increases.
Each bank and financial institution should be required to
reduce its dollar loans and dollar securities investments by at
least four percent each year.

This requirement should fairly well

amortize the dollar's life over a period of about one-quarter of a

With these provisions, golders and dollars should associate

on very friendly terms.

The name Golder will inspire faith in its

enduring value because the name is a reminder of that commodity
which, above all others, has retained its value since man reached
a mild condition of civilization.
The preservation of the life of the Dollar is needed to ease
the nation's struggle to meet its commitments and its legal obligations.

It would not be within the power of the Federal Government,

the State Governments or the local governments to satisfactorily
meet their obligations with gold, with golders or with material

The differences in quantity creates an impossibility.

Social Security, pensions, retirement pay, military obligations
and a multitude of other commitments must be liquidated with dollars.

-18To attempt to meet these obligations with the present available real
wealth substance would invite a rebellion of a very dangerous nature.
The third major change needed to bring health back to America
is the restructuring and perfecting of the economic machinery in
America. This machinery uses money as blood to carry nourishment
to all parts of the economy. Lei me again emphasize that America
must look to money circulation, rather than money quantity, if this
nation is to survive and prosper.
One hundred billion dollars could have achieved each and every
national objective, aimed at but not achieved, through the process
of producing and storing in reservoirs nearly two thousand five
hundred billion dollars. No means for the reservoir money to reach
the places where it was most needed was provided.
No economic concept is more dangerously false than that one
which believes that large quantities of dollars made available to
large industrial institutions will induce them to provide satisfactory conditions of employment, of wealth production and of
wealth distribution. Unlimited dollar supplies could not gain
the desired objectives.
The Preamble to the United States Constitution sets forth and
establishes six high national goals. The six are: 1) FORM A MORE

-19It is important to note that among the words naming the goals
there are no words referring to Capitalism, Free Private Enterprise,
or the Profit Incentive.
body of the Constitution.

These are economic tools provided in the
These tools are intended for use in

propelling the nation toward her goals.
The Government is made responsible for harnessing, controlling
and directing the nation's manpower and material resources so that
they will contribute to the nation's progress.
Also, the Constitution provides the economic tools to be used
by the government in managing the nation's manpower and material

Private Industry is motivated by the profit incentive

and will not function in any economic region where there is an
absence of the profit incentive - (profit opportunity).
At this time the United States has no entity which is equipped
or competent to assess and to determine the overall economic and
social needs of this nation.

The Government has no means to inform

itself regarding the quantity, quality and best uses of its productive resources.

The American Government's economic managers, in

recent years, have permitted dollar quantity philosophy to displace
the philosophy of earlier economic managers —

the philosophy which

believed that the full and wise use of manpower and material
resources is the only means available to reach the nation's goals.
If the American government is going to give up its foolhardy
efforts to achieve social and economic health for this nation by
printing credit dollars, and if it is going to wisely harness the

-20manpower and material resources now being wasted, the following
things should be considered.
It is proposed that legislation be passed to establish the
"FEDERAL ECONOMIC ASSISTANCE BOARD". This Board should have about
the same number of members as those which constitute the Board of
Governors of the Federal Reserve System. The Assistance Board
should function in the economic field much as the Reserve Board
functions in the field of finance.
The Federal Economic Assistance Board should be empowered and
equipped to explore every economic community in the United States,
to ascertain the quantity and quality of manpower and material
resources in each community; to ascertain the social and economic
needs of each community; to ascertain how those resources can best
be used to promote the nation's well being, and to ascertain what
is required to satisfy the needs of the community.
The Federal Economic Assistance Board should be empowered
and equipped to explore and ascertain what opportunities for beneficial trade or investment exists in the various nations of the
World — especially opportunities for profitable exportation of
goods and services produced by America's fully employed labor
When the Federal Economic Assistance Board is fully informed,
it should establish National Economic Objectives, and establish
priorities for those objectives. When the objectives and priorities are firmly established, then the Board should provide profit
incentives whjch would induce Private Enterprise to do what is

-21needed to be done to reach the objectives in all of those regions
where, by the nature of things, there are no profit incentives to
activate private enterprise.
To illustrate this proposition, let us consider the unemployment situation which now wastes the productive power of nearly
eight million citizens who are able and willing to work, but who,
through unemployment are driven into hostility toward the government.
It is proposed that the Federal Economic Assistance Board's
economic machinery shall guarantee a job for every American citizen
who is able and willing to work, but who, otherwise, would be
unemployed. Each person working under the guaranteed job plan
would be paid the legal minimum wage regardless of his productive
capabilities. The job and pay is to provide decent living conditions for the worker; to keep him off the welfare rolls, and to
keep him from becoming a social liability.
No worker under the guaranteed job plan would be paid more
than the minimum legal wage. This is to keep this labor pool from
competing with private enterprise for labor. The moment private
enterprise can pay five -:ents an hour above the minimum legal wage,
private enterprise gets the man. Should any person who is unemployed and who has no means for self support, and who refuses to
accept the guaranteed job employment, and then turns to crime to
satisfy his desires — still, that man should be housed, clothed
and fed, in jail.
The Guaranteed Job Labor Pool will immediately absorb any
labor released by private enterprise as a result of business

-22decline or for any other reason.

When business is expanding, the

labor pool releases to private enterprise any needed workers.
It is unthinkable that the Federal Economic Assistance Board,
or any other governmental agency, should directly handle any work
projects providing guaranteed jobs.

For this purpose, the govern-

ment is incompetent and unequipped.

The government uses private

enterprise in the production of war material and it must use private
enterprise in the activities designed to combat dangerous forces
in the homeland.
In all of the activities of the Federal Economic Assistance
Board and in the activities of the job guarantee plan, there is
absolutely nothing that will weaken free private enterprise; that
will lessen private enterprise's freedom to explore, to expand and
to make a profit.

The guaranteed job plan will do much to prevent

business recessions and depressions.

Since no money is consumed

when spent in the home economy, there is no money cost to the
national economy.

Since the employed would produce many needed

things now not produced;America would gain.
The Federal Economic Assistance Board, through its international studies, can far better lead this nation in its overall
foreign trade and investments.

Presently our foreign activities

are motivated and regulated by profit opportunities for private

Frequently profit advantages for private enterprise

produces disadvantages for the nation as a whole and leads to
activities which impede America's progress toward her high goals.
The Economic Assistance Board would have the power to provide

-23profit incentives which would induce private enterprise to contribute to, rather than impede, this nation's progress.
To recapitulate: America's sickness is curable. To obtain
that cure, false money concepts and false economic concepts must
be abandoned. Money quantity increases must be recognized as a
negative force rather than a positive force. Means must be provided which will carry money to the dry and undernourished parts
of the nation's economy. That money must be free from inflation
contamination and must have forced circulation.
This nation will return to the road of ascendancy; will again
assume the role of a World leader, and will progress toward her
established goals when wisdom and sound judgment replaces money
quantity as a controlling factor in the management of the social
and economic affairs of the United States.

^tJ.jsL (Elj0t« in (tiurrtncQ (Enmmtssion
325 llrnnsghiama JWmtc, S.15.
ans u


111 JUasIjington, 5.C 20003



November 12, 1981

Public Hearings
by Joe Cobb
Executive Director

The mandate of the U.S. Gold Commission, to examine the
appropriate role for gold in the U.S. monetary system, has
been interpreted by most commentators as "whether or not to
fix the price of gold in terms of dollars." We submit, for
your consideration, an alternative proposal: Let the American
people have freedom of choice in currency; demonopolize the
monetary system of the United States and let gold (or silver,
or Swiss francs, or anything else chosen by individuals) circulate or be used as a lawful tender.
Mr. Costamagna offered a paper at the meeting of the
U.S. Gold Commission on October 26, 1981, that would open the
door to this idea. Rep. Ron Paul has openly advocated this
idea, and we have noticed some measure of support for remonitizing gold in coin form to compete with the $3 billion per
year Krugerrand/Gold Peso market in the domestic economy.
The Issue is Not a "Gold Dollar"
Advocates of a "gold standard" call for a dollar-as-good-asgold, modeled on the 19th century Bank-of-England system that
fixed the price of gold in terms of pounds sterling, and which
resembled the defunct Bretton Woods system. Their theory is
that "dollar" is really a unit of weight of gold, although its
absence from the National Bureau of Standards does beg a fundamental question.
The larger issue, however, of how to stabilize the val .e of
United States currency -- or to re-establish confidence that
the monetary unit will have a half-life of more than three years
[i.e. to reduce interest rates from the 20% range] -- is one that
must address the meaning of the very words we use to write contracts.

U.S. Gold tlUWlJliTS^ion
Statement of Joe Cobb


Monetary Units and the Meaning of Words
>rge Orwell, there was a government
etary system over the past 190 y<
In 1792, Congress passed the first Coinage Act (31 USC 371)
which created our decimal coinage system. Tin U.S. dollar was
defined as 416 grains of silver .89243 fine (1 he amount of pure
silver was 24.05C grams). Because the new nation, for political
reasons -- Article I, Section 8, of the Constitution -- was supposed
to have a common currency, the Congress established a monopoly for
the central government's coins. Under Article I, Section 10, however, it is clear that the intent of the Founding Fathers was for
the U.S. monetary system to be based on silvei and gold, not paper
money. None of the Founding Fathers suspected that just 70 years
later, Congress would pass the legal tender law and make the paper
dollar our basic unit of money (12 Stat. 345).
Because there was a government monopoly for "dollars," the
Supreme Court refused to distinguish between paper dollars and
silver dollars (79 US 457). The principle had been established
that the word "dollar" is a governmentally defined word, and whenever Congress wants to do so, it can change its definition. In
1913 and 1933, moreover, Congress created the Federal Reserve
System and subsequently prohibited Americans from using anything
other than its monopoly money (Federal Reserve Accounting Unit
Dollars). Congress simply stripped any and all meaning from the
word "dollar" in its original sense.
Today the word "dollar" has a pronunciat on, a spelling, a
connotation -- but it has no meaning. Like a"l crimes of violence,
the damiage cannot be undone: it is impossibl* today to "put Humpty
Dumpty back together again." This, unfortunately, is what the
advocates of "a Gold Dollar" seem to want. There is no bill today
in Congress to create a "gold dollar," although there is a bill to
create a new Silver Dollar (H.R.
Monetary Units and Weights of Bullion
The Free Market Gold Coinage Act (Senate Bill S.1704 and
House Bill H.R.3789) is a new initiative to re-establish the
famous principle of honest money, as expressed by philosopher
John Locke in 1695. He wrote, the "unit was i.nd should be a
definite weight of bullion, which must not be altered."
-- pure "noble" metal. Definite weight -- thK monetary system
should emerge from the common system of weights and measures;
it should not be "invented" by government as an artificial denomination of weight.
It was an unfortunate historical accident that
the common coin in the Thirteen Colonies was tot precisely an
ounce of silver, which might have gone by the name "One Ounce"

without the government's trademark ("silver dollar"), but for that
matter there was not a standard definition of the ounce in those
days either. It was the monetary use of metal that led to the
establishment of the standard of weight in 1827.
Economist and historian, Murray N. Rothbard, in his book,
Man, Economy and State, makes an important argument about preventing government from destroying a nation's monetary system:
The transition from gold to fiat money will
be greatly smoothed if the State has previously
abandoned ounces, grams, grains, and other units
of weight in naming its monetary units and substituted unique names, such as dollar, mark, franc,
etc. It will then be far easier to eliminate the
public's association of monetary units with weight
and to teach the public to value the names themselves.
Furthermore, if each national government sponsors its
own unique name, it will be far easier for each State
to control its own fiat issue absolutely. [p.941n]
The Issue is Freedom of Choice
The principle of freedom of choice in currency, therefore,
is founded on the use of gold and silver, by units of weight,
in all kinds of transactions where honest men and women come
together to trade freely and make contracts. It is impossible
today to make an honest long-term contract in terms of "dollars"
because the word has no meaning.
There is no difference between using the word "dollar" today
in a contract and using the word "shrug" (e.g., I promise to pay
you 100 shrugs in five years, at 10,000 percent interest); how
may Big Mac hamburgers do you think you will be able to buy with
the "dollars" you get back?
If the government could change the definition of the word
"dollar" in the past, what would prevent them from debasing the
meaning of the word in the future? This is where the importance
of "grams" and "ounces" becomes clear, because the Congress can
not change the definition of those units. The kilogram is defined
by an international treaty, and the ounce is defined by millions
of other objects that weigh exactly one ounce. If the government
tried to change the definitions of those words in order to inflate
a bullion-weight monetary standard, people would just laugh and
ignore the statute -- just as engineers and architects ignored
the Indiana State Legislature in the 1890s when it tried to change
the definition of pi from 3.14159 to 3.00000 to make the measurement
of circles easier!
Yet, in the U.S. courts and in payment of taxes, the undefined
word "dollar" ir. the unit of measurement. The Free Market Gold
Coinage Act, and its sister legislation, the Free Market Silver
Dollar Act, in Section 5, establish the principle that you can use

U.S. Gold Commission
Statement of Joe Cobb


gold bullion (or silver bullion) in courts and for the measurement
of tax liabilities. The American Institute of Economic Research
in Great Barrington, Mass., has analyzed the Free Market Gold
Coinage Act as it was introduced in the House of Representatives
and their valuable suggestions were incorporated in the Senate
version, and in the Free Market Silver Dollar Act. The A.I.E.R.
recommended that the use of the new coinage as money would require
exempting transactions in gold and silver from discriminatory
taxation, and lifting the legal tender monopoly presently enjoyed
by paper dollars.
Support for the proposal of freedom of choice in currency
has received additional impetus from Dr. Richard Rahn of the U.S.
Chamber of Commerce, writing in The Wall Street Journal on Oct.22.
He had been introduced to the idea behind the Free Market Coinage
Acts at the Arden House Conference of the Committee for Monetary
Research & Education in March, 1981. Dr. Rahn also made the point
that the use of gold as money would require that transactions
denominated in gold would have to be exempt from discriminatory
capital gains taxation. As long as the IRS were able to enforce
a monopoly rule that businessmen had to use "dollars" for bookkeeping, there would not be an equal competition and freedom of
choice in currency would be nugatory. Section 5 of the Free Market
Coinage Acts would repeal the monopoly elements of the U.S. monetary
system, so that gold and silver coins could compete on equal terms
with paper dollars.
The Process of Currency Competition
Since the issue is really Freedom of Choice -- not just gold
or silver coins versus paper dollars -- the repeal of all monopoly
elements in current law is essential. The bills in Congress to
achieve this would coincidentally permit Americans to use other
national currencies also, if they chose; they could keep checking
accounts in Swiss francs, German marks, or any other currency, as
well as in ounces and grams of gold and silver.
In a free market economy, freedom of choice always makes the
system work better. There are many reasons to believe that the
new frontier in freedom of choice -- currency competition — will
be the only way to save the United States from a devastating inflation that has already caused the highest interest rates in history
because nobody with money to invest is willing to secure those
investments with pieces of paper promising to pay "one shrug" in
the future in exchange for real goods and services today.
If the principles of John Locke were good enough for Thomas
Jefferson and Congress when the Declaration of Independence was
signed in 1776, the principle of "bullion weight" must be the
principle that will save the monetary system, and the free market
economy, of the United States today!

BOX 1718

November, 1981

TO: The Gold Commission
Re: Returning the United States to the Gold Standard
Ladies and Gentlemen:

My name is John P. Dessauer. I am a graduate of
the Cornell Law School, formerly practiced law with the firm
of Harris, Beach, Keating, Wilcox, Dale and Linowitz in
Rochester, NY. Senator and late Ambassador Kenneth B. Keating,
and U.S. negotiator Sol„M.' Linowitz were partners of that firm
and both knew me and my work.
After leaving the practice of law in 1967 I began
a career in banking and investments that led to my becoming
the senior investment officer in Europe for Citibank's
Investment Management Group. Citibank is the nations largest
commercial bank and has a large and successful money management
operation in Europe.
Last year I began a new phase of my career in business
for myself. I now publish a twice monthly investment letter
devoted to the subject of international diversification
and the application of classical investment techniques to
private investment.
In the course of my work I have made observations and
formed opinions on the subject of gold and its' role in

John P. Dessauer

monetary affairs. It is in that connection that I submit
this testimony in hopes that it will be of value in your
Controlling the U.S. money supply has become the
number one monetary problem in dealing with inflation, the
value of the dollar and assuring a sound basis for productive
economic effort.
Efforts on the part of the Executive, Congressional
and Federal Banking branches of government have focused on
the economic proposition that too much money chasing too
few goods produces harmful inflation.
Continued growth of the broad money aggregates such
as M-3 have shed doubt on the ability of government, without
a gold standard, to effectively control the growth of money.
While I do not disagree with this logic I do wish
to point out the difference between DILUTING the value of
money and inflation. That difference is important in considering
the gold standard.
Gold is more than a special, unique commodity. It
is more than a convenient tool for use in regulating money
supply. It has been and still is money for much of history and
for much of the world. Looking at gold as money may seem
archaic but it is essential to understanding the current
monetray problems and the benefits and risks of returning
to the gold standard.

John P. Dessauer
Once gold is accepted as money it makes sense to
examine prices in terms of gold. We have become aware of
the differences in view point that come up when things are
priced in different currencies. Recently when the price of
oil was declining in terms of dollars it was rising in terms
of Swiss Francs, Deutschmarks and French Francs.
Gold is money that transcends all currencies. Gold
is gold in Saudi Arabia, Dusseldorf and Paris as well as
Washington. When we look at the world's most important
commodity, oil, in terms of gold a startling picture emerges.
Back in the great depression the price for an ounce
of gold was $35-00 and a barrel of oil cost $1.05. That
combination produced a gold price for a barrel of oil of
.9^ grams of gold per barrel.
In January of 1980 when gold shot to $850 an ounce
the official price for a barrel of Saudi crude oil was
$25-50. That combination produced a gold price for oil of
.93 grams per barrel, very close to the depression level.
Currently, as this is written, gold is selling for
$400 and oil for $34. The present gold price for oil is:
2.64 grams per barrel or more than 260% greater than the
price in 1980.
If world monetary experts judged inflation by looking
at the price of oil in terms of gold they would conclude that
we are in for trouble ahead because the gold price for oil
has risen dramatically.

John P. Dessauer

Instead we look at the U.S. dollar price alone and
conclude that the dramatic rise in oil prices is over. That
is our point of view as dollar based consumers.
The Sheiks and Shahs of the middle east where the
dollar is not a valid currency and who have looked at gold
as money for centuries would have a decidedly different
Looking at gold as money and using gold to "see"
the price of oil is one example of the complexity of the
problem called inflation. Getting at the root of the
money supply/inflation problem requires digging a bit deeper.
The value of money can be reduced by dilution as well
as price increases.
Dilution is seldom addressed in the discussions of how
to preserve the value of the dollar. If the subject were wine,
dilution would be easily understood.
A glass of wine diluted by a quart of water is
definitely less valuable that undiluted wine.
Increases in the monetary aggregates, i.e. the
printing of more money that the economy requires, is a
cause of dilution. But the real problem of dilution is one of
quality rather than quantity.
Individual members of an economy through productive
enterprise give money its value. Government adds to that
value through exercise of its' classical powers such as
the police power. Government also necessarily dilutes the value
of money through social programs.

John P. Dessauer

There is nothing wrong with sensible and well
considered dilution of value through social action. In fact
it may well be the neccessary result of any well run government.
The problem comes when the dilution proceeds faster than the
additions to value from productive effort.
For purposes of reviewing the gold standard issue
it is not neccessary to resolve that question. It is enough
to recognize its' merit.
The main point is to admit that dilution is different
from inflation and that dilution may be a given in any
well run social/economic system.
Excessive dilution is harmful to the economy. The
present consideration of returning to the gold standard is
a thrust toward stooping excessive diltuion by making the
connection between a currency, the dollar, that can easily
be diluted and a money, gold, that cannot be easily diluted.
There is no doubt that the world's supply of gold is
limited and that gold, therefore, could be helpful in
guarding against excessive dilution of the dollar.
There is another part of the problem, price increases,
that is not automatically treated through a mechanical
connection between gold and the dollar.
My example of how a falling gold price INCREASES the
oil price in terms of gold is designed to make the point that
there are dangers in returning to the gold standard with
only dilution in mind.
Fluctuations in the gold market, currency markets and
commercialjnarkets_can and do affect the prices of world goods.

John P. Dessauer

When the U.S. post office increases the cost of a
first class stamp to 200, when General Motors increases the
sticker price for a car, when the grocery store increases
the cost of soap or napkins the product is inflation. Raising
the price of things or services is inflation. That is quite
different from dilution.
Understanding the difference is critical to the
gold standard issue.
Returning the U.S. to the gold standard would be
a direct handling of the issue of dilution but would not
directly address the issue of inflation.
Prices, in terms of dollars, would not be directly
affected by the gold standard.
Arguements that by controlling the quantity of money
we would solve the too much money chasing too few goods problem
ignores the difference between inflation and dilution.
Inflation has many causes. Black markets during World
War II and in Vietnam should drive home the fact that inflation
can run wild even when there is too little money around.
To embrace the gold standard believing that the problem
of inflation would be automatically solved would be a grave
It is important to address the diltion problem and
equally important to deal with inflation. But they are, to
a large degree, separate problems and require separate solutions.
Some proponents of the gold standard point to 1971»
the year when the past gold link was sevred, and claim that
it is more than cooincidence that prices began their upward

John P. Dessauer

climb shortly thereafter. That case is compelling but not
proof that the gold standard would solve present inflationary
It could be that the pre 1971 gold price was set too
low. It may have acted like price controls and once released
from gold prices rose to reflect the dilution that had been
masked by the gold standard.
Perhaps the rapid increases in prices in the few
years immeadiately following 1971 were much more the result
of dilution than inflation.
This aspect of dilution can be seen through the example
of a stock split. When a company is doing well and the price
per share rises, management may decide to increase the
number of shares. This is a stock split. What happens in the
wake of that form of dilution is a fall in the price per share.
When the dollar is "split" or diluted we get the same result
in that the price of a dollar falls. We "see" that in terms
of rising prices rather than the falling price of a dollar
but the process is the same.
Refusing to admit the fact of a "split" by hanging
on to a gold connection too long was the problem of the 1960s.
The dilution of the value of the dollar went on but was
masked by the dollar-gold connection. Oncethe connection
was severed the fact of the dilution became all too evident.
The severing of the link was forced by an outflow of U.S.
gold that, in turn, is compelling evidence of

this point

and evidence of the risks in returning to the gold standard
without recognition of the difference between diltution

John P. Dessauer
Returning to the gold standard is not a simple
solution to the problem called diltution. In fact the gold
standard could be dangerous if it masked future diltution.
Understating the extent of dollar diltution through the gold
standard would set the stage for an outflow of U.S. gold,
unstable financial markets and a re-run of past rampant
There is a common misconception that gold and inflation
are linked. We often believe that lower gold prices mean
lower inflation and that higher gold prices mean higher
Serious work done by economists such as Arthur
Laffer, addressing gold as an appropriate vehicle for investment,
conclude that gold and inflation do not correlate.
Gold reltes to the level of world prices rather than
the rate of change of world prices. That is the conclusion
of the studies. And, that is an effective way of saying that
gold is money.
As money gold should connect to prices rather than
the rate of change of prices.
In fact falling gold can be inflationary. The 260$
increase in the oil price argues to this conclusion. All
the while gold has been falling, the price, in terms of gold,
for a barrel of oil has been rising. That increase is apparent
to many world economies. Those that can see the increase in
their domestic currencies are well aware of these facts of
economic life. Others that must borrow to buy oil are also

John P. Dessauer
aware that their gold reserves will now buy less oil than
In the United States we recently faced a real economic
threat from OPEC . There was a time when we worried that OPEC
might refuse to accept dollars for oil. What would we have
used as payment? Gold? Perhaps! If gold is seen as money,
insurance, a fall back treasury for the United States we can
understand that there should be great concern about the gold
price for a barrel of oil. The cheaper a barrel of oil in
terms of gold the more barrels our gold reserves would buy.
This commission should be concerned not only with
inflation and the money supply but with the question, how
much oil can we buy with our gold reserves. Obviously with
oil having appreciated 260fo in terms of gold since early
1980 we can now buy considerably less oil with our gold than
a year or so ago.
This oil/gold discussion is one way of understanding
the extent of misconceptions about gold. Returning to the gold
standard while those misconceptions are so rampant would be
fraught with problems.
It is important to begin a process of restoring value
and confidence in the dollar. Confidence, will, I believe, follow
actions that really do increase the dollar's value.
Rather than trying to find the "right" price for the
dollar/gold connection and rather than trying in one step to
introduce a system

to assure the right price we should consider

John P. Dessauer
The Treasury should be authorized to buy as well
as sell gold. The intent should be to increase the stock
of U.S. gold through net purchases in the open market.
Sales can be made when the market runs and purchases when it
falls. Good trading done over a period of years would assure
that U.S. transactions did not overly influence the price.
There is no way to escape the fact that speculators
will always try to anticipate government purchases and sales.
That was true when we were on the gold standard and it is
true today. In fact the recent declines in the gold price
are, in large part, due to speculators anticipating that this
commission will recomend returning to the gold standard at a
low gold price. This is a fact of economic life that cannot
be eliminated. Better to deal with it in a practical way
through competent market transactions that to try and
create a systemt to eliminate the role of speculators. Their
actions will even out over time.
Other governments have already taken this step.
Many have increased their gold reserves in an attempt to
add to the value to their respective currencies. The USA
should do the same.
Once our gold reserves are at a point where the
dollar stabilizes on world markets a return to the dollar/
gold link could be made. Under those circumstances there would
be some measure of assurance that the connection would not
be a huge distortion. Then, the problem would be to reduce
dilution and to adjust quickly whenever dilution occurrs.

John P. Dessauer
The gold standard is not a simple solution to the
problems of dilution and inflation. It could be a useful
tool but only after the role of gold as money is clear, the
interests of the U.S. with respect to such things as oil are
clearly defined and U.S. gold reserves have been built to
the point that the dollar stabilizes on world markets.
To reach for the gold standard as a quick or
sure soltution to the rapid growth of the money supply,
inflation and the value of the dollar is a certain way to
invite financial disaster.
Caution, and a heavy dose of respect for the power
of the markets is required to set the stage for a pleasing
outcome to the gold standard discussion.

Respectfully Submitted,




American Market
Needs New Tools
T H E R E C E N T R E T U R N trip to 820 on the D O W has
rekindled the old arguments.
Debate centers on stock performance during
recessions and the interest rate connection. As valuable
as these factors m a y be, they haven't helped investors in
the past few years. Stocks have risen while interest rates
climbed and fallen on their decline, quite the opposite of
conventional market rules. The problem with the old
rules and the reason they haven't been working lately is
the internationalization of world markets, particularly
stock markets. What investors need are some new tools.
Starting with this issue, I will devote this front page
article to a detailed explanation of some of the new tools
I have developed and how they can help in analyzing
markets and producing profitable strategies.
The starting point for the story of these new tools is,
as it should be, the present. . . 1981.
OFFICIAL U.S. Treasury statistics indicate that net
foreign purchases of U.S. equities totaled $4.5 billion
during the first six months of this year. As the chart
on Page 2 shows, increasing net purchases by foreigners
provided the support needed to carry the D O W industrials over 1,000 not once but four times.
The most significant question is: w h y did so m a n y
foreign investors pour so m a n y billions into U.S. stocks
in the face of gloomy business prospects and high interest rates? The answer to that question holds the key to
understanding the current market and forming a sound
investment strategy.
To Page 2
T H E A M E R I C A N S C E N E . . . B u y stocks, the ones
recommended in this Journal, for gains and look at
bonds for income, Page 3.
G O L D O U T L O O K . . . There are m o r e negatives
than positives on the issue that return to a gold standard
would lick inflation and solve the monetary problem,
Page 4.
W O R L D P R O G N O S I S . . . Fears of waning
Capitalism are affecting all markets . . . U.S. dollar and
interest rates continue to hold attention of traders, Page
CURRENT SELECTIONS . . . Two low-priced
"special situation' stocks are recommended for current
purchases, Page 6.

Nov. 11,1981

H E N R Y K A U F M A N , I love it!
But to be a successful investor, you need to keep cool
and stay focused on what is being done rather than explaining w h y things are the w a y they are. It is nice to
speculate on the whys, and doing so leaves us with the
feeling w e can discern the future course of markets with
Henry Kaufman is a skilled, respected economist for
the big bond broker, Solomon Brothers. In an effort to
develop business, Solomon Brothers has "marketed"
Dr. Kaufman.
While that is terrific for his ego, it presents some
sticky problems. Dr. Kaufman's opinions have become
so potent that they can shape, and many times have
shaped, the course of the markets. In the realm of bonds
and interest rates he has had the same sort of effect as
Joe Granville in the stock market. In addition to the
obvious ethical problems, that reduces the value of the
doctor's work.
Once crowds of influential buyers blindly start
following his advice, you can't tell if the markets are
moving because of his forecasts, or if his forecasts are in
line with underlying market forces.
A L L I N V E S T O R S want to know is: are the markets
going up or down? Once they latch on to a conclusion, the
rest of his wisdom is lost.
This time investors should listen carefully. H e says,
and I agree, that short-term rates will fall. H e also
warns that the current decline and the rally in the bond
market m a y not last very long.
The basic problems that produced inflation and high
rates are still with us. They have been distorted by Fed
policy, and the distortion is producing falling short-term
Be wary of the bond market rally and stay invested
in well-selected U.S. and other c o m m o n stocks.

Page 2

Dessaueiis Journal

Nov. 11,1981

From Page I

D o w Jones Industrial Average

Increased Foreign
Buying Pushed D o w
over 1,000

$1.2 Bil
$936 Mil
$744 Mil
$636 Mil

$588 Mil

1980 Monthly

$440 Mil

Net Foreign Purchases of


U.S. Equities |



Feb. March April
During these six months, Henry Kaufman, noted
economist for Solomon Brothers and influential market

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made payable to Dessauer's Journal or Urrsmat
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to change without notice. Limmat Publications, Inc., its
officers, directors, stockholders and employees m a y from
time to time o w n or have positions in the securities
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Copyright, 1980, by Limmat Publications, Inc. Permission
is granted for reproduction in whole or in part providing
credit mention in the reproduction is given to Dessauer's
John P. Dessauer
Assistant To The Publisher
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General Manager
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analyst, repeatedly warned of troubles in the credit
markets and higher interest rates ahead. While rates did
not cooperate with Dr. Kaufman's forecast, they did
remain high during the whole period.
Six-month Eurodollar rates, for example, ranged
from a high of 19V 2 % to a low of 14 3/16%, high enough to
discourage any investor familiar with the rule that high
interest rates spell low stock prices.
IN T H E F I R S T SIX M O N T H S O F 1981.
Those foreign buyers are not naive, desert-dwelling
sheiks w h o don't care about money and they aren't insensitive Europeans looking for political shelter at any
cost. They are sophisticated financial experts with
plenty of worldly experience.
R A T H E R T H A N smugly pointing to the correctness
of the bearish U.S. market forecasts, investors should
m a k e every effort to understand the motives of those
foreign investors and assess the likelihood of those
buying attitudes spreading to the U.S.
A M E R I C A N S T E N D to be optimists when it comes
to personal financial planning. It isn't unusual to find a
wealthy investor with 90%-100% invested in common
stocks. With that huge stock position, worry naturally
focuses on future stock market performance.
Foreign investors are very, very different. They are
more conservative and tend to have 7 5 % or more of their
assets liquid, invested in short-term deposits and
government notes. As a consequence, their worries are
not stock prices but currency fluctuations, interest rates
and buying power.
A wealthy European with say $500,000 would have
$375,000 or more invested short term. In today's world
that would easily produce 1 0 % or $37,500 in income.
(Higher if invested in U.S. dollars.) Try to put yourself in
that position with lots of cash and a high current income.
With inflation picking up in Europe, thanks to the
stronger dollar, wouldn't you begin to worry about
protecting both your income and cash from rising inflation? Leaving money invested short-term has been in
England and the U.S. the one sure w a y to lose during the
past decade.
Because of the dollar's decade-long decline, U.S.
stocks look very cheap in terms of D-marks or Swiss
francs. In fact, the D o w in D-marks is about one-third
the cost in 1970.
C H E A P U.S. S T O C K S , the chance for a gain on the
stronger dollar and too m u c h cash are powerful motives
for investing a part of those assets in c o m m o n stocks.
W h e n you add gains on Japanese stocks, that foreign
investor begins to emerge as a person with lots of
reasons to buy U.S. stocks. That stands in sharp contrast
to the domestic investor w h o is worried about the
economic future and forecasts of a coming market
Ironically, it w a s lower U.S. interest rates and
recent short-term softness of the dollar that cooled
foreign buying.
To Page 8

Dessauer^ Journal

Nov. 11,1981

Page 3

Scanning the American Scene
U.S. Stock Market Outlook
T H E M A R K E T D I D it! M a y b e it was Halloween,
goblins or witches, but the number 820 stopped the
market's decline and set the stage for a spectacular rise
on the final trading day of the month.
Better yet, the market's Oct. 30 surge was triggered
by Federal Reserve action L O W E R I N G the discount
rate. And Henry Kaufman, the respected economist
from Solomon Brothers, changed his forecast to indicate
L O W E R - S H O R T - T E R M rates.
These events are exactly what m y work has been
indicating for some time.
U.S. stocks are undervalued and money has been
piling up in short-term investments, but the long-term
bond market is still suffering from a near total lack of
I expect stock prices to continue their advance with
910 being the next significant level. Short-term rates will
now fall fast and furiously. The bond market will rally
and the rally could last for a couple of months, but don't
fall in love with bonds.
BUY STOCKS, the ones recommended in this
Journal, for gains and look at bonds for income.
In previous issues I have pointed out that the D o w
today is cheaper in terms of oil than it was during the
Great Depression and that in terms of m a n y currencies,
such as the D-mark, the D o w is one-third its level in 1970.
N o w I would like to show how from a purely current and
American point of view stocks can be seen as undervalued.
To make m y point, I will use one of the stocks
recommended repeatedly in this Journal, Chase
Manhattan Bank. Chase is having a good year and will
earn about $11.00 per share. That alone is good news and
should account for a further rise in the shares. But the
case becomes clearer when you take a look at Chase's
past dividend policy.
From 1971 through 1979 Chase paid out between 4 0 %
and 45% of regular earnings. (I have left out the troubled
year of 1976 when earnings fell and the payout became
If Chase returned to that policy, the dividend would
be between $4.40 and $4.95. Rising earnings and rising
dividends surely would produce a rising stock price. If
the market called for a yield of between 6 1/2 and 7 % ,
Chase's stock would sell for about $70.
THE REAL PUNCH line is that at $70 the stock
would be near book value and provide Chase with ammunition to use in acquisitions or capital raising. For
that reason I expect Chase to raise the dividend. W h e n
that happens, investors w h o saw Chase just a few years
ago as stodgy, troubled or uninteresting will be forced to
change their judgment.
A turnaround in a major company like Chase can be
the predecessor for a turnaround in a lot of investor
judgments on a whole range of stocks. That would send
U.S. stock prices higher.

U.S. Interest Rates Outlook
N O W T H A T T H E Federal Reserve has caved in
again, there can be little doubt about m y claims that
money has been flooding into the short end of the market
and that the Fed's high rate, tight money, policy has
done tremendous damage to the economy.
N o w the Fed and other officials in Washington will
manifest their panicky fear of a severe recession by
trying to prop up the economy. Watch what they do and
don't pay m u c h attention to what they say.
Washington, particularly the Fed, has a big stake in
trying to appear courageous and consistent. It will try to
rationalize a change in monetary policy through denials
and statistics. But money will be pouring into the banks
in a rescue effort, setting the stage for higher inflation
later on.
One way to watch what is happening is to keep score
at the Monday " T " bill auctions. Here is the recent score
July Weekly Avg.
$15.55 billion
$8.1 billion
Aug. Weekly Avg.
$16.9 billion
$9 billion
Sept. Weekly Avg. $16.4 billion
$9 billion
Oct. 5 actual
$18.1 billion
$9 billion
Oct. 9 actual
$18.1 billion
$9 billion
Oct. 19 actual
$21.7 billion
$9.4 billion
Oct. 26 actual
$21.1 billion
$9.4 billion
Nov. 1 actual
$19.3 billion
$9.4 billion
The late October amounts tendered to the Treasury
are records. The previous record was $19 billion in
March of 1980. In April, M a y and June of 1980 short-term
rates fell to below 10%. N o w that new record levels of
applications have appeared at the Monday auctions,
investors should expect further softness in short-term
rates but should keep a careful watch for any signs at
reduced levels of applications.
L O W E R S H O R T - T E R M rates will m e a n that bond
dealers will pay less on loans to sustain long-term bond
positions. They will also m e a n that some investors,
trying to speculate or "nail down" high yields, will step
up to the plate and buy bonds.
R e m e m b e r that some big guns like Merrill Lynch
are recommending bonds. This combination of dealer
and retail buyers should give a nice rally in the bond
markets. But watch out! There is little long-term confidence, and that is what it takes to sustain a bond
market rally. It won't be long before rising inflation,
caused by the recent high rate policy emerges to scare
both investors and the Fed.
Then, the rally in the bond market will succumb and
lower bond prices will follow. In the end w e will see that
a normal yield curve develops with short-term rates
below long-term rates. But those long-term rates won't
be m u c h below today's levels.
Unless you are a nimble trader or need the income,
avoid the bond market. Stocks offer ample opportunity
for speculation with lower risk and good gains from
conservative investment strategies.

Page 4

Dessauer journal

Nov. 11,1981

The Gold Market Outlook
The Gold Pendulum
(Oil price expressed in grams of Gold)

O P E C Oil at $34
Changes the range for Gold
N e w floor—$408
Next stop—$500

T H E M O S T SIGNIFICANT long-term issue for the
gold market is the growing feeling that returning the
U.S. dollar to some form of gold standard would lick
inflation and solve the monetary problem. There are
more negatives than positives surrounding this issue.
Short-term gold is buoyed by reports of higher U.S.
inflation and O P E C price consistency at $34.00 a barrel.
The short-term negatives are continued high interest
rates, lower gold mining profits and the potential for
renewed technical strength in the dollar exchange
M y work indicates a floor under gold at $408 and
immediate potential to $500. Recent upward momentum
halted at $460. It is more than coincidence that 4+6=10
and 10 hundreds make 1,000. It is proof of the
psychological power of numbers and the emotional
nature of the recent decline from $460. It won't take
much to penetrate $460 and clear the way for gold prices
around $500 an ounce.
Economist Arthur Laffer proposes that the United
States should return to the gold standard. The compelling nature of ideas from Laffer was amply demonstrated in the Reagan economic package.
Laffer is the father of the Laffer Curve and "the
wedge". His work indicated that the U.S. government
through high taxes and excessive regulation had become
a wedge between natural American entrepreneurial
spirit and solid economic result. It was Laffer who
started the drive toward reducing this wedge and increasing incentives that culminated in the Reagan tax

HIS I D E A S S U R V I V E D intellectual assault and
political emasculation. N o w he proposes a quick return
to the gold standard and supports his view with compelling evidence of the connection between leaving the
gold standard in 1971 and subsequent inflation, money
growth and high interest rates.
Gold has not, in recent years, been respected in the
United States. Officially, it is viewed as an opponent that
has caused inflation by rising to record levels. In the
American financial community it is looked at as "just
another commodity" endowed with primitive notions of
To be of genuine value, a gold standard must be
based on a healthy respect for gold as the proxy of free'
market, trans-national expression. Without that respect,
efforts to enact a gold standard will deteriorate into
another destructive power play, demonstrating
American potency in containing the gold monster while
increasing the risk of financial chaos.
Because of the significance of the issue and m y fear
that Americans will succumb to the temptation of using
economic power to reduce gold to a submissive servant I
will be taking the question apart issue by issue and offering m y views. Here is a summary of what I fear could
1) The gold price will be fixed at the "low" end of the
range. This will result in higher exchange rates for the
U.S. dollar but they won't last.
2) The initial response to the gold standard and
improvement in the dollar will be euphoric. Faith in the
efficacy of the "new" solution to inflation will be accompanied by sharply higher stock prices and
moderating interest rates.
3) Ultimately, the euphoria will end in disillusionment caused by a serious O U T F L O W of U.S. gold
reserves. O P E C will recognize the low gold price as a
high "real" price for their oil and will insist on payment
in the yellow metal. This is embodied in the concept of
"the gold pendulum" which shows how the "real" or
gold price for oil has been rising as gold quotations have
been falling. In the end, failure to understand this
concept and failure to recognize money as a genuine
store house of value will take its toll.
4) Outflows of U.S. gold will force either a
devaluation of the dollar or a renunciation of the gold
standard. Either result will produce higher interest
rates, higher inflation and the threat of financial chaos.
This sweeping summary of m y concerns will be
explained in detail in future issues. For now remember
that I a m early in assessing this situation. The gold
standard issue still isn't taken seriously in m a n y circles.
In the immediate future higher gold quotations will
develop. From present levels ($440) the road to $500
seems clear.

Nov. 11,1981


Page 5

E X P E R T S , preoccupied with Socialist political
gains in Europe, are creating opportunities for investors
willing to take a fresh look at the Capitalism versus
Communism issue.
That is the background, or long-term analysis.
Short-term or in the foreground of world markets, the
dollar and U.S. interest rates continue to hold the attention of traders.
There is no clear trend for the dollar at the moment.
Winning the A W A C S sale to Saudi Arabia adds to the
Reagan case for the dollar while falling U.S. interest
rates act as a negative.
Watch the dollar versus the Swiss franc for the best
indications of sentiment about the dollar. In that market
the dollar was somewhat stronger as October c a m e to a
close but not strong enough to break the September down
trend. The dollar spent most of October marginally
below the September lows.
That tells m e that the dollar is still weak. I look for
that weakness to moderate in November but do not
expect the dollar to show renewed strength. O n balance,
the dollar should remain weak for the time being. The
weakness should appear in the yen markets before long.
I N T E R E S T R A T E S for pounds sterling have been
rising while dollar rates have been falling. This has
closed the gap, and both currencies carried the same
rate near the end of October. This is significant.
For years the pound required a higher rate than the
dollar. But during the past few months, because of the
radical American interest rate policy, the dollar actually
has been paying investors more interest than the British
currency. That, as I have written before, seemed
completely unrealistic. N o w things are returning to
more realistic relative rates. Once the dollar has taken
its proper place in the ranks of currency and interest
rates, we should be able to get a clearer picture of world
sentiment about the dollar.
That sentiment, in large measure, will be the
product of feelings on the Capitalism versus Communism debate. Many experts see the Socialist victory
in France as a move away from Capitalism to the
detriment of investors and the predecessor of further
Socialist gains in England and Germany.
Fears of waning Capitalism are affecting all
financial markets. The picture, however, seems confused. Gold, for example, has not skyrocketed as you
might expect. Investors truly afraid of C o m m u n i s m and
expecting the demise of Capitalism should turn to the
insurance afforded by gold.
I don't accept the explanation that high interest
rates have been the lure keeping investors in paper
currency and out of gold. In m y view the gold market is
showing that the c o m m o n perception of the new
Socialism is wrong. The gold market is responding to
other factors such as the talk of returning the U.S. to a
gold standard.
O N T H E E Q U I T Y markets two countries in the
center of the debate, Italy and France, have not only not
collapsed but have risen significantly. Italy's stock
market rose 400% during reports of national economic

trouble and increasing Socialism. France's stock market
has recovered in the wake of the Mitterand victory and
policies of nationalization.
Rising stock prices in France and Italy cannot be
explained by the common, popular view that sees those
countries as leaning left, away from Capitalism.
They can be explained by a different view of the
political/economic world. There are tremendous opportunities for investors who have the courage to see events
through this new perspective.
This does not m e a n that Russia is impotent. O n the
contrary, it explains w h y Russia would build up its
military power to C O M P E N S A T E for the bankruptcy of
the Communist economic idea.
IN T H E N E X T ISSUE I will share with you reports
from Switzerland on why so m a n y aggressive companies
are going to Northern Italy to cash in on the boom
despite news reports of deepening economic problems. I
also will offer m y view of the emerging N E W
C A P I T A L I S M and how investors can profit in the
current confusion.
For now remember that L'Oreal and Moet Hennessy
are up 1 8 % since the spring Socialist victory in France.
Paribas, the other recommended French stock, has
gained 3 5 % and it is targeted for nationalization.
Clearly, looking at the French situation through a new
perspective already has produced significant gains.
This is only the beginning. The French stock market
easily could boom as did the Italian market, not only
recovering all the ground lost since spring but moving to
new high ground.
The contrast between the popular views of the
markets and this new perspective is even more apparent
if you compare these French stocks with General
Motors, Kodak or Xerox. Those American stocks in the
land perceived as the last bastion of Capitalism have
been falling while the French stocks, even after taking
account of the French franc, have been gaining.

T H E F R E N C H F R A N C was devalued versus the
German mark in order to restore order within the E M S .
The franc has not weakened versus the dollar as a result.
In fact, the franc spent all of October comfortably above
its September lows versus the dollar despite the realignment in the E M S .
I do not expect a significant upward move in the
franc in the near term. More likely is continued
vacillation amid all the confusion over nationalization
and French Socialism. But I do not see increasing
weakness either. The franc should be able to hold at
present levels in the near term.
The French stock market, like the franc, is caught
up in the nationalization issue. It will be difficult for the
market to advance sharply until the air clears. Then
To Page 6

page 6

Dessaneffc Journal

From Page 5
French stocks should surprise most outside observers by
advancing on strength of improved profits in the smaller
and m e d i u m sized companies as well as companies like
L'Oreal and Moet Hennessy that have m u c h of their
business outside France.


B Y L A T E O C T O B E R six-month Eurorates for
pounds and dollars stood at the s a m e level, 16 5/8%.
This is a far cry from M a y of this year when U.S.
rates were, for example, at 1 9 % and British rates were
16%. Back then I felt that 3 % more on dollars than on
pounds was unrealistic. The U.S. Fed caused that bit of
interest rate distortion and now the markets are finally
The British stock market is not taking this too well.
The slide on London's stock exchanges continued
through October. There were sparks of life and vitality
but not enough to offset the negatives of a lower pound,
higher rates and growing concerns about the health of
British industry.



"iT H A S B E E N rather dull in the G e r m a n markets
lately. The stock market spent October within its September limits and the D-mark did not overreact to the
devaluation of the French franc within the E M S . Germ a n s seemed to view this as the logical result of the
extraordinary strength of the franc in early 1981. N o w
that score is back to even.
Investors should take note of Deutsche Bank. The
stock continues to trade around 264dm while earnings
are advancing. This is a situation where dividends could
be increased triggering an upward reassessment of the


T H E N E W S F R O M Japan is the yen and leverage.
The yen has remained weak versus the dollar despite
lower U.S. interest rates. Analysts are searching for an
explanation. Recent trading seems at odds with general
investor enthusiasm for everything Japanese.
M y answer to the dilemma is leverage. First, you
have to be aware of the fact that Japanese companies
tend to borrow more than U.S. companies. Japanese
companies, for example, borrow through bank loans and
bonds about 4 0 % of the funds they need. This compares
to 2 5 % for American companies. In a time when
borrowing by governments and business is front page
news it should not be a surprise that Japan is being
looked at questioningly at the moment.
Leverage is also a factor on the Japanese stock
markets In fact, the recent declines of the Tokyo stock
market directly are related to changes in margin
regulation Foreign investors provided the support that
pushed the Neikki D o w to record levels. The leverage
question scares them. Their standoffish attitude accounts for the weaker yen and softness in Japanese
stocks I don't think this will last. The leverage storm
will pass That will allow higher stock quotations in Tokyo.


Nov. m m

Current Investment


W H E N E V E R T H E S T O C K market declines, you
hear more and more that it is a market of stocks rather
than a stock market.
You can't buy the market is the usual opener for
analysts defending their particular selection. Another
"tag" used to avoid the issues of a market in a state of
decline is "special situation". The idea behind that label
is that there are companies whose fundamental financial
picture is so strong that their stocks can go up even
though the market is going down.
The concepts inherent in both market strategies are
valid. They can be abused and substituted as crutches
for stocks that should be sold. For that reason I don't
often use the title, "special situation." This issue is an
There are two stocks, both American, that deserve
close attention. I'm calling them "special situations" to
distinguish them from the pack, set them apart and alert
you to their limited usefulness in a portfolio. Do not put
all your eggs in either basket. But do put a few eggs in
each to improve performance in the months ahead.
The two "special situations" are: T R I T O N GROUP,
40 cents per share traded on the Pacific stock exchange
and carried in the Wall Street Journal under, "Other
Markets", and W A C H O V I A R E A L T Y , 6 5/8 per share
traded on the N e w York Stock Exchange.
T R I T O N G R O U P stock falls in the "penny stock"
category which ordinarily is consigned to the ranks of
speculations for those w h o only have pennies. Worse, the
company is the survivor of a 15-month workout under
Chapter 11 of the bankruptcy laws. These two facts make
ordinary analysts turn away and shun the stock. That is
one reason the stock sells at 40 cents while the company
has 25 cents per share in cash. There aren't many stocks
around these days that have 2/3 of the share price in
cash. That is what attracted m e to the company. I have
been looking for cash rich companies.
Triton has a fine pedigree. Back in the mid-70s it
became popular to form REITs, real estate investment
trusts. S o m e of the biggest and best banks sponsored
subsidiaries with similar names. Triton once was named
Chase Manhattan Mortgage and Realty Investment.
Chase Manhattan, a stock recommended repeatedly in
this Journal and one of America's biggest and most
prestigious banks, was the sponsor of the original Triton.
W h e n the real estate market fell on hard times in the
70s, this company suffered from rising interest rates, too
much debt and falling real estate values. That combination led to serious financial trouble and bankruptcy
under Chapter 11. During the workout debt was reduced,
real estate sold off and the company reorganized.
T H E N A M E O F the company was changed so as to
avoid embarrassing Chase Manhattan Bank with the
failure of this financial child. B y M a y of 1980 the workout
successfully was completed and Triton emerged as a
new company with new potential. Debt was down to a
To Page ?

Nov. 11,1981

Dessauer^ Journal

F r o m Page 6
fraction of net worth .4:1 in M a y of 1980 and .2:1 by M a y
of 1981. B y the end of the fiscal 1981 period book value
was 64 cents a share.
There is another element to this story. The troubles
of the past produced a huge loss amounting to $2.10 per
share. Under the new tax laws this loss can be carried
forward 15 years and used to offset future income.
With all that cash and a loss carry forward, Triton is
searching for an acquisition. It tried to buy a drug and
food company, but the deal didn't materialize. The
failure of that deal isn't important. What is important is
the intention of management to m a k e an acquisition and
to use both the cash and the loss to generate future earnings.
Because of the loss Triton is also a candidate to be
acquired. A profitable company could buy Triton and
benefit from both the cash and the tax loss.
In either case it seems to m e that Triton shares are
worth closer to $1.00 a share. That is 125% higher than
the current stock price. These shares, therefore, are
attractive for speculation.
W A C H O V I A is another R E I T sponsored by a
prestigious big bank. In this case the sponsor was
Wachovia Corp., the bank holding company that is the
real "blue suit" banking organization in the WinstonSalem region of North Carolina.
Wachovia Realty is in the process of being acquired
by Old Stone Corp., a N e w England banking
organization. The price is more than 2 5 % over the
current stock price and will be paid in January. That
gives investors an opportunity to earn the equivalent of
134% per year by buying Wachovia Realty at 6 5/8 or
W h y is this transfer from a southern to a northern
banking company taking place? Wachovia Corp. has
suffered with its financial child; it wasn't as painful as
the Chase experience with Triton but painful nevertheless.
Wachovia also has other lines in the real estate
water through a subsidiary of the bank holding company. It doesn't need the R E I T and no doubt will be very
happy to see a n a m e change to Old Stone so that the
troubles of the past can be forgotten. Old Stone, on the
other hand, looks at this as a bargain way to get deeper
into the real estate market and to have a foot in the fast
growing North Carolina territory.
T H E R E A L W I N N E R S in the immediate future will
be the shareholders of Wachovia Realty. They will
receive one share of an $18.00 Old Stone convertible
preferred with a $2.60 dividend for each Wachovia share.
Assuming that interest rates are 1 5 % in January, the
preferred would have a market value of $17.00 giving a
value of $8.50 to each Wachovia share. That is 2 8 % above
current quotations. If interest rates continue their
decline, the return would be higher. For investors
looking for income the Old Stone preferred wouldn't be a
bad long-term holding.
This is a situation with minimal risk and attractive
short-term potential. Just what the doctor ordered to
cure the market gloomies! Wachovia Realty shares are
recommended at 6 5/8 or better.


Page 7

Current Notes
On Past Ideas

E X X O N (30 1/2) reported third-quarter earnings
down 2 0 % from levels of a year ago. O n that news and
fears of further declines the stock sold off. In m y view,
the report provides good reasons for buying rather than
selling Exxon.
In its report the company explained that foreign
operations were the problem because the cost of crude
rose faster than foreign prices, causing a profit margin
squeeze. Rising crude costs, contrary to m u c h of the
news focusing on lower crude costs, is very m u c h in line
with the analysis of this Journal. The higher, interest
rate driven dollar is causing rising prices.
That is also the exact opposite of the reasoning
behind the fall, earlier this year, in the oil stocks. N o w
that O P E C has agreed on $34.00 a barrel, you can expect
investors to take a new look at the oil stocks. This time
they will focus on rising crude prices. That will produce
higher oil stock valuations.
The profit margin squeeze is temporary. Retail
prices will rise, and the dollar won't keep skyrocketing.
The bad quarter will be offset later on by a good quarter.
O n balance, over the next 12 months I expect profits to
grow modestly. That makes Exxon look undervalued at
present quotations.
That view probably will be reinforced by a dividend
increase that could take the yield to more than 11%. If
management does hike the payout, the stock will trade
at higher levels.
O C C I D E N T A L P E T R O L E U M ($24) also reported
lower third quarter earnings. Net income was down 1 3 %
compared to last year. Per share earnings showed a
somewhat greater drop due to an increase in the number
of shares. That increase c a m e largely as a result of
OXY's acquisition of Iowa Beef.
The good news, however, was improvement in the
coal division. This is very m u c h in line with reasons for
m y recommendation of O X Y . The Polish situation, with
reduced coal production, will continue to provide a mild
upward bias on coal prices. That marginal price improvement will add significantly to OXY's coal profits.
Iowa Beef, the O X Y reported, also added
significantly to income. That m a y m a k e the share
dilution worth the current pain.
The news also carried word of another deal by
OXY's chairman, A r m a n d H a m m e r . H e is well known
for his Russian connection and is now apparently using
that to trade beef from OXY's new Iowa Beef division to
the food hungry Russians.
O X Y m a y benefit from the Polish situation in two
ways. First, from higher coal prices due to Poland's
problems and second, by helping with the solution in
supplying badly needed beef.
I like O X Y . At $24 with a $2.50 dividend the stock
looks very attractive.
A I R L I N E S . The International Air Transport
Association, meeting in Cannes, France, proposes a 1 0 %
To Page 8

Page 8

Dessanerls Journal

Foreign Investor Watch

Price at First
In Local
In U.S. $ Currency

Recent Price
In Local
In U.S.$ Currency





Chase Man. (12/80)
Citicorp (12/80)
Man. Han. (12/80)
Citizens&S.Ga. (9/81) 7 3 4
Amer. Air. (2/81)
Delta (2/81)
Home Building/Housing:
Black&Deck. (6/81)
Maytag (2/81)
Ryan Homes (2/81)
Ashland (5/81)
Occidental (5/81)
Exxon (4/81)
Mobil (5/81)
Data Pro.:
Burroughs (8/81)
Cont. Data (8/81)
Carolina P&L (5/81) 18 5/8
18 3/4
Texas Util. (5/81)
Special Situations:
Triton Grp (11/81)
WachoviaRlty (11/81) 6 5/8

54 1/4


8 3/4












Best Buy













20 3/4












Deutsche Bk. (12/80)
*Hoechst (12/80)
'Siemens (12/80)
B M W (12/80)

























Paribas (12/80)
L'Oreal (12/80)
Moet-Henn. (12/80)










71 Off

















338 yen











Swissair (2/81)
Gold Mines:
*Drief Cons. (6/81)
"Kloof (6/81)
Gold (12/80)
Silver (4/81)




27 1/2
32 3/4
' American Depositary Receipts (ADRs) Available

Nov. 11,1981

70% U.S. dollar assets — 90% common stocks and 10% gold or medium term
, „, .
., „
, ,
20% German assets — 75% equities and 25% six-month Euro-D-mark placement.
7 5 % French equities 2 5 % Japanese equities — special situations such as Honda.
100% C o m m o n Stocks — A conservtive alternative would be 70% common stocks.
10% gold and 20% medium term governments.

IF YOU ARE wondering why the Dow was able to
stay above 820 during October in the face of gloomy
economic news and forecasts of a coming market crash,
take a look at the first-hour volume on the N Y S E .
Out of 22 trading days in October there were 13 days
when first-hour volume was above the month's
average. That indicates foreign investor activity on
those days. O n eight days the D o w was up during the
hour, and on five it was down.
This means a presumption of buying on the up days
and selling on the down days. October is, then, another
month where foreign investors provided buying support
for the U.S. market.
IN T H E N E X T ISSUE: Details on how this indicator

Dessauer's Dividend
C I T I Z E N S & S O U T H E R N CORP.'S stock price*
moved up over $8 since first recommended a few weeks
ago. The m o v e c a m e on news of improved third quarter
C & S also announced the proposed acquisition of a
small neighboring bank. This acquisition by itself is not
significant. What is significant is that it is another in a
chain of acquisition efforts. C & S obviously aggressively
is seeking to expand its business.
The truly significant thing is that C & S was a
troubled bank a few years ago. In 1978 C & S had a deficit
in per share earnings and wouldn't have dared approach
the regulators with acquisition proposals. N o w in 1981 it
has prepared five applications and has plans for more.
That is a remarkable turnaround and deserves more
investor recognition than the present stock price affords.
C & S at $8> 2 remains on m y recommended list.
N E X T ISSUE: Nov. 25,1981.


F r o m Page 2
Obviously, foreign buying or selling is extremely
important to the future course of the markets. The U.S.
Treasury Department publishes statistics monthly but it
looks back three months.
W e need a current proxy for foreign activity. That is
w h y I developed the "First Hour Volume Indicator". The
details of that new market tool and how you can use it
will be the subject for the next issue.


From Page 7
hike in air fares. That is exactly what I have been
predicting. Higher air fares the world over.
C I T I C O R P ($24) announced disappointing thirdquarter earnings and the stock has been underperforming. Investors should note that the third
quarter was H I G H E R than the second quarter and the
company has shown steady improvement in earnings
since the fourth quarter of last year. This is being missed
by the crowd. Citi is attractive at $24.

NOVMBER - 1981
TO: AITmftobers of the GOLD COMMISSION
&: others including Anna Schwartz* Extra for press.
Hesfectfully submitted
BT: C. F* Dockstader, P* 0* Box 19523, Denver, CO 303 93% 1168
I have just concluded 3% pages of legal briefs in a suit against
the City of Denver (Pro Se) and feel somewhat of an authority on
history of money in the U* S»» The suit attempts to prove
that Federal Reserve notes are not dollars and the only standard
today is embodied in 31 IT* S* Code 31*f and is the only possible
Money of Account of the United States as specified in 31 U* S* Code
371» Federal Reserve notes have never been declared the Money of
Account (period)
This offering is brief in interest of economy of my finances and
your time*
I have read all the reports available of your efforts and that of
Anna Schwartz* I believe you are^S good track*. I am very disappointed in the reference to the U. S. Constitution and intent of
the founding fathers* It is my belief that no statute should ever
be enacted or course recommended except it be in harmony with the
paramount law*. It is very clear on this matter*
MT REPORT HERE IS IN DEFENSE OF THAT supreme law and of the intent
on its framers in regard to proper money*

From the beginning in the Colonies great chaos and loss of the fruit
of ones labor was the rule because of PAPER MONEYS No one could
anticipate a loan or do a job except under penalty of loss of value
of money (as today)* Circulation of foreign-made coin was a nightmare* Coin had different values everywhere and coiners were not
alwaje to be relied on for value as stated. Commerce between States
was difficult at best*. Paper cheated trusteis right and left*
As early as April 19, 1776 debates started on the money question

Over: Please read from bottom*

which lasted about one year; suspended during War; resumed 1782 and
finally culminated in the 1787 Convention results, namely; the U. S.
THE WAR could well have been lost except for hard money - just as
our nation will be lost if we continue on the PAPER MONEY CHASE*
Here's the account of a significant development in the Revolutionary
War to illustrate the evils of paper money.
The families of the men in the Army were in very bad straits;
starving for need of a dependable medium of exchange to purchase
supplies•. You can imagine the moral of the men who loved these families could not be very good knowing this from far awayAfter the "Christmas Victory" at Trenton in 1776, Robert Morris was
able to save Washington1 s Army (get them to reenlist) by going house
to house on New Year»s day 1777 to gather £50,000 in gold donations
in Philadelphia. The Continental Currency was worthless; gold saved
the Army!
Out of the April 19, 1776 appointment by the Continental Congress to
determine the value of the different gold and silver coins in circulation there came four reports written on money recommendations•
They were by: Mr. Williamson (Journal of Congress), Friday May 13,
1785; Mr. Jefferson (July 24, 1784); Mr. R. Morris (Jan. 15, 1782);
and Mr. G. Morris (Date not certain but in Papers of Continental
Cong., No* 26, folio 557)+ These papers and reports can be found
in The National Archives Microfilm Publications*
Hugh Williamson in his report made the suggestion to establish the
Unit or Money of Account as one dollar, a piece of silver. Later
the Constitution was to mention "dollar" in two places and this
established it as our trademark for our money. This cannot be
changed by statute. Williamson was to use the term "imaginary money"
to describe the fiat paper of those days.
Thomas Jefferson, who had his report published in the Providence
Gazette and Country Journal of July 24, 1784, made a very significant
statement which along with the Williamson report indicated that the
MONEY OF ACCOUNT question did not just establish the arithmetic of


JEFFERSON STATED: "If we determine that a dollar shall be our unit,
we must say with precision what a dollar is"* It is useless to talk
about arithmetic, except in theory, in the every day world unless
you apply it to some concrete thing.
Later the Spanish Milled Silver Dollar's weight was established in
the Coinage Act of 1792 as being the dollar unit* In Sec* 20 of that
Act the MONET OF ACCOUNT OF THE UNITED STATES is spelled out and
became today's 51 U« S« Code 371 (not positive law) which reads:
DOLLARS OR UNITS, dimes or tenths, cents or hundredths, and mills
or thousandths, a dime being the tenth part of a dollar, a cent
the hundreth part of a dollar, a mill the thousandth part of a
At the time of the adoption of the Constitution Article I Sections
8.5* & 10*1* working together became the engenious devise by which
"paper money was to be crushed forever"* The framers did not anticipate the genius of people to misinterpret and the ignorance of the
framers intent.
IN ORDER TO KEEP THE 'friends of paper money' FROM OBTAINING THE
'license' to monetize the United States debt, Secion 10.1* prohibited the States from Declaring irredeemable paper (or anything other
than gold and silver coin) to be a tender in payment o£ debts*
The intent of the framers is clear; replete with quotations after
quotation by men of that day that paper money was to be crushed.
Space or your valuable time, does not allow me all the quotations
but a list of the men is on p a g e s i x . . They spoke against paper
money, wr0te in favor of a metal economy or voted for same in the
Constitution. That included those who ratified the Constitution.
NO DISSENTING voice was raised against Article I Section 10* No
State required it to be expunged, nor did any State propose an amendment* It was universally received without exception.
A short explanation of the tie-in between Article I Section 8.5* and
10*1* is very ably set forth in the following Indiana case reproduced on the following page*

Over: Please read from bottom*


T H A Y E R V. H E D G E S


The following appears

CONSTITUTIONAL LAW.—1. At the adoption of the Constitution, all


West Publishing's on


the Constitution;
U. S. Code Annotated

governmental power was in the States; and in the division of it
made by the adoption of the Constitution, the Federal Government
received only what was granted to it, the States retaining the
residuum, except so far as it was extinguished entirely by prohibitions upon the States.


S A M E . — 2 . ^ h e prohibition of a power to the States did not of itself,
operate as a grant of the power to the Federal Government, but
rather as an extinguishment of the power as a governmental one P
where a grant of it was not made in the Constitution to the Federal
8 A M E — L E G A L T E N D E R . — 3 . The power to coin money is one power, <o
and the power to declare anything a legal tender is another, and K>
different power; both were possessed by the States severally at ;*•
the adoption of the Constitution; by that adoption, the power
to coin money was delegated to the Federal Government, while
the power to declare a legal tender was not, but was retained by 1U
the States with a limitation, thus: "Congress shall have power
to coin money," &c. " N o State shall coin money"; and "no


under (updated to 1981)

1 § 10, cl. 1

M A Y TERM, 1864.

page 235*
States, though they cannot coin m o n e y ,
can declare that gold or silver coin, or
both, whether coined b y the Federal or
the Spanish or the Mexican government,
shall be legnl tender, and as Congress
was authorized to m a k e m o n e y only oat
of coin, and the states were forbidden to
make anything but coin a legal tender, a
specie currency w a s secured In both the<S
federal and state governments; thcreV
was thus no need of delegating to Con-<S
prom flw power of rieelnrlnsr a ]r>nn\ S
Imiilur In IriiiiiinHliiiixj wllhln the d o m a i n ^
nf fcdcrnl Ir-jilitlntlon. Tlio m o n e y coined%f
by It wns the nrccsunry m e d i u m . T h n y - ^
er r. Hedges, 1804, 22 Ind. 30L

and Another.


Thayer v. Hedges and Another.


State shall make anything but gold and silver coin a logal tender,"
&c. States, then, though they can not coin monoy, can declare that
gold or silver coin, or both, whether coined by the Federal,
or the Spanish, or the Mexican Government, shall be legal tender.
A.nd as Congress was authorised to make money only out of coin.
and the States were forbidden to make anything but coin a legal
tender, a specie currency was secured in both the Federal and State
Governments. There was thus no need of delegating to Congress
the power of declaring a legal tender in transactions within the
domain of Federal legislation. The money ooined by it was the
i necessary medium.
S A M E . — 4 . The words delegating to Congress power u to coin money,"
regulate the value thereof and "of foreign coin," do not include
the right to make coined money out of paper. If they do, then
the States have a right to make such money a legal tender. It
does violence to the language to give it such a meaning.
S A M E . — 5 . T h e power to declare paper a legal tender is not incidental
to any power delegated by the Constitution.

A P P E A L from the Boone Circuit Court.
P E R K I N S , J.—This suit was instituted upon a promissory
note of the following tenor:
«$500. March 26,1862.
" Four months after date we promise to pay to Oel Thayer,
or order, 600 dollars in gold, value received, without any
relief whatever from valuation or appraisement laws.


The plaintiff prayed for a special judgment for the gold or
its equivalent.
The defendant answered, alleging a tender of the amount
due, before suit commenced, Ac, in legal tender treasury
notes, at their face.

Then came what I call the Banana Republic Decision of 188^; more
precisely 110 U« S. 1+21 - Julliard v Greenman; because it was based
not on our own U. S» Constitution but on "one of the powers of
sovereignty in other civilized nations"Here is what Paul Leicester Ford, Editor of the FEDERALIST, printed
1898, had to say in his introduction to the 85 separate commentaries
by Hamilton, Madison ami Jay written to introduce the new Constitution in 1787-1788:: Emphasis added,.
"Once only, by the third legal-tender decision, had the court markedly failed in the chief purpose for which it was created, and the
failure is the more extraordinary, for none knew better than the
judges that it was to prevent just such outrages as fiat money that
the national government was created, and that the very words "legal
tender", except as applied to intrinsic money for commercial and
legal convenience, are a lie and a fraud, through which someone is
to be robbed* To allege that the "right to make notes of the government a legal tender" has been deemed "one of the powers of
sovereignty in other civilized nations," which were the grounds on
which the decision was based, was to place our national government
on par with those which have notoriously been planned for the benefiting of some at the expense of others, and t^ destroy the very pledge
of justice that the majority gave to the minority in 1788 »» The
pride of this country has been that elsewhere the majority or the
minority, depending on the degree of power enjoyed by each, has
abused the other, but that here they were equal before the law*"
* To assign "banana republic" status to our nation has to be an
affront to all thinking persons•>
31 U.. S* Code 571 quoted above is being violated by every state in
that Federal Reserve notes or fiat coins have not been declared
the Money of Account of the U. S»* For those who get the impression
that the CODIFIER with this title means anything like it seems to
imply here is the answer to that:
Sometime after July 23, 1965, the date Congress passed public law
89-81, an act providing for "additional coinage" of cupronickel
tokens, the MONEY OF ACCOUNT STATUTE was embellished by codifiers
with the title "Decimal System Established.." This title was never

Over: Please read from bottom

part of the original bill, S- 2080; it was never debated, never voted
on, was never enacted into law. Codifiers are not legislators, and
the words of codifiers are not lawThe nearest thing to the MONET OF ACCOUNT in which ALL ACCOUNTS IN
THE PUBLIC OFFICE, etc- must be kept is embodied in 31 TJ. S. Code
314 wherein it is stated, "The dollar of gold nine-tenths fine—»
shall be the standard unit of value?...".
In other words we have never been off the Gold/Silver standard except
based on statutes (in my opinion Unconstitutional) of Congress that
have declared Paper Money, at least in w 0 rds a "legal tender"; that
ghastly fraud which Lexicographer Noah Webster called "the devil"
and those who favor it "were counterfeiters, deserving of the
gallows, — » ?
The Constitution did not use the word "legal" once, not even in respect to the word "tender" in Section 10-1.; for good reason.
Regarding Gold/Silver coins., if the Commission does decide to recommend them, I suggest they be stamped with the value in dollars to
comply with Art- I Sec. 8.5» but that at the same time the weight of
pure metal be stamped in grams or decimals of a gram which is the
metric system and the forward standard which sooner or later will
he set upon as the only logical course of weights & measures.
Since gold is necessary for a specialized society and division of
labor (which means a high standard of living), and since g0ld production represents a consumption of capital, it would be advantageous to everyone to economize the use of gold.
The banking system has provided an ingenious solution to this problem: fiduciary media- Fiduciary media consists of fclaims to money1
that are not backed by goldTherefore, I suggest reserve requirements be set at 20-2.5% gold
backing. Experience has shown this to be a practical figure- I
also suggest paper money be made convertible into gold to show trust
in the American individualCordially,
£ % ^ O ' c ^ J ^ ^
P* S. Here is a list of the founding fathers who spoke against
paper money, wrote in favor of a metal economy or voted for
metalfge Washington Robert Morris John Landgon Abiel King William Hindman
fr Sherman*
Gouverneur Morris James McHenry
Joseph Piatt Cook Charles Pinckney
& Williamson
Col. Mason
Luther Martin
Melancton Smith William Houstoun
^ Jefferson Mr. Elseworth
W- R. Davie
John Beatty
Gerry Elbndge
es Madison
James V/ilson
Ben Franklin
Joseph Gardner
nder Hamilton George Read
David Howell
John Vining
!» Sherman was the author of the 17 words at Article I Section 10.1.:
•• •



Mr. President,
Where Is Our Gold ?
An Update O n the Remarks
Made By
E d w a r d Durell
At Dr. Franz Pick's
Two-Day Seminar
In New York City
June 29-30, 1981

Adapted For Publication)

Privately Published In 1981
Edward Durell
Graduate of Princeton University
Captain In World War I
Industrialist To Present Date
M e m b e r of Board of Trustees,
Ohio Manufacturers' Association for
Over 40 Years

A copy of this pamphlet will be sent
to those from w h o m w e receive selfaddressed business size envelopes
containing $1.00 (U.S.) to cover
postage and handling, sent to the
author at;
P.O. Box 586
Berryville, Virginia 22611

Mr. President,
Where Is Our Gold?
This is the question I have been
asking repeatedly over a period of
seven years. There is sufficient evidence indicating that all of the gold
that is reputed to be at Fort Knox is
not there.
Three Presidents (Ford, Carter &
Reagan) and four Secretaries of
Treasury (Simon, Blumenthal, Miller
& Regan) have refused to order an
independent inventory and assay of
whatever gold exists in the hands of
the U.S. Treasury and its agents. In
addition, the Chairmen of the prestigious banking committees of
the Senate and the House and the
ranking minority leaders of these
two committees have been importuned many times to take steps to
determine whether the U.S. Treasury holds the gold it claims. All
have refused.
W e have been stonewalled by the
executive and
branches of government and ignored by the news media.
I believe the inclusion of facsimiles
of the documents in the Exhibits in
this pamphlet will convince you
(1) Of the 219.5 million Troy
ounces of gold that left Fort
Knox alone during the operation of the London Gold
Pool (1961-68), 165 million
Troy ounces are missing. At
$500 per ounce the missing
gold would be worth $80
(2) Whatever gold an independent, external, physical inventory and assay would

disclose belongs not to the
U.S. government, but to the
Federal Reserve System;

(3) The 12 regional Federal Reserve Banks are guilty of
misfeasance in not ascertaining the existence of the
gold collateralizing the gold
certificates shown as an
asset on their respective balance sheets; and
(4) There exists an unbelievable
control of the news... newspapers, magazines, radio,
investment letters and TV...

W h e n w e learned in January 1968
that a bill was being introduced to
remove the last 2 5 % gold backing
from our currency, m y wife and I
journeyed to Washington and N e w
York in an effort to gain more time
for consideration of the consquences of this bill. W e felt that its
enactment w a s going to increase
the speed in which our currency's
purchasing power would decrease.
In March 1968, Congress passed
this bill abolishing the 2 5 % gold
backing. It was signed by President
Johnson very quietly, yet it radically
changed the stability of the dollar.
The first worldwide reaction to the
removal of the gold backing c a m e
on August 15, 1971, when President
Nixon closed the "gold window"
which, in effect, told the world that
the U.S. would not redeem its paper
currency with gold when asked to do
so by foreign central banks.


The next shock c a m e when w e read
the cover story of a Chicago based
tabloid, T H E N A T I O N A L TATTLER,
in July 1974, showing that the gold
at the U.S. bullion depository at
Fort Knox had been tampered with.
Exhibit #1 * shows the July 7, 1974,
and August 18, 1974, front pages of
In the July issue, Dr. Peter David
Beter, a Washington attorney and
former counsel to the Export-Import
Bank, stated that he was willing to
go before a grand jury and prove the
correctness of his charges.
Due to m y long interest in sound
money, as witnessed by m y efforts
in January-March 1968, to get a
more orderly examination of the
consequences which would result
from the removal of the gold
backing from our currency, I interviewed Dr. Beter and his story
seemed to warrant an investigation
Prior to this, I had correspondence
beginning in February 1974, with the
late Wright Patman, Congressman
from Texas and then Chairman of
the House Banking Committee,
about reported sales of gold by the
U.S. Treasury.
It may interest you to know that
Wright Patman had tried unsuccessfully to secure an audit and inventory of the assets and liabilities of
the Federal Reserve System during
his long chairmanship of the House
Banking Committee before his untimely death.

Correspondence with Chairman of
Federal Reserve System

In July 1974, Congressman John
Rarick of Louisiana became interested in the situation and his letters
to and from Arthur Burns, then
Chairman of the Federal Reserve
System, appeared in the CONG R E S S I O N A L R E C O R D of July 18,
1974, (pages E4827 & E4828).
Please note in Exhibit #3* the
marked statement in Burns' letter to
Rarick of June 28, 1974, stating,
' o u r system of audits and examinations would quickly disclose any
unauthorized transactions in System assets, which, I repeat, do not
include gold." However, the balance
sheet of the Federal Reserve System
dated March 27, 1974. showed that
it carried an asset of $11 2 billion of
gold in its "Gold certificate account" (figured at the official gold
price of $42.22 per Troy ounce).
"Settlement Committee"
30-Day Exercise
Apparently Congressman Rarick's
speech on the floor of the House
and Dr. Beter's statements in the
July 7th and August 18th NATIONA L T A T T L E R aroused enough interest in Congress that Mrs. Mary
Brooks, then Director of the Mint,
invited m e m b e r s of Congress and
the n e w s media to c o m e to the
bullion depository at Fort Knox,
Kentucky, to see the alleged gold
hoard. I have been informed by
m e m b e r s of the General Accounting
Office ( G A O ) that this w a s the first
time such a visitation had been
Exhibit #2* is a letter from John
m a d e since President Roosevelt was
Klossner, Acting Director, Office of
there on an inspection tour April &,
Domestic Gold & Silver Operations,
Department of the Treasury, stating
O n e senator and six congressmen,
that an annual physical inventory of
with 1 0 0 + m e m b e r s of the
the nation's gold w a s required under
went to Fort Knox on
Title 31, U.S. C o d e .
September 24, 1974, and were
*(1) THE NATIONAL TATTLER front pages dated 7/7/74 & 8/18/74. See Page (11)
*(2) Letter to Durell from John Klossner dated 8/27/74. See Page (12)
*(3) Letter to John Rarick from Arthur Burns dated 6/28/74. See Page (13)


shown the contents of only one of
the thirteen cell-like vaults.
They did not see the underground
central core vault where the gold
was originally stored.
The news media then advised the
world that the gold w a s all there!
Exhibit #4* is a typical report
published by the n e w s media.

Unusual Events
Surrounding Gold Auction

While this was going on, we
secured a copy of a letter (w/enclosures) from then Secretary of the
Treasury William Simon to Congressman J. Kenneth Robinson
dated November 4, 1974, (see Exhibit #5, 6, 7*) in which Simon
Mrs. Brooks at that time instituted encloses a table of "Monetary Gold
a 30-day so-called audit by a
Stock Of The United States" listing
settlement committee under the
276 million Troy ounces at nine
direction of the G A O which consistlocations, including the five U.S.
ed of 15 m e n : two from the G A O
bullion depositories.
and 13 from the Treasury. It w a s
Note that Exhibit #7. one of the
said they spent 30 days in the five
enclosures, is a breakdown of the
U.S. bullion depositories, including
fineness of the gold at the five
Fort Knox. At Fort Knox, they said
depositories. Only 48 million ouncthey handled 91,604 bars of gold
es (or less than 2 0 % ) is known as
weighing approximately 400 ounces
"good delivery" gold suitable for
each. There are 20 bars to a melt
international exchange. The coin
(a pouring or casting). Even a 1 0 %
melt could, of course, be refined;
sampling would have required 458
however, it is said the total known
chip samples (one from each melt)
capacity in the U.S. for that process
to be assayed. In their report, they
is only about two million ounces per
said they took only 100 chip
samples and the assaying of these
Also, note there are 24 million
chips only covered 54 of the 100
ounces of good delivery gold shown
samples. Also, note they did not
as being at Fort Knox, but when
take borings, only chip samples.
Secretary Simon testified before a
Although this 30-day exercise was
s u b c o m m i t t e e of C o n g r e s s in
completed on October 21, 1974,
December 1974, he stated that the
repeated attempts to secure a copy
gold to be sold at auction would not
of this report were unsuccessful.
c o m e from Fort Knox as the gold
The efforts to get these results were
there w a s of inferior quality.
most insistent w h e n it w a s an(Exhibit #8*)
nounced that there would be an
On December 9, 1974, the Treasury
auction of s o m e of the nation's gold
announced the closing of the Exon January 6, 1975. In the fall of
change Stabilization Fund and the
1974, a bill w a s passed that would
transfer of its entire two million
restore to the U.S. citizen the right
ounces of gold from that fund to the
to o w n gold as of December 31,
general fund of the Treasury. (See
Exhibit #9*)
*(4) Article from SAN FRANCISCO EXAMINER dated 9/24/74 covering Ft. Knox Visit. See Page (14)
*(5) Letter from William Simon to J. Kenneth Robinson dated 11/4/74. See Page (15)
"(6) Attachment to above entitled "Monetary Gold Stock of U.S." See Page (16)
"(7) Attachment to above entitled "Gold Holdings As Of 8/31/74." See Page (17)
*(8) Article from THE WASHINGTON POST on Simon's testimony of 12/4/74. See Page (18)
"(9) Treasury announcement on transfer of gold from Exchange Stabilization
Fund to Treasury, dated 12/9/74. See Page (19)

Note that in this a n n o u n c e m e n t
Treasury states that "Gold certificates were then issued by the
Treasury to the Federal Reserve
S y s t e m for all the ounces of gold
held in the General Account for
which such certificates had not
been previously issued, and the
B a n k s deposited $191 million to the
accounts of the Treasury."

G A O ' s Report to Congress
During the period of November
1974 to December 1975, THE FIN A N C I A L T I M E S of London had
carried a series of articles by the
world k n o w n financial writer,
Gordon Tether, bearing on the
possibility that the U.S. government
did not have the gold it claimed.
O n February 11, 1975, an article by
appeared under the heading "Ft.
Knox G o l d — T h e Plot Thickens." In
Exhibit #11* this article concludes
with Tether stating that "The puzzling thing is w h y the Administration
is not hastening to demonstrate that
there is no cause for concern if it is
in a position to do so."

This is a very important statement
because it says that the certificates
record the n u m b e r of ounces rather
than the market value of the gold in
dollars as of that date. For s o m e
reason k n o w n only to the Federal
Reserve System they have been unwilling to furnish m e with even a
typewritten copy of the legend on
o n e of these certificates denomiDue to the five hours difference in
nated in ounces.
time zones, it seems a reasonable
T h e General Services Administraassumption that knowledge of this
tion ( G S A ) announced the auction of
article w a s the cause of the General
two million ounces of gold on an "as
Accounting Office (GAO) hurriedly
is, where is" basis with no inspecrubber stamping the date February
tion available; a very unusual pro10, 1975, on their -Report To
cedure. (See Exhibit #10*.)
Congress (FOD-75-10)" which had
During the m o n t h of December 1974
been prepared m u c h earlier and
the n e w s media put on a blitz trying
delivering it to Congress on
to discourage Americans from o w n the morning of February 11th.
ing gold and only 754,000 ounces of
Bear in mind this 30-day exercise,
the two million offered were sold on
authorized by the Director of the
January 6, 1975, with the price
Mint in September 1974, had been
determined by the lowest accepted
completed on October 21, 1974;
bid; another very unusual prohowever, the report was not recedure.
leased at that time. It is interesting
Is it a coincidence that the gold
to speculate w h y this report was not
transferred from the Exchange Stabm a d e public before the January 6,
ilization Fund to the Treasury w a s
1975, auction.
the s a m e amount, in round figures,
Exhibit #12* is the cover sheet of
that w a s offered at auction since
"Report to Congress". You can
Secretary S i m o n had said that Fort
probably obtain the complete nine
K n o x did not have any good delivery
page report by writing to the General
gold even though the tally (see
Accounting Office, 441 G Street,
Exhibit #7*) s h o w e d 24 million
N W , Washington, D C 20548, and
ounces being stored there?
*(7) Attachment to above entitled "Gold Holdings As Of 8/31/74." See Page (17)
*(10) General Services Administration announcement of sale of gold on an "as
is, no inspection" basis dated 12/13/74. See Page (20)
*(11) Article from THE FINANCIAL TIMES of London by Gordon Tether entitled "Ft.
Knox Gold-The Plot Thickens."See Page (21)
*(12) REPORT TO CONGRESS (FOD 75-10) dated 2/10/75. See Page (22)


ask for "Report to Congress by
Exhibit #15* is a copy of m y
Comptroller General of the U.S.,
telegram to President J i m m y Carter
FOD-75-10", dated February 10,
dated June 14, 1977, and is an
example of our efforts to stimulate
The Report states, a m o n g other
the Carter Administration to take an
things, that the settlement commitinventory.
tee "believed" that the gold w a s all
165 Million Ounces Missing
there and that the last inventory of
the gold w a s taken in 1953 (on order
Now my narration divides into two
of President Eisenhower.)
parts and I will first s h o w you that
It is m y opinion, and I have so
the operation of the London
stated m a n y times, that this exerGold
(1961-68) 165 million
cise was inadequate, incomplete
left Fort Knox, the
and possibly fraudulent.
is unknown.
The Treasury held 21 auctions
selling 17,053,900 ounces of gold
You will recall that under U.S. law,
between January 6, 1975, and Nothe Federal Reserve Notes were to
vember 1,1979. These auctions and
have a 4 2 % gold backing. Our
world events caused the price of
Congress reduced the gold backing
gold to vary widely, but it n o w
to 2 5 % which m a d e it possible for
seems to have temporarily stabilized
them to increase the number of
at $450—$500 per ounce, or about
paper dollars per ounce of gold
14 times the price the government
backing by 6 0 % , from 87 paper
attempted to hold it a t — $ 3 5 per
dollars per ounce of gold to 140
paper dollars per ounce of gold.
News Media Control
Under Secretary of the Treasury
Those of us w h o have been
Dillon, a bill w a s introduced in 1961
questioning whether or not the
take the balance of the gold
Treasury has the gold it claims
backing away from our dollar. But
made vigorous efforts to get s o m e on the morning that the first hearing
one high up in government to
w a s to be held w h e n all those
interest themselves in the evidence
interested in hard m o n e y were to
that our correspondence and visitatestify
(among them Dr. Beter w h o
tions were developing, but w e had
General Counsel for the
no success.
American Gold Association), word
Exhibit #13* is an example and
c a m e from the Treasury that they
these are excerpts from m y letter to
had withdrawn their support of the
W . Michael Blumenthal dated
bill and therefore there would be no
January 6,1977. All w e got from him
was a two-hour visit to Fort Knox.
It w a s then that the so-called
The news media w a s supplied with
London Gold Pool arrangement w a s
his speech to the Louisville C h a m b set up.
er of C o m m e r c e (Page 1, Exhibit
Exhibit #16 shows the Treasury's
#14*), which w a s written before he
most recent description of that
left Washington, stating that the
gold w a s all there.
*(13) Letter from Durell to W.Michael Blumenthal dated 1/6/77. See Page (23)
*(14) Treasury news release of Blumenthars speech in Louisville, Kentucky
dated 7/28/77. See Page (24)
*(15) Telegram from Durell to President Jimmy Carter dated 6/14/77. See Page (25)
*(16) Letter from W. Dennis Thomas to J Kenneth Robinson dated 4/23/81
describing London Gold Pool. See Page (26)

arrangement. Note that they say it
w a s an "Informal and flexible arrangement" which s e e m s like a very
loose w a y to handle the nation's
gold N o Congressional consent
w a s sought. Strange?
I a m confident that an unbiased
examination of this operation would
reveal s o m e very interesting, if not
illegal, acts by the Treasury and/or
the Federal Reserve System.
Exhibit #17* is a copy of a tally of
the shipments of gold from Fort
Knox between January 1961 and
June 1974. This is a very revealing
tally and worthy of your careful
This tally w a s mailed to m e on April
11, 1975, by H.L. Krieger, then
regional m a n a g e r of the Washington
office of the G A O . H e and three
other m e n from the G A O had c o m e
to m y farm h o m e to try to convince
Dr. Beter and m e that the 30-day
exercise examining the Fort Knox
and other four bullion depositories'
gold would stand up in court as an
accurate and satisfactory inventory.

Note that more than 9 million
ounces was said to be sent to the
N e w York regional Federal Reserve
Bank. I will accept that as probably
reaching its destination.
Secretary Simon wrote Congressm a n John Conlan on May 4, 1976,
that during the operation of the
London Gold Pool 45.2 million
ounces constituted the net sales by
the U.S. for the benefit of the Pool.
W h e n you deduct these figures you
get over 165 million ounces of gold
where no satisfactory destination
has been given. Where did it go?
The tally shows that it went to the
N e w York Assay Office and Bullion
Depository in N e w York City, but did
I question whether or not some of
the shipments ever were received by
the N e w York Assay Office because

(a) Between February 3, 1965,
and March 24,1965. the tally
s h o w s 97 000 hars h3vinq
been shipped. It would take
forty, 40-ton tractor-trailer
loads carrying 2400 bars per
Note that the last shipment of 14
load to move this quantity,
million ounces w a s m a d e just 29
or nearly six such shipments
days before President Nixon closed
per week, which would have
the so-called "gold window." Doeshad to have been individually
n't it s e e m odd that w e would ship
weignea ana at least une oar
out 14 million ounces on July 9,
out of every 20 assayed (the
1971, w h e n the Treasury and the
average number in a melt),
President certainly k n e w that the
then boxed for reshipment;
world w a s going to be advised on
this is an impossible task
August 15,1971, that there would be
with the modest facilities
n o m o r e r e d e m p t i o n s of our
available at N e w York;
currency with gold?
(b) W e discovered newspaper
Referring to the writer's N O T E at
pictures of four tractor-trailthe bottom, if you subtract that last
er loads of gold which len
shipment of 14 million ounces from
Fort Knox on January fl.
the total 233 million ounces, you
1965, which shipment is noi
c o m e up with 219 million ounces
s h o w n on the Treasures
that left Fort K n o x during the
tally, but w a s later admittw
L o n d o n Gold Pool period of operato having contained oven-'
million ounces of gold; ana
*(17) Tally of gold shipments from Ft. Knox furnished by
H L Krieger, Manager, Washington Regional Office, U.S.
General Accounting Office, Falls Church, Virginia, in letter
dated 4/11/75. See Page (27)

(c) also, the m a n that Treasury
says receipted for this shipment w a s not on the N e w
York Assay Office payroll.
The appended correspondence between Mr Robert Carsweil. Deputy
Secretary of the Treasury, and
Senator William Proxmire, (Exhibit
#18*) as well as a letter from the
author to Senator Proxmire on this
subject, (Exhibit #19*) are both
revealing and disturbing.
Federal Reserve Carries
As Asset Gold Claimed By Treasury

the present time it is $11.2 billion
(figured at the official gold price of
$42.22 per Troy ounce).
Exhibit #21 * is the balance sheet of
the Federal Reserve System dated
2/11/81 which appeared in T H E
N E W Y O R K TIMES on 2/14,81
At the same time, the Treasury
carries on its balance sheet (Exhibit
#22*) as a liability under the heading
"Gold certificates, and credits payable therein" an equal amount of
$11.2 billion (again figuring at the
official gold price of $42.22 per Troy

Now let me turn to the issue that
Note that the balance sheet refers
whatever gold is found to exist in
to several footnotes. Exhibit #23*
the U.S. and stored by the Treasury,
illustrates Footnote 5 which refers
does not belong to the Treasury, but
the heading "Gold certificates,
to the Federal Reserve System.
and credits payable therein." The
Since November 1980, w e have
last sentence reads "These obligabeen trying to pin the Federal
tions are fully secured by gold in
Reserve System d o w n to facts and
the Treasury." Would you not think
figures, but w e have met with little
that this footnote clearly meant that
success However, w e have developthe $11.2 billion shown by the
ed some very interesting informaFederal Reserve System as an asset
w a s collateralized b y 264.3 million
We first secured the balance sheets o u n c e s of gold held by the
of the regional Federal Reserve
Banks. Exhibit #20* is from the
Yet here again the government
Richmond Federal Reserve Bank
claims ownership of the gold.
dated December 31, 1980. It carries
In a letter by Jerry Nisenson,
on its asset side under the heading
Deputy Director for Gold Market
"Gold certificate account" $961
Office of Foreign Exmillion. W e find that the amounts of
c h a n g e Operations. Department of
the 12 regional banks under this
Treasury, in a letter to M r . L.
heading varies from time to time,
H e n d n c K s dated March 13 1981.
but the total of the 12 is always
#24*) states a s follows: " A s
carried on the statement of the
31, the U.S. gold stock
Federal Reserve System as an asset
264.3 million fine Troy
under the heading "Gold Stock". At
*(18) Letter from Robert Carswell to William Proxmire dated
12/19, 78. See Pages (28, 29)
*(19) Letter from Durell to William Proxmire dated 1/12/79
See Page (30,31, 32)
*(20) Balance sheet of Richmond Federal Reserve Bank dated 12/31/80. See Page (33)
*(21) Federal Reserve System balance sheet dated 2/11/81 which appeared in
THE NEW YORK TIMES of 2/14/81. See Page (34)
*(22) Balance sheet of the Treasury from the 9/30/79 Annual Report of the Treasury. See Page (35)
*(23) Footnote page from above report. See Page (36)
*(24) Letter from Jerry Nisenson to L Hendricks dated 3/13/81. See Page (37)

ounces". If the government does not
hold the gold it claims, then this
statement is not only erroneous, but
I believe you will agree that since
the gold in the Treasury is collateral
to the certificates held by the
Federal Reserve System, it cannot
be o w n e d by the United States
Let's go back to the Richmond
Federal Reserve balance sheet
(Exhibit #20*). If you examine this
statement, would you not believe
from the heading "Gold certificate
account" that the bank actually had
in its possession certificates that
were collateralized by gold figured
at the official price of $42.22 per
Troy ounce? I would.
But when we asked the regional
banks if they had any evidence of
ownership for the certificates, w e
were surprised h o w vague and
confusing their responses were.

the Federal Reserve Bank of New
York and are a minor portion of the
collateral behind the Federal Reserve Bank notes. Each Reserve
Bank has an undivided interest in
the pool of certificates rather than
ownership of any particular certificates." W h a t has b e c o m e of these
O n e bank's explanation entitled
"Assets — G o l d Certificate Account"
(Exhibit #25)* explains that gold
certificates are bookkeeping credits
and that the Treasury "monetizes"
its gold by issuing gold certificate
credits to the Federal Reserve
W h e n asked w h e n w a s the last time
anyone of the 12 regional banks or
the Federal Reserve System had
verified the existence of the gold
allegedly held by the Treasury as
collateral to these certificates, no
satisfactory answer w a s given. Apparently the 12 regional banks and
the Federal Reserve System, of
which they are a part, have been
satisfied to take the accounting
procedure of the Treasury as to the
existence of the gold.
Could it be. and I ask you these
questions in all sincerity, that three
Presidents, four Secretaries of the
Treasury, and at least four highly
placed m e m b e r s of Congress know

One bank president stated, "...With
respect to the gold which underlies
the gold certificates held by the
Federal Reserve Banks, I have m a d e
no effort to eyeball that gold. I a m
prepared, with no reservations whatever, to accept the representations
of those Government officials responsible for the gold that they do, in
fact, have it under their surveillance
and that the reported a m o u n t s are,
(a) It would be "unwise" to try
in fact, there."
and find out where the 165
One bank official stated that,
million ounces of gold that
"Included in our gold certificate
left Fort K n o x is n o w locataccount are $500,000 in definitive
ed; and
gold certificates, which our auditors
verify to be in our possession." Note (b) It would be "unwise" to find
out what gold m a y exist as
here that the a m o u n t is stated in
collateral to the $11.2 billion
dollars, not number of ounces.
carried as an asset on the
Another bank official states that,
Federal Reserve System's
"These (gold) certificates are held at
balance sheet.
*(20) Balance sheet of Richmond Federal
dated 12/31/80. See Page (33)
*(25) Attachment entitled "Assets" from letter toDurell from president of
one of the regional Federal Reserve Banks. See
I Page (38)


I believe the evidence I have presented to you raises strong presumptions that
(1) Of the 219.5 million Troy
ounces of gold that left Fort
Knox alone during the operation of the London Gold
Pool (1961-68), 165 million
Troy ounces are unaccounted for;
(2) Whatever gold an independent external, physical inventory and assay would
disclose, belongs not to the
U.S. government, but to the
Federal Reserve System;
(3) The 12 regional Federal Reserve Banks are guilty of
misfeasance in not ascertaining the existence of the
gold collateralizing the gold
certificates s h o w n as an

asset on their respective
balance sheets and
(4) There exists an unbelievable
control o' 'he news media
concerning this gold mystery, even to the extent of
controlling what information
elected and appointed officials reveal to interested, tax
paying citizens of the U.S.
What rights do w e citizens have as
depositors of m o n e y in our banks
and other financial institutions
which are associated with the Federal Reserve System and its regional banks? W e have a legal right
as creditors to d e m a n d that our
m o n e y be secure in all respects and
that if this gold mystery is not resolved, the Federal Reserve System
will continue to lose credibility and
our m o n e y will continue to be

So again I repeat,
Mr. President, Where js Our Gold?


(13) Letter from Durell to W. Michael
Blumenthal dated 1/6/77.
(Page 23)
(14) Treasury news release of
(2) Letter to Durell from John
Blumenthal's speech in
Klossner dated 8/27/74 (Page12)
Louisville, Kentucky
dated 7/28/77 (Page 24)
(3) Letter to John Rarick from Arthur
(15) Telegram from Dureii to
Burns dated 6/28/74. (Page 13)
President Jimmy Carter
6/14/77 (Page 25)
(4) Article from SAN FRANCISCO
W . Dennis Thomas
EXAMINER dated 9/24/74
to J. Kenneth Robinson
covering Ft. Knox visit. (Page 14)
dated 4/23/81 describing
(5) Letter from William Simon to J. London Gold Pool (Page 26)
Kenneth Robinson
(17) Tally of gold shipments from
dated 11/4/74. (Page 15)
Ft. Knox furnished by H.L.
Krieger in letter dated
(6) Attachment to above entitled
4/11/75 (Page 27)
"Monetary Gold Stock of
(18) Letter from Robert Carswell to
U.S." (Page 16)
William Proxmire dated 12/19/78.
(Page 28, 29)
(7) Attachment to above entitled (19) Letter from Durell to William
"Gold Holdings As
Proxmire dated 1/12/79.
of 8/31/74." (Page 17)
(Pages 30, 31, 32)
(20) Balance sheet of Richmond
(8) Aritcle from THE WASHINGTON
Federal Reserve Bank
POST on Simon s testimony
dated 12/31/80. (Page 33)
of 12/4/74. (Page 18)
(21) Federal Reserve System
(9) Treasury announcement on
balance sheet dated 2/11/81
transfer of gold from
which appeared in THE NEW
Exchange Stabilization Fund
Y O R K TIMES of 2/14/81.
to Treasury, dated 12/9/74.
(Page 34)
(Page 19)
(22) Balance sheet of the Treasury
from the 9/30/79 Annual
(10) General Services AdministraReport of the Treasury (Page 35)
tion announcement of sale of
gold on an "as is, no inspec(23) Footnote page from
tion" basis dated 12/13/74.
above report. (Page 36)
(Page 20)
(24) Letter from Jerry Nisenson to L
(11) Article from THE FINANCIAL
Hendricks dated 3/13/81.
TIMES of London by Gordon
(Page 37)
Tether entitled "Ft. Knox—The
(25) Attachment entitled "Assets"
Plot Thickens." (Page 21)
from letter to Durell from
president of one of the
(12) Coversheet from REPORT TO
regional Federal Reserve Banks.
C O N G R E S S (FOD 75-10) dated
(Page 38)
2/10/75. (Page 22)
pages dated
7/7/74 & 8/18/74 (Page 11)



^SSit mmmm



| The Uott Retpected Name in People- To People Journalism

H o w You Can Trim $500 From
Your Food Budget This Year



VOL.21.N0.1. JULY 7, 1974

International MonetaTyExpert Sounds Alarm:

N o Gold Left
In Fort Knox!
Federal Reserve System Charged With Secret Sale of U.S.
Gold Supplies Overseas to Super-Rich David Rockefeller
The Most Respected Name


in People- To-Peoph Journalism

Eyewitness Claims UFO Was
Manned'by Beautiful Girls

^ * * ^ ^ ^ — ^ ^ .

VOL. 21. NO. 7. AUOLST H



lowup to TATTLER Report-Page 5


Who Has Missing
Ft. Knox Gold?
^Congressmen Demand Accounting*Accuser Witt
Go Before Grand Jury mTrsasury Chief Premises Tntth


AUG 27 1974
Mr. Edward Durell
Milton Valley Farm
Berryville, Virginia 22611
Dear Mr. Durel1:
This is in reply to your letter of August 5 concerning your inquiries
on gold.
In answer to your specific questions:
1. The Bureau of the Mint has primary responsibility for the
protective custody of gold stored at Fort Knox and other Mint field
2. The attached statement shows where the stocks of U.S. gold are
stored and the amounts.
3. TH1e 31, U.S.C. provides that at the 8*n*s and Assay Offices
tt»r* shall b* mete aftnuatiy a genera* settlement «f accounts twder tfie
t«M0di*te supervision of a eowalttee appointed t>y the Director of th&
KJHtt with a physical Inverttory «f all bullton, coin, currency,. etc*
Sincerely yours,

iohn Klossner
Acting Wrector, Office of Domestic
Gold and Silver Operations


K'V-' >N\V.
,..-.'.•.> '.':*'.
;jjff[[i" •','£;


•^•' June 28, 1974

The Honorable John R. Rarick
House of Representatives
Washington, D.C.
Dear Mr. Rarick:
So far as I know, the article on gold in the July 7, 1974
issue of the National Tattler, which you enclosed with your inquiry
of June 25, is totally without foundation. Certainly, the comments
contained therein about the Federal Reserve System are baseless.
Specifically, 1) the Federal Reserve System has made no sales of gold
to foreigners, nor would it be legally empowered to do so; 2) I am
not serving on any Committee that is studying the question of legal
title to the U.S. gold stock; 3) we have in no way been involved in
the use of the nation's gold reserves "by a handful of international
monetary speculators."
As I am sure you are aware, the United States Treasury is
charged with accounting for the nation's stock of gold. None of it
is held by the Federal Reserve, except for amounts that may be stored
at the Federal Reserve Bank of New York in its capacity as a fiscal
agent of the Treasury. The Treasury's Daily Statement, a recent
copy of which is enclosed, reports that the gold stock is very close
to its level of a year ago. I see no reason whatever for questioning
thi6 report.
Finally, the article states that the Federal Reserve System
is not subject to accounting or government audit. Let me point out
that each Federal Reserve Bank is subjected to strict internal
auditing procedures and that each is examined every year by staff of
the Federal Reserve Board, subject to the review and advice of an
independent national firm of certified public accountants. I »
confident that o W ayacea of audits and examination* would quicfciy
discioa* any uaauthoriwrt tratrtaetioaa in Syatam a«*eta» wfeich, I
repeat, 4» nat include $014*
very truly,

Arthur F. Burns


SAN FRANCISCO EXAMINER f September 24,|l9?4'\




0T >^H

•f • .*^i

tfWl'':' 'il§l§lB



|W; "*%















| f








mm 1,




Director Mary Brooks, 2d from left, 'St
Fort Knox with Congressmen Huddle-

ston, Kentucky, Crane, Illinois; Conlan,
Arizona; Rousselot, California
— U P l Pheto

Yup, that thar gold
is sure thar, at Knox
Associated Press
FORT KNOX, Ky. —They
were stacked from floor to
ceiling: 36,236 golden b a n
valued at $499,823,244.58.
"it's a sight to take your
breath." said Mary Brooks,
director of the Mint, who led
a delegation of congressmen
and newsmen through the
U.S. gold despositorv here
It was the first time since
the two-story vault was built
in 1936 that "unauthorized

personnel" have been perm i t t e d inside. President
Franklin D. Roosevelt saw
the gold in 1943, but even he
had to ask permission.
Mrs. Brooks said the
inspection was arranged so
t h a t the Mint "can clear
away the cobwebs and reassure the public that their
gold is intact and safe."
The question had arisen
last July wJuen Rep. Philip
M. Crane, R-m. quizzed Treasury Secretary William Si-



m o n about recent reports
that the vault was empty.
Crane suggested that
some members of Congress
might want to take a look at
the gold and Simon obliged.
What Crane saw at Ui<>
depository W H S enough to
convince him that the reports were unfounded.
The audit will take about
90 days and is being conducted by the Treasury Department and the General
Accounting Office.


NOV 4 IS74

Dear Mr. Robinson:
Thie is in further reply to your letter of October 9 concerning
the statue of the United States gold stored at the Fort Knox depository.
First, 1 wnOd point Ottt that the gold reset*** of the United State*
la stored In several depositories, the largest of which i» tn Fort Rnoa,
tontueky* For y e w information I heme enclosed a list of the federal
depositories and the anoint of gold stored in each one •
In response to your query regarding foreign claims an the 0. S.
gold reserve, I can state categorically that no foreign government has
any claim whatever an any portion of the gold stored in Fort Knox or
any other federal depository. The popular misconception on this point
possibly arises from confusing the gold stock of the United States with
the gold held by the Federal Reserve Bank of New York on behalf of many
foreign governments. The New York Fed presently acts as eeatodlan for
over 400 million ounces of gold owned by the International Monetary Fund
and more than 50 countries throughout the world. The gold held in these
foreign accounts is totally separate from the gold reserve of the United
States and is not included in any listing of U. S. Government assets.
In response to your question an the gold bars stored in Fort Knox,
I have enclosed a table shoving the distribution by weight and fineness
of the approximately 368,000 gold bars stored at that depository. The
United States Bureau of the Hint is responsible for the accuracy of these
figures, and I can assure you that the integrity and technical competence
of the Lflnt personnel and the quality of the equipment available to them
is not surpassed In any of the world's great financial Institutions.
Sincerely yours,
iir>-,.,Fl4t >'.' „, . . . III"... I

William E. Simon

The Honorable
J. Kenneth Robinson
House of Representatives
Washington, D, C. 20515



I • i 111 > ^11


l l l i i i l l l l l l il

•' • •'





(in millions of ounces)
Account of the U. S. Treasury

Fort Knox
Denver Mint


New York Assay Office


San Francisco Assay Office


F R B New York - Special Custody Acct.


Bank of England


Bank of Canada



Exchange Stabilization Fund






(In Fine Troy Ounces)

fine Gold in
Good Delivery





Other Fine

Coin Gold Bars


• 0 -



Sar. Franc i sco

HI, 964


New York



Fort Knox

- 0 -





Bureau of the Ltint

Note: (l) Converted to ounces from dollars
(2) Rounded to the nearest ounce












- 0 21,703,800


U.S. Will Sell Gold
Worth $365.5 Million
By Nancy L. Ross
Wuhlntion Fort Stiff wnut
1 1 The U.S. government plans
• The news of the gold aucf Ito eell 2 million ounces of cold
,'tion sent gold mining Issues
*lat public auction on Jin. 6.
'plunging on the stock exThe surprise announcement
was made yesterday by Secrechanges. Bullion prices also
tary of the Treasury William
declined on foreign markets.
E. Simon in testimony before
The announcement came as
the House International Fi.a shock to subcommittee
nance Subcommittee.
According to Simon, gold
'Chairman Henry B. Gonzalez
will be sold for the present
!(D-Tex.), who had called a
only In bars weighing 400 troy
'hearing on his bill to postpone
ounces (27.5 pound), worth aplifting restrictions on gold
proximately 173,100 apiece. A
ownership for six months.
troy ounce Is about one-tenth I
T h i s Is catapulting the Amerheavier than an ordinary
ican public into a pit, placing.
ounce. At current world prices
nations like South Africa—
of $182.75 per troy ounce, the
where gold miners are paid 35
total value of the gold offercents a day—into positions of
ing would be around $365.5
equality with the leading namillion. By law Americans
tions of the world," he said.
will be able to o w n gold bullion for the first time since
Rep. Albert W . Johnson (R1934 starting Jan. 1.
Pa.) expressed the fear that
Anticipating a "gold rush,"
Arab nations might "gobble
. Slaon said, he made the declup" U.S. gold. Simon assured
"iion with President Ford's apthe committee that, although
anyone was free to bid, it was
t»»>at u« •cu'uif a small fracunlikely that foreigners, who
tion of the United States' gold
have long been able to buy
reserves of 276 million ounce*
gold, would want to buy U.S.
Otherwise, ne said, Americans
gold at prevailing market
i would have to buy gold in forprices and pay to have it shipeign markets. This in turn
ped to their countries.
[would lower the value of the
U.S. dollar In relation to forThe Treasury Secretary also
eign currencies.
sought to allay fears that any
sale of gold would be parting
"In other words," he said,
with our "national patrimo"there would be a clearly adny." Ha^noted that the U.S.
verse effect on our efforts to
gold was being fgld to U.S. cit
bring inflation under control."
izens and in ^ u e h s m a l l
H e also said that the governamounts that could lnm>«[ay
ment intends to use the profits from selling gold to Its citithreaten the availability of
izens at the prevailing market
gold needed for military and.
price (the official U.S. rale is
industrial purposes related toj
| still pegged at $42.22 an
national security. !
l ounce) to reduce its need for
For years the United States'
short-term borrowing to run
has been trying to de-empha-'
the country. Simon said this
size the role of gold in the international monetary system.
would leave more money In I
We're the government to decirculation for private Investlay any longer In lifting rement in industry, housing and I
strictions on gold ownership
for its own citizens, the secreother activities.
tary observed, "we would seriTreasury officials denied
ously undermine the credibil; the move was also intended to
ity of our position and of our
'. drive the price of gold down
.from record prices on world
Both supporters and opmarkets although that will be
ponent* of the gold sale agreed
the yellow metal had a mystione inevitableresultof yestercal aura hat resulted In Its
day's announcement.
free market price being far


WedntMloy. Dec. 4. H7i

out 67 proportion to the actual
cost of production, between $6
and $8 an ounce. Yet Simnn
said he hoped that eventually
gold would be trsded like any
ulhcr commodity. H e cited the!
experience of Japan, where re-l
stru-tions on individual ownersliil) were removed in 1073. After an Initial surge, demand
<im>-kly subsided.
Gonzales also objectedToThe'
sale of gold without specific
government regulations to prevent abuses. H e likened the
situation to a pplrer game/In
which the players make the
rules after play begins.
Simon sought to reassure
him that the many regulatory
agencies overseeing gold sales
had sufficient authority already
to protect the public. At the
same time he warned Americans
to "investigate before they buy"
especially in the first days after
Dec. 31 when there may be
temporary shortages.
sources, the Jan. 6 auction is
believed to be the first of its
kind ever to be held by the
U.S. government Prior
1934, the public could buy gold
at fixed prices. In the intervening years gold was sold for
industrial, artistic and numismatic proposes also at fixed
prices. The Treasury stopped
selling gold for these purposes
in March, 1968, when the price
was still $35 an ounce.
The actual sale will be conducted by the General Services Administration. Interested parties—mainly dealers
who will cut up the bars for
resale to the publics-will receive Invitations to bid in
about 10 days. Any person not
receiving an invitation and
wishing to bid should write to
the GSA.



When a bid is accepted and I
payment arranged, the buyer
arranges to pick up his gold at
one of three places: the Assay
Office in N e w York, a branch
of the U.S. Hint; or the Treasury Depositories in Denver or,
San Francisco. No gold will he!
dispensed from Ft.
mod said ft. Knox"
Cave facilities lo hamfiT"

Ar^p^esHn^^mv Treasury
does not have the facilities to
cut up the bars Itself. Simon
added that it might be possible later to arrange for sales
of smaller-sized bars.

Department of theTREASURY
iHINGTOK. DC. 2 0 # | ^ .y m ^ O N t VyO*204lV;
FOR RELEASE AT 3:30 PM, EV"*****5*®

At the opening of business today there were three different
gold accounts administered by the Treasury.
The General Account of the Treasury held 271 438 135 ounces
of gold, valued at $11^460 million at the par value of the dollar
in terms of gold, against which gold certificates had been
issued to Federal Reserve Banks in exchange for dollar deposits
for the account of the Treasury at those Banks. The gold
certificates represent a pledge by the Treasury of a corresponding
amount of gold until such time as the certificates are repurchased
tor dollars by the Treasury.
The General Account also held 2,510,528 ounces of gold,
valued at $106 million at the par value, against which no gold
certificates had been issued.
The Exchange Stabilization Fund administered by the Treasury
held 2,020,264 ounces of gold, valued at $85 million, which had
been acquired by the Fund prior to August lb, 1971, when the Fund
engaged from time to time in gold transactions with foreign
monetary authorities and with the market for the purpose of
stabilizing the value of the dollar relative to gold.
In view of the likelihood that the Exchange Stabilination
Fund will not oe engaging in further transaction* to stabilize
the value of the dollar relative to gold the gold held by the Fund
—*7 j/was 5ojd today to the Treasury at its par value.
Gold certificates were then issued by the Treasury to the
Federal Reserve Banks for ail the ounces of gold held in the
General Account for which lucTi certificates had not previously
been issued, and the Banks deposited |191 ytillion to the accounts
°f the 'Treasury. The Treasury now holds gold inonly one account,
that i s 2 7 S, 96 8,9 2 7 ounces, va Jned at' lli, 6 52 tail lion, against
al 1 of which gold .certificates; have '&e&!!!iil£.«dJ"",m"
The transactions undertaken have had no direct effect
on any individuals or institutions apart from the Treasury,
the Exchange Stabilization Fund, and the Federal Reserve Banks.
The additional deposit balances of the Treasury in the Federal
Reserve Banks will be available for the use of the Treasury.
In future when sales of gold are to be made by the Treasury
the corresponding gold certificates will be redeemed by the
Treasury prior to transfer of the gold to its purchasers.



s m a afiauMtnunoN


Tlti» j o W

i* beittg




Caution to Bidders - Late Bids


See paragraph 5 of Special Terms j|
and Conditions, Entitled "Late
dp.,Bids and Modifications or _-f-/'X'-Withdrawals."

PAGE N O . 1 O F _ 1 2

r>AT»rt December 13, 1974


Sealed bids in.
subject to the terms and conditions set forth here,T
in, for the purchase and removal of the Government-owned property listed in this Invitation, will be
received until the time, date, and at the place indicated
below, and then publicly opened.
* Local time at the

L L A M , place of bid opening

DATE OF Q»*uiMft
January 6
. 19_ZL.
PlACE Of Q»»nmr. Rid R o o m 1701 7thfcD Streets. SWt_
Washington. D C 20407



iwwtowow •eyim* -WSWWH,.

.tt AND.,
W o Ingtmstton permitted - e*e p4&» j>



Office of Stockpile Disposal
General Services Administration
2QQ0 L Street. BiW. Washington. D C 20036


gee page


GSA DC 75-5248




Tfeft * 3 M P < M T b ^


Fort K n o x gold—
the 'plot' thickens
V 3 P T I « ! [ ^iJSS?* ~ « T J 1 is not only ? h a t u n,d the indicated that their suspicions
-.til ^ L L ^ H L ^ effeci. of 81 ner » tln 8 «' lot more bad not been set to rest by the
«? £.• «T«fc?^Jrl..?^£!£ (,uest ons ^ a n U «nlw*re<». It officially cenducted tour of Fort
as one of the year's four poten- jc also that the subsequent Knox
tial top news stories In a 1975 efforts of such seekers after the Vnr An . •*,!«.„ th. .»,„,• ,t
horoscope, he was not thinking in " Fort Knox truth " as CongressJ- I ?for
the speed
- grounds
the charge
that at
our own Great Train Robbery. tA a.t •>,« AH,,j«,«..»iDnm t.
0 e o u W
terms of a m a m m o t h American "m em nm Robinson
Crane and« Mr
. ^ . n ^andnrnnl.Ai
™ t *»ve
been of the
The "sensation" to which he was
l e t e d W a s su<
if it ever
of probing
?P ™ ° ?»,
tn S t* lhat
h•» „would
? /& £
bullion raid
the -tradition
of information
come DurrelUhe
to Sprovide
were to break-from what has the American gold stock tbat was [T^L^^sm^oi
come to be known as the "Fort not exactly helpful to the official t ^ V JJbout F o r K n n x For
Knox gold mystery" And, its contention
all was
B1 Jk
th* Operations
, that ,
. as
t hIt etw,„*^i2!
Gold and
be such, *>,n»M
and would
anocner, although the Director of
according to one American news- For its implications were that, Office announced as far back as

p in several important senses
W h e n Dr. Peter Beter, former and, at worst, was guilty of
counsel to the U.S. Export- deliberately deceiving the public
The disclosure
that four-fifths
Import Bank, made the astonish- ,,,
+ll- __i. .„ »„_• ir„ n , t. *•
iart v«Ir"tw ' ^ ' ^ I A I Z M I Inferior
quality in the senseX that Close observers of the " Fort
ing allegation In the middle of l M n , fcoin
c £ £ *°°„ .A°J
oart o f t h * ^ i S L T S H * 2 £ * - ° « * "
metaT-lt is not Knox mystery" assure m e that
K M i„ % £ K £ ? I . H w « of good delivery for international this—so far unexplained-official
lara*lv arfirit.H « « « „„ £ W settlement purposes, caused a procrastination, read in conjunc^ I L . i w 'T*w wi! aparticularly
Impres- tion with other circumstantial
mTa nLv dwo .In ^.v-n"fin"^',
or unfortunate
w a slater
t o m when
o u n d e dthe it is no longer a question of
' A n d <his
ta ? m » Jtrueto
£ £ ? wiayA tbat
™ .not
i Treasury
Secretary, Pin an effort
there i
s a discrepanc;
that thar* m . » u,«n K . .««.fi.i..
neeaea ior uie January sucuon iwijsit.ii ie*i
In what h ? Z Z
something had t0 be taken from the ^ &e gxp ls
Exchange Stabilisation Fund's , JJ. j, }uatii» <a4eaeaary 1a poiat
meagre stock appeared to be ^
# * *** *eeo»*
saying that there is no good ^pp**™* <•** tt» f r e t a m fea*
H o w is one to explain that
delivery" gold at all in Fortftsetf* * e * tsw s ^ o* * sews***
growth of the suspicion that
0 f WtterfttMy** pfoecrtKx*.
has naturally * e CflnswgueweasforAmerica la
there really is a discrepancy— encouraged those who maintain *e»ef*l *8$ t»W 4s*W** in parties^
and one of potentially worrying that Washington has something Mt OiaMl *t * W * serious, tlw
size—between the published to hide to press home the attack. *<»«rtl^1fc*»f tt * W IhfrJWtebl-.
statistics for American gold A n d they have been furnished aUnflftO is wri hastattiflt to)
stocks and the physical reality? with additional firepower by the dtrottttytte W i t Wsttt St w
it seems, to begin with, that the eurious way—to put it mildly—in «*»**» tm.ammtk
i| it i* ift *'
U S . Treasury's decision to take which the U.S. authorities have .faattto*W-tffc-a*
a party of Congressmen and behaved in relation to the gold ,^1^asasssasassssssssssaasssssssssss^BMB
journalists to visit Fort Knox stock audit which the General
m the autumn of 1974, in the Accounting Office, an arm of the
nope of disposing of the Beter U.S. Government responsible to
charges, turned out to be Congress, waa asked to undertake
tenae Congressmen





Accountability And
Physical Controls Of The
Gold Bullion Reserves
Department of the Treasury



January 6, 197 7


Mr. W. Michael
Secretary-designate of the U. S. Treasury
c/o Bendix Corporation
Bendlx Center
Southfleld, Michigan 48076

Dear Mr. Blumenthal:

As Secretary-designate of the U. S. Treasury, you will soon assume the
great responsibility of protecting many assets, including all of the
"bullion, coin, currency, etc.", belonging to the citizens of the United
States. The gold is allegedly stored in U. S. bullion depositories,
Mints, the New York Assay Office, the Federal Reserve Bank of New York
and other locations here and abroad.
Thirty months of research, starting in August 1974 with U. S. Attorney
General William B. Saxbe, has convinced me that the U. S. Treasury does
not have the gold reserves it claims.
According to a statement contained in a Report to the Congress by the
Comptroller General of the United States dated February 10, 1975s the
Acting Comptroller states - "The last inventory of the Treasury's gold
reserves was taken in 1953" (B-87620). This Report was signed by Acting
Comptroller General R. M« Keller. This document includes' an "audit" of
the U. S. Bullion Depository at Ft. Knox and the other four depositories
conducted between September 23 and October 21, 1974.
For over thirty months, the writer has tried to determine five things:
(a) How, when, by whom and by what authority the nation's gold was
removed from the U. S. Bullion Depository at Fort Knox from 1961
to 1974.
(b) Why and by what authority was the gold in Fort Knox transferred
from the maximum security underground vault (referred to as the
Central Core Vault) to "13 sealed compartments" at Fort Knox.

Page 2

Open Letter by Cert Hied M;>il
Mr. W. Michael Blumenthal

Exactly where the alleged gold reserves of the United States are
now located, both here .ind abroad.

(d) How to hring about a return of this gold that has left the United
States from 1961 to date if it is found to have been taken illegally
or under color of law or cloak ot authority.
(e) Why it is not possible to bring about an audit and Inventory of the
nation's gold reserves by a non-government, impeccable firm of
I am confident that I can convince you that you would be well advised to
protect yourself and President-elect Carter by assuring the Senate Committee
responsible for your confirmation hearings that you will, immediately upon
taking office, order and carry out the physical inventory and that you will
have this audit taken by a non-government and impeccable firm of accountants
following the best procedure for determining the weight and fineness of the
1 further suggest, as one businessman to another, that the assaying of the
borings from the bars not be done by the government's own assaying office.
1 stand ready to cooperate with you in any way I am able.

Sincerely yours,

Edward Durell




12:30 P.M., EDT


••.v..;;!-". :' it-J- appear a bit **«led I hope you'll forgive u»:;.:::
X*#e "iuwt. been dow» ttoe/road- to inspect the nation'a sold;•':=
>toc* *t ?ort Knox* ••'
Firet, i can re^^x^i. :«till titers. If that cohorts '=!
youf thin* what it 4oe*:-:#d« •«*•:-.*•-• the man who has Ifl^al •:
responeibility for ita security.
Second, it's beautiful and impressive. But.I couldn't
help but reflect that the great pile of gold there is a
monument to a by-gone era in monetary policy and economic
Today it pleya no role at all itt U.S. domestic
tton*t*ry policy — and Virtually every country in the *orl4
h»* *gre*d to reduce its role in the international wwteta**::
In the old days of commodity money, people believed that
the strength of a currency depended on the country's stock
of gold or other monetary commodity. But we understand today
that the value of our currency, at home and internationally,
depends not on our holdings of those metals, but on our
fundamental economic performance. That means we must concentrate on those fundamentals in order to assure a strong
dollar — and a strong dollar is of major importance not only
to the United States but also to the rest of the world. By
concentrating on fundamentals, I mean that the way to assure
the strength of our currency, and the only way to assure a
strong dollar, both at home and in international money
markets, is by following sensible economic policies, by
keeping inflation under control and introducing an effective




DJ3J3GJ3 ftfl*.;*.^^^ -C^TY
western union b \i JCuliiJ'^S C l s T B

I ~— '

2-025207E165002 OS/14/77 ICS IPMMTZZ CSP FCHA
I 7039551653 MGM TDMT BERRYVILLE VA 06-14 115IA EST


7039551653 MGM TDMT BERRYVILLE VA 133 06-14 115IA EST

PO BOX 586
1154 EST



Jspril 23 > 1981

Dear Mr. Pohinson:
I ar pleased to respond to your letter of March 23 to
Secretary Regan requesting information concerning the London
"C-old Pool" which operated between 1961-1960.
The London fiold Pool was an informal and flexible
arrangement among the United States, Pelgiuw, France, Germany,
Italy* the Reth#riand0# the United Kingdom and Switzerland*
fettOhtaenberundertook to supply an agreed proportion of gold
«ol<5 in the London free market by the Bank of England acting aa
agent for the Pool in order to stabilize the price at about the
?35 per oonee official Monetary price. During that time, thers
was an effort to maintain official currency par values in tern*
Of «FOid# and the objective of <JOld Pool operation* was to avoid
the development of a significant differential between the erics
Of 90l<3 in the private market an<3 the official monetary price.
During the period of the Pool operations, the United Stat«»
sold e net total of 45.2 million ounces of gold in the London
werfcet throwh the Pool arrangement. The transactions were
reflected durinq that period in the U.S. Government's regularly
published statistics on gold, ^hip, and the gold provided liy
other members of the Pool, was sold in the market by the Dank
of Fngland, and we have no information on the identity of
individual purchasers.
I hope this information will be helpful to you.

Dennis Thomas
W. Dennis Thomas
Assistant Secretary
(legislative Affairs)
The Honorable
J. Kenneth Robinson
Mouse of Pepresentatives
T-'a shine ton, P. C. 2CS15



Value at time


No. of

Fine Ounces

of shipment
($35 per troy ounce)

May 1961 U.S. Assay Office, N.Y. 24,534 10,005,848.009 350,204,680.33
Feb. 1962 U.S. Assay Office, N.Y. 35,080 14,402,551.668 504,089,309.07
8-17-62 U.S. Assay Office, N.Y. 34,987 14,375,277.124 $ 503,134,699.42
4-26-63 U.S. Assay Office, N.Y. 21,341 8,676,727.819 303,685,473.65
4-26-63 Federal Reserve Bank
of N.Y.




2- 3-65 U.S. Assay Office, N.Y. 25,048 10,308,492.599 360,797,240.90
3- 9-65 U.S. Assay Office, N.Y. 35,864 14,491,994.910 507,219,821.85
3-24-65 U.S. Assay Office, N.Y. 36,203 14,455,737.781 505,950,822.32
7-28-65 U.S. Assay Office, N.Y. 35,236 14,510,428.065 507,864,982.28
4-26-66 U.S. Assay Office, N.Y. 42,497 17,227,760.267 602,971,609.29
9- 7-66 U.S. Assay Office, N.Y. 35,644 14,484,435.037 506,955,226.35
10-18-67 U.S. Assay Office, N.Y. 24,576 9,058,592.688 317,050,743.96
12- 3-67 To London via Federal
Reserve Bank of N.Y.




1-29-68 U.S. Assay Office, N.Y. 70,398 28,698,040.664 1,004,431,423.25
3-22-68 Federal Reserve Bank
of N.Y.




3-27-68 U.S. Assay Office, N.Y. 32,646 10,726,843.364 375,439,517.25
6- 3-68 U.S. Assay Office, N.Y. 45,436 14,424,295.394 504,850,338.78
7- 9-71 U.S. Assay Office, N.Y. 44,835 14,292,245.793 500,228,602.73
Totals 605,610 233,723,565.676 $8,180,324,798.68

SPEAKER1*' Tatty Total 233,"? WlHon &flK«s
... KQTE
less 1971 shipment
te$s Z Shiptaztits to
H.Y". Fed.

- 14.2
- $.Z

Jess shipments to
U>rtd$p &>)<) Pool
- 4S..2
Total - flesti nation UM3H3KN 16& Hi Hi on Ounces




Decestber 19//1978 /

Dear Mr. Chairman:
Last year you brought to- the attention of the
Secretary certain allegations of improper pcocedures
at the U.S. Assay Office in New York. These allegations were withdrawn, a cursory investigation revealed
no improprieties and you were so advised.
Subsequently, we pursued other questions that had
been raised about the New York Assay Office, which is
par/t of the Bureau of the Mint, and I rsust now inform
y w * thmt tlkftre Haver been significant irregularities in
«0<pottnti&9 aad management procedures in the New York;
Aftsfty Office that appear to go back a number of years.
In particular, the Bureau of the Mint's internal auditors
have concluded that there was an unrecognized loss of an
aggregate of perhaps 5200 fine troy ounces of gold from
1973 through 19 77, and possibly beyond. More than half
of these indicated losses may have been incurred as part
of the normal melting and refining processes of the Assay
Office; an additional percentage may be recovered at such
time as the building is dismantled and equipment purged.
However, we cannot eliminate the possibility that theft
may have accounted for some part of the loss. The full
truth »ay never be known because of the inadequate records
kept over the years.
Obviously, this is a situation which requires immediate and positive action. We have taken the following
steps to ensure there will be no further unexplained
losses or irregularities in the New York Assay Office:
1. The U.S. Secret Service has completed a
security survey of the Office and the
recommendations of that survey are being
implemented under the direction of
Stella B. Hackel, Director of the Mint,
who assumed her office in November, 1977.
2. The newly appointed Superintendent of the
New York Assay Office, Manuel Sanchez,


has assumed direct responsibility, with
technical support from the Secret Service,
for security, accounting and related
matters at the Office.
3. The Director of Security of the Bureau
of the Mint has been temporarily detailed
to the Office to assist Mr. Sanchez in
the security area.
4. Ms. Hackel and Mr. Sanchez are making
management changes to ensure the efficient and secure operation of the Office.
In addition, the Secret Service is continuing its
investigations to establish whether any violations of law
or regulations of the Bureau of the Mint were committed bypresent or former employees of that Bureau. Should such
violations be established, they will be referred for
prosecution or appropriate personnel action taken by the
t « & & & & a $ s » «afce t h a t e&*X£e# tfcift yett?, ** efltpltigp&e
« & t & e Jtew Ywrk A*«H*jr <*r*i*s* * * » #j^r£rk$*&$<J »fc%*a«f*fcittg: t*
£«»«# *** ptxmtsxt* *eith gofcjS concealed tm hit $*&»#&(*?to*i#
J5WW *» ^ct$««** Tn.,..f1icitr0y <>fu-r tin- employee apprehended, Ms. HncVrl ordered an extended shutdown of refining
operations until an inventory of operations was completed
and security tightened. This was accomplished by the end
of July. At that time I directed the Secret Service to
reassess the entire security situation at the Office and
the possibility of other thefts. When the Office of
Inspector General was established in the Treasury Department three months ago, I directed Leon Wigrizer, on the
day he was appointed to the post, to oversee the investigations involving the Assay Office, and report directly
to me.
The possible loss of a significant amount of gold in
the New York Assay Office is a very serious matter. You
should understand, however, that all indicated losses have
taken place not in a storage area but in the melting and
refining division, where a "normal" operating loss occurs
when unrefined and impure gold is converted to finished
gold bars. Any gold molting and refining operation
necessarily incurs losses through oxidization and other
chemical and/or metallurgical reactions. Such "normal"
losses were not accurately accounted for by the procedures
of the Office, and they account for a significant portion
of the shortfall. Permanent storage or vault areas are
not involved i n these irregularities.
We will keep you advised of any developments in
this situation, and appreciate your earlier drawing
it to the Department's attention.
I am sending copies of this letter, for their
information, to Senators Javits and Moynihan and
Representative Murphy, in whose district the New York
Assay Office is located, and to the Chairman of the
Treasury Appropriations Subcommittees in both the
Senate and the House.
Robert Carswell
The Honorable
William Proxmire
United States Senate
Washington, D.C. 20510


P. O BOX 586

January 12, 1979

Chairman of the Senate
Banking Committee
Dirksen Senate Office Bldg.
Washington DC 20510
Dear Mr. Chairman:
fhii letter i* sent to you in the belief that you *ill do your
country « great service If you will hold hearihga to get the
•never* to aany oueations arising from the handling of the
nation*» alleged gold reserves by the department of the Treasury,
In September 197^, the Director of the Mint, Ms. Mary Brooke,
ordered an exanination of the U.S. bullion depository at Fort
&KHC iAd Other depositories. The General Accounting Office
furnished 2 men and the Treasury 13 men to make up the "settlement committee" that undertook this examination.
This 30 day examination or "audit" was finished October 23 but
the Comptroller General (titular head of the GAO) did not
furnish Congress with his report until February 10, 1975.
FOD-75-10, (B-87620), although numerous attempts were made to
secure the copies before the first auction of the nation's gold,
January 6, 1975. I M * "audit* v»* inadequate, inaccurat*, aad
poaeihly fraudulent. Example, it Is rtated therein, the settle*
aent cop*ittee was credited with *vi***elly inspecting noniavaa*
toried co»pert*ents", — Without breaking the seals on solid
iron doorel
If the U.S. Assay and Depository in New York was one of those
depositories checked in 197U. apparently, from the enclosed
newspaper clippings, i.e. New York Times, Washington Post, Daily
News, New York based Newsday and Staten Island Advance, the
examination there must have been completely inadequate.



William Proxmire
January 12, 1979
Page Two
May I briefly summarize these newspaper stories:
a) That you were advised of the situation at the
Assay Office about a year ago;
b) That the former employee who wrote this letter
to you later signed an affidavit stating the letter
was a forgery;
c) In May 1978, Robert Davis, an employee, was caught,
convicted and sentenced for attempting to take another
brick of gold from the Assay Office worth over $20,000;
d) that according to Joseph Lai tin, Assistant Secretary
Of the Treasury JPublic Affairs)* as reported in Hewaday,
December 21, 1970, *\*The full truth may my*3r be know*
because the records are »o poor. Because of rather
antiquated management and accounting procedures (at the
Assay Office), it is very difficult to ascertain the
e) Later in the same article Mr. Laitin is quoted as
saying "..Internal Auditors..seemed to come up with some
disturbing information. They couldn't ascertain this or's very technical and complicated."
f) Secret Service investigators found "security was rather
g) The State©. Island Advance in New York, December 26, 1978,
csirle* m, story of a "kitty- or *sluah fund" which has been
used at the Assay Office for years to cover up discovered
The article also says "the 'whiste^blowers' at the Assay
Office have written numerous letters to the Treasury
Department, the Civil Service Commission, the Justice
Department and other government agencies in an effort to
bring alleged improprieties, lax security and mismanagement to their attention."
The above statements and facts are directly contrary to
previous Treasury comments on the proposal for a gold audit,
inventory and assay.
May I refresh your memory and remind you that during the operation
of the 'London Gold Pool' (1961-1968), at least 14-9,490 bars totaling
more than 196,6^8 million troy ounces of gold were shipped from Fort
Knox to England and passed through the N e w York Assay Office. It
is hard to believe that this could have been done with the "antiquated management and accounting procedures" without some "errors"
and possible shortages resulting.\
In closing, I earnestly urge you to immediately hold a congressional
on this whole subject. I await with interest your early








433 Pounds of U.S. Gold
Missing in N Y — M a y b e
tray office], it is very difficult to ascertain
B y Peggy B r o w n
N e w York—The U.S. Treasury Department an- [facts."
Unaccounted for, Laitin said, is 6,200 troy
nounced yesterday that more than 433 pounds of
•old worth $1-1 million is unaccountedforat its ounces of gold. Troy weight, the standard measure
N e w York assay office, the only place in the coun- for gold, is based on a pound of 12 ounces. The distry where the government refines and melts the appearance, Laitin said, seems to have occurred bemetal. And, a Treasury spokesman says, investiga- tween 1973 and 1977. But investigators alio art
tors aren't sure if the gold will ever be found. «_ loolung into 1978 and the years before 1973.
"As of now, the investigation indicates mat per"""'' Investigators aren't even sure when the gold
jappeared, or even if it did for sure, said Joseph haps 6,200 ounces are unaccountedfor—butit
liSn, assistant secretary of the Treasury. "The could be a lot more and it could be less," he said.
, Jl truth may never, be known because the records " ^ T h e investigation began about a year ago, LaT
are so poor," he said. "Because of rather antiquated tin said, when a former employee of the New York
gemenl and accounting procedures {at the as- assay office wrote a letter to Sen. William Proxmire (D-Wis.), "charging irregularities and naming
names." Even though the ex-employee eventually
signed an affidavit saying he had nothing to do
with the letter, Laitin said, "It set some machinery
in motion and raised a lot of questions."
Auditors at the assay office conducted an inter
nal audit, Laitin said, which "seemed to come up
with some disturbing information. They couldnt
ascertain this or that . . . it's very technical and
It is possible that the gold was stolen, Laitin
said. "Nobody's been charged with anything yet,
but we're not overruling the possibility of theft. In
fact, he said, Secret Service investigators found security was rather lax" One employee was arrested
walking out the door with some gold. He since has
been convicted of theft and is in prison. Since then,
security has been tightened, Laitin said.
If the gold was stolen, it may be thei largest
theft of government-owned gold from a nderaiiacility in the country's history. The• onlyotte
known Iheft of gold from a government bf**™
in 1955, when 1,800 ounces was discovered misang
from the Denver Mint and was traced to a ciere.
It is possible, though, that up to half of the
N«» «Uy Photo by Alan R»l»
5,200 ounces was lost in the normal refining processes. "There's a formula which says thatforso
many ounces of gold you refine, you will lose K
many ounces," Laitin said.
The N e w York assay office, at 32 Old Slip St. in
the Wall Street area, Btores gold in addinoiw
Gold worth $1.1 million is smelting it. The storage facility is not undermves
for at the tigation. About 55 million ounces of W*-?™\
federal government's as- than one-fifth the nation'stotalreserves-uiatorw
say office in New York, there. About 86 employees work ui the smeltongw
and Assistant Treasury cility, Laitin said. "They melt it down and punry »
Secretary Joseph Laitin, and, once it's turned over to storage, they Jjg
nothing to do with it anymore, .to """; ./M
amount of gold that's in process right now ui
million ounces," he said. At today's gold pnces, tnav
is worth more than $4 billion.
Besides security changes, there have been tome
management changes, Laitin said, and more are
#19 In September, Treasury Secretary w. •
r,'~L^,ty. „}„...* chael Blumenthal appointed Leon Wignzef «•»•
left, says the truth about . d e ^ m e n t , gfirgt j . ^ ^ fgBtt^. "His uuo«J
the trussing metal, like ate
aasigimient wastocoonhruite the inves^> B
above, may never be wLaitin
fa sthe
e w York
do wnaww^


D E C E M B E R 31,1979

Gold eertiiicatB teeount . _ _ _ „

$ 1,292,576,481.10

Special Drawing Rights certificate account





























Loans to depository institutions
Federal agency obligations
U. S. Government securities:


Cash items in process of collection
Bank premises
Furniture and equipment, net



Other assets



Interdistrict settlement account








W ^PUPww6»W $^SSSJ™*ev^r


Previous wses


R 367,400
R 160,300
R 162,200

9 ^tW*s»S ---- - *~

M-TB (one week lag) f
Adjusted Monetary Base (Fed-Ree-Wash) t
Adjusted Monetary Base (Fed Res-St.LouJs) t




Al MSflcMT BMmS Daily averages

Required Reserves
Total Reserves Held, Including vault cash
Excess (Deficit) Reserves
Less: Non-seasonal Borrovrtrig st Federal Reserve Banks 1,113
Equals: Frte (Net Borrowed) Reserves

R 40,449


Reserve Position nght Major N e w York Banks Daiiyaverages

Excess (Deficit) Reserves
Borrowings at Federal Reserve
Net Federal Funds Purchases
Basic Reserve Surplus (Deficit)

R 7,862
R (7,875)


R 3,047
R 9,907


R 130,957


Federal Reserve Credtt Outstanding Oaity averages
Governments and Agencies Held Outright
Governments and Agencies Under Repurchase
Otner Assets


Other Factors Affecting Reserves Dairy averages
Special Drawing Rights
Currency In Circulation
Treasury Deposits





5 7 . — Stock of bullion, coin and currency, selected dates, June 30. 1945-75. and Sept. 30. 1977-79
[In thousands of dollars, except percentage Of gold to total stock)



Bullion and co:n
Silver bullion (at monetary value)
Fractional coin (subsidiary)
Fractional coin (minor)
Subtotal 23.356.548
Less Gold, silver bullion, and standard silver dollars held
as security for. or redemption of outstanding paper



5«p*. 30.


















Let,s. A m o u n t included in collateral held by Federal Reserve
lgcms for Federal Reserve notes
10,968,000 _
Subtotal 7'138-600
Gold certificates prior to Series of 1934*
;V,ToV fl
Silver certificates'
' I iX
Treasury notes of 1890*
U S notes*
Federal Reserve notes'*
federal Reserve bank notes"
":' ',
National bank notes'
,- . ,.. t~*,\ .. . 31,608,588
Total paper currency (net) ..'.—.-.50.238.644
_ . . . 36,885.360
Total slock
' '-=
Percentage of gold to total stock
Footnotes o n next page.











Total bullion and coin (net) _ 3,276,771_
Currency: „ ,«• .n*.*™

Gokt certificates, and credits payable thereat»

•.. I a. ioo.«»





$156,039,431 for all dales in this table through 1965. T h e net of M a y 31. IJ171 (31
U S C 404) required that the amount or U.S. notes then outstanding. $346,681,016.
be kept in circulation. T h e Old Series Currency Adjustment Act provided that this
amount should be reduced by such amounts or notes as the Secretary of the
Treasury might determine to have been destroyed or irretrievably lost. T o " l e . the
Secretary has made such determinations with respect to $24,142,000 of the U S . -notes issued prior to July l.»1929.
'• Federal Reserve banks secure Federal Reserve notes by depositing like amounts
of collateral with Federal Reserve agents. T h e Federal Reserve Act. as amended (12
U S.C. 412), authorizes the use of the following assets for this purpose: (a) gold
certificates or gold certificate credits; (b) certain discounted or purchased commerO
cinl paper; (c) securities issued by the United States; and (d) special drawing rights
cerlificntci issued by the Hxchange Stabilisation Fund. Federal Reserve notes are
obligations or the United States nnd ore afirstlien on all assets or the issuing Federal
Reserve bank.
Pursuant to the Old Series Currency Adjustment Act or 1961. funds were
deposited by the Federal Reserve banks on July 28, 1961. with the Treasurer or the rrj
United Stales for the redemption or nil series or Federal Reserve notes issued before
the Series or 1928. T h e amount shown for 1979 includes $687,388 or such scries
•Consists of: Gold certificates outside of the Trensury (issues prior to Scries of 1 " Federal Reserve bank notes at issuance were secured by direct obligations or the 53
1934 are included through 1961), nnd credits with (he Trcusury of the United States I
United Slates or commercial paper. Since termination or their issuance on June 12.
payable to the Hoard of Governors, Federal Reserve System, in gold certificate* •
1945 (12 U.S.C. 445 note), the notes have been in process or retirement, nnd inxvlul -n
These obligations are fully secured by gold in thejjriisury.
money has been deposited with the Treasury or the United States for their
general fund of the Treasury and upon redemption will he rclitcd.
" National bunk notes at issuance were secured by direct obligations or the United
'Silver certificates were originally secured by silver bullion at monetary value
States. From Dec. 23. 1915 (12 U.S.C. 441) these notes have been in process of T|
(SI 29 + perfinetroy ounce) and standard silver dollars held in the 1 rcasury. 1 hey
retirement, and lawfiil money has been deposited with the Treasury or the United
arc n o w payable from the general fond (see footnote 4).
Slates for their redemption.
•Treasury notes or 1890 have been in process of retirement fince March_ I90C (3
N O T E —Figures for years not shosvn appeared in the following Annual Reports:
U.S.C. 411) upon receipt by the Trensury. Until June 30. 1961, secured by silver;
1860-1947. 1947 report, p. 482; 1948-49. 1956 report, p. 542; 1951-61. 1961i report.p.
thereafter redeemable from the general fund.
634- 1962-64, 1964 report, p. 596; 1966-68. 1968 Statistical Appendix, p. 224; 1969~
•U S notes were secured by a gold reserve (31 U.S.C. 408) until this requirement
71, 'l971 Statistical Appendix, p. 234; 1972-74. 1974 Statistical Appendix, p. 250; and
w ? ^ P u b l i c L a w 90-269, npproved Mar. 18. 1968. This reserve, which
1976, 1976 Statistical Appendix, p. 306.
was 3 E ' . U Z r X t Z n y no9,'esnPof .890 until March ,8, .968. amounted to
• Value of gold holdings at $35 perfinetroy ounce through 1970, and at * 4 2 - 2 2 . r ° '
1974 through 1979. Amount for 1970 is exclusive of gold deposited with the United
Stales by the International Monetary Fund.
• Excludes bullion carried at monetary value but released for coinage use.
•Through 1970 consists of standard silver dollars. A m o u n t for 1979 consists of
$481,781,898 in standard silver dollurs and $1,334,237,000 in cupromekcl-clad
•Comprises the security for: Gold certificates and credits payable therein (100
percent in gold); U.S. notes (gold to the extent or the reserve required by law (31
U S C 408))' and silver certificates and Treasury notes of 1890 (100 percent in silver
bullion or standard silver dollars). Since enactment of the Old Scries Currency
Adjustment Act (31 U.S.C. 912-916) on June 30. 1961, gold ciilifioilcs prior to the
Series of 1934, silver certificates issued before July I. 1929. and Trensury notes or
1890 have been payable from the generalfiiml.The requirement lor a gold reserve
against U.S. notes and Treasury notes of 1890 was repealed by Public L a w 90-269,
approved Mar. 18. 1968. Silver certificates issued on and after July 1, 1929. became
redeemable from the general fund on June 24, 1968 (31 U.S.C. 405a-3). T h e amount
of s e c i i i j ^ ^ ^ ^ ^ n t h i s l m e l o r y c a r y r f u ^ ^ ^ ^ k ^ & ^ l l j s ^ ^



March 13, 1981

Dear Mr. Hendricks:
This is in response to your recent letter to Secretary
Regan urging an audit of the United States gold stock.
I can assure you that there is no gold missing from the
U.S. gold stock. All of the transactions, including those
involving gold certificates, have been reflected in published
U.S. Government statistics, with these transactions fully
accounted for on the books of the Treasury. As of January 31,
the U.S. gold stock amounted to 264.3 million fine troy ounces.
You may be pleased to learn that an audit is now in process
which, when completed, will cover all United States-owned gold
for which the Treasury is accountable. This continuing audit,
together with a special audit in 19 74 of part of the gold in
Fort Knox by the General Accounting Office, has covered 72 per cent
Bjf tfco god<3; stock as 0? yefcr^ary ?B, l^Bl- Ho discrepancies in our
records have been, found with regard to afty gold in permanent storage*
A complete audit is a very time consuming task because of the
enormous quantity of gold to be handled, the highly specialized
manpower skills required, and the security precautions involved.
In performing the audit, the gold bars are physically removed
from one vault to another. During this operation, the melt
numbers and the number of bars in each melt are verified with
an inventory listing, and one in fifty melts is randomly selected
for weighing and test assay- The results of the assays are given
to the audit committee to compare with the fineness shown on the
inventory listing. The procedure is one which the General Accounting Office has followed and observed and to which it has taken
no exception. AttfcOtt$h the XS53 gold audit, tx> which you referredT
Vaa also perforated in, accordance with. a<jc*pt«sd avt&iting standards,
ifc wa$ oniy * partial audit <<ove.rlttg 5 perefcnt of the U.S. gold

I hope this information will be helpful to you.
Sincerely yours,
Jerry H. Nisenson
Mr. L. Hendricks
4430 A
Lincoln, NE 68510

Deputy Director for
Gold Market Activities
Office of Foreign Exchange Operations



»**^t yfirfffttntf rtrttffif
Gold certificate credits held by the Federal Reserve Banks.* S o m e credits are
pledged with Federal Reserve Agents** as collateral for Federal Reserve notes
issued. •••
Except for some actual gold certificates that Federal Reserve Banks use for
public education displays, all "gold certificates" are bookkeeping credits.

"iMotttew" tttt £ Q M < 7h* T-RHnwrf teWM
J U M dtrtific** <a*6t» » iter Federal R*M#<* fvtkl ill* an Mpttl MMMMtt to <fc*-

tan <»era4ftod 4a k» aovpoM *i lit* Afewntt
B«ri* l r t b * T i w w y «f*h« to jettifoid
dtasfewtfrnrtf* * w WW****** it « w *
l!h»tfut«a*d bj nKfcentef folft eatilfctte
ftfcdlii iaufcd tt A t Bttkm* Butte, W h a t
Tfd^Hi^ipI^Cttt. <fce T t — « » M » ^ * *f M f

<M«f * Wfrmw•** «*ftwen*9 M &
In August 1971, the U.S. suspended
virtually all Treasury buying and selling of
gold. In 1972 and 1973, Congress raised
the U.S. official gold price and the
Treasury issued gold certificates against
the increased value of the U.S. gold stock.
In 1974, the Treasury monetized the last,
small, remaining amount of nonmonetized
O n December 31, 1974, the 41-year old
legal prohibition against Americans buying, selling and holding gold ended, and, in
January 1975, the Treasury sold gold to the
public, redeeming gold certificates held by
the Reserve Banks.
•* The Federal Reserve Agent is the Board
of Governors' representative at each Reserve Bank. The Agent and the Reserve
Bank have joint custody of the Bank's unissued Federal Reserve notes. T o obtain the
release of notes, the Reserve Bank is required to pledge collateral at least equal to
the amount of notes it wishes to issue.
The Federal Reserve Act (Section 4)
specifies that the Board of Governors shall
designate one of the three "Class C " directors of each Federal Reserve Bank (directors appointed by the Board) as Chairman
of the Board of Directors and Federal
Reserve Agent.
•** Statutory minimum gold reserve requirements against Federal Reserve deposit liabilities and notes were abolished on
M a r c h 3. 1965 and March 18, 1968, respectively. However, each Reserve Bank
must maintain collateral equal to the
amount of its Federal Reserve notes outstanding. This collateral m a y be gold certificate credits or Special Drawing Rights

certificate credits, U.S. Government securities, or collateral received in making
loans. Most Federal Reserve Banks continue to pledge a portion of their gold certificate credits as collateral against these
Federal Reserve note liabilities.
Each Reserve Bank receives a share of
the total gold certificate credits in the account equal to the percentage of total
Federal Reserve notes outstanding that it
has issued. Redistribution of credits is
m a d e on or about each January 15, beginning in 1976, to reflect changes in the
percentages of notes issued by individual
Reserve Banks during the previous year.
Until April 30, 1975, Federal Reserve
Banks used gold certificate credits to settle
daily amounts due one another from the
movement of checks and wire transfers of
securities and funds between districts. T o
effect settlements, a pool of gold certificate
credits was established that was not available for use as a collateral against Federal
Reserve notes issued. With the ending of
the practice, the gold certificate credits in
the entire pool became available for pledging as a collateral against Federal Reserve
notes. Thus, at present. Federal Reserve
Banks settle amounts due one another with
"debit" and "credit" asset entries. Each
Reserve B a n k records on its o w n Condition
Statement, in a separate "Interdistrict setdement account" item, the net balance
"due to" or "due from" other Reserve
Banks. T h e item appears directly below
"other assets" in the separate condition
statements, but does not appear on the
Consolidated Statement because the sum of
the "due to" and "due from" balances of
the 12 Federal Reserve Banks always nets
out to zero.
A s transactions are m a d e between Reserve Banks, each Bank's "Interdistrict
settlement account" is increased (debited
with a "due from" entry) or reduced
(credited with a "due to" entry) as appropriate, on a daily basis. " D u e to" and "due
from" settlements are netted against one
another; there is no corresponding liability
adjustment. This asset item, therefore, is
reported as a negative number when "due
to" balances exceed "due from" balances.
Each year, on the last business day of
continued on next page


Mr. President,
Where Is Our Gold ?


TESTIMONY offered to the Gold Commission has, it appears, concentrated
upon the problem of the Federal Reserve Bank, viz. how to maintain the
value of the currency. This, however^ is a problem that has no solution
which can be set down, once and for all, by legislation: if currency is in
circulation, then by its very nature it may be at par, or it may be at a
discount, or it may (conceivably) be at a premium -- just as a cat, by
its very nature, may be asleep on the mat, or lapping milk, or looking
for trouble.
But it does not follow that nothing is to be done. On the contrary, the mice
would be better off if they knew when the cat was on the prowl, and the
markets would be better off if they knew when the currency was appreciating or depreciating. It is only right and proper that Congress should
regulate the value of coin, so that fluctuations of the currency could be
observed and discounted.
This may appear to be, today, impractical, since every current coin is
heavily over-priced; 10 troy ounces of copper coins -- 100£ -- will buy
1-1/%-lb. of copper. Nevertheless, it is herein argued that Congress
could resume the minting of gold coins and, by so doing, stabilize the
currency as the market now stands. Coins could be minted, not freely,
but for a seigniorage, IN C U R R E N C Y , equal to the face value of the coin
(e. g. the charge for minting a double eagle would be $20 currency);
then any depreciation of the currency would result in more gold being
coined, and, in the limit, a collapse of the currency would restore free

Brian "W. Firth,
206 West Robinson,
Carson City,

This study is confined to one question only: what exercise of the powers
of Congress to coin money, and regulate the value of (its own and foreign)
coin, is appropriately to be made by the 97th. Congress? The reason for
so restricting the enquiry will appear.
The popular perception is, that the currency (i. e. the notes of the Federal
Reserve Bank) is unpredictable in value. This is no doubt true; but the
questions arise, why is this remarkable? and, why is this important?
Banks are engaged in the demanding and difficult tasks of safe-keeping money
and lending money: no-one would expect banks to be free from the risks
attached to doing business. And we know that the States united in anticipation
of contingencies, such as war, that would as a matter of course shut down
all banks; a bank cannot exist unless the courts are open, unless creditors
have a remedy at law.
And indeed we see that the Federal Reserve Bank has not been charged with
failing to cash out its notes in U. S. coin. All the complaints against the
F. R. Bank would be plainly misconceived if we could believe that the
Congress had succeeded in regulating the value of U. S. coin.
Any failure of the Congress to regulate the value of coin must, it would
seem, give rise to grievances on the part of those who have either borrowed
from, or deposited in, the banks.
Today, it is assumed that currency and coin are at par, one can be
exchanged for the other without loss. This, however, is true only at this
time and where the Congress has legislation, since it stems from the F. R.
notes being legal tender.
In general, the relationship between currency and*coin is an inequality:
currency *£ coin
This merely expresses the fact that, if the currency rises to a premium
greater than, say 103%, coins will take the place of currency.
A coin, at least under the holdings of the courts of the U. S., is composed
of metal, a commodity (e.g. Legal Tender Cases, 1884, 4 S. Ct. 122, 137.)
It follows that the coin must be capable of buying as much of the commodity
as it contains (except in special circumstances, e.g. in the Republic of
South Africa gold is contraband):
coin ^ commodity
The coin may very well be worth more than the commodity; for the mint
to be "open" is a special case.
These two relationships may be combined:
currency ^ coin-^commodity

W e m a y n o w m a k e two deductions:
(1) Coin is the link between currency and commodity.
"Convertibility" between currency and commodity (advocated by m a n y
"gold standard" theoreticians) is an extraordinary special case where:
currency = X ,coin; coin = ~* commodity
The only plausible manner to establish these conditions would be to
m a k e X equal to unity. In words, the legislature would institute free
coinage and leave the banks exposed to c o m m o n - l a w liability (deny
them the privilege of bankruptcy. )
In today's circumstances, "convertibility" is not to be attained simply.
(2) The situation of the States today is, to say the least,delicate. Coin it
is which holds the monetary system together, but the most valuable
coin in circulation, the cent of 0. 1 tr. oz. copper, is worth, as a commodity,
only 6 0 % of its face value. In other words, the price of copper is today
85^ per lb. , but only because there is a shortage of coin is it below $1. 45.
Obviously, other coins are far less valuable, since the dime is about
the s a m e size as a cent but has ten times the face value.
This means that even a discussion of a "gold standard" is fraught with
danger; if the market tests the value of U. S. coin, it will find that coin
is over-priced. Thus any reform which involves any change in the coins,
as distinct from merely a regulation of their value, is ipso facto
obj ectionable.
This analysis thus leads to a clear conclusion: that the first requirement is for
the Congress to regulate the value of coin. If it can, in so doing, also stabilize
the currency, that would be a secondary benefit.
The problem has been narrowed down to, regulating the value of coin. But
the answer to this problem is known -- it is, in a word, specie, viz. coins
valuable only for their metal content. (This strict use of the term can be
justified by remarking that John Randolph proposed to the constitutional
convention that the States reserve the power to m a k e any "specie a tender
in payment of debts. ")
Thus what is required is to make at least one coin available in unlimited
Three means to this end can readily be perceived. The first is for the
Congress to transfer the status of legal tender to the cent of l/10th. tr. oz.
copper, 9 5 % fine (where it has legislation.) There would then be no prospect
of the coin ever being worth m o r e than l£, coins would no longer be "hoarded"
(in bottles rather than banks), and normal minting would quickly achieve
equilibrium. Such is allowable, since the Congress is not prohibited from
impairing the obligation of contracts, and in any case the currency would go
to a p r e m i u m , since a note is m o r e convenient than ten ounces of tiny coins.
There are, however, two disadvantages. Such a devaluation would give rise
to a surge of wholly illusory profits; and copper is a poor specie, since the
cost of making coins is relatively high (notice that the States rejected it in
favor of gold and silver. )

The second is for the Congress to resume the minting of 900 parts silver
coin, the cost of coining which is low enough for there to be free coinage.
Then, every day that the Mint was open, it would be ascertained how much
currency was required to purchase a coin (today, it would be about $9
currency to $1); any tendency for the credit of the F. R. Bank to deteriorate
would be made apparent. The advantage of this option is that the States have
traditionally used a silver standard, de jure from 1792 to 1871 and de facto
from 1934 to 1964; the disadvantage is that silver is a volatile commodity,
since it is mined mainly as a by-product of other metals.
Thirdly, the Congress could resume the minting of gold coins (the word
resume is used to emphasize that the American Arts medallions are not,
properly, coins; not one State has legalized them. )
Today, a gold coin, as specie (i.e. disregarding any scarcity value) is
worth, in currency, 20 times its face value, i. e. a double eagle would be
worth $400 in currency. But this is to say that the face value, in currency,
is 5% of the cost of the metal: and we know that this is more, but not much
more^ than the premium on American Arts medallions and foreign coins.
Thus the Congress could mint the coins for a seigniorage, payable in
currency, equal to the face value, without disturbing the market for bullion
coins, and yet expect to mint a significant number of pieces -- dou ble eagles
trade at a premium of 40% or more.
Once the minting of coins for a seigniorage of the face value, in currency,
is an institution, then not only would there be an unquestionable specie coin,
but also the currency would be stabilized. Suppose the currency fell until
the price of gold was $850 currency per tr. oz.; then the seigniorage would
be 2.4%, U. S. coins would be the lowest-premium gold mintage, and gold
owners all over the world would want F. R. notes to pay for coining. If, on
the other hand, the currency returned to par and the price of gold was $20. 67
—as when coins were circulating — the Mint would still be open; there would
surely be at least one collector who would want a double eagle dated 2002,
even though it would cost him $40.
The currency-as-seigniorage institution would, plainly, establish the
veridical relationship between currency and coin; if F. R. notes became
valueless, all that would happen would be that the States returned to free
coinage of gold.
The contemporary problem, of regulating the value of U. S. coin (and
currency), is susceptible to a legislated (i. e. lasting) solution. It is, for the
Congress to mandate that the Treasury shall strike a U. S. gold coin for
whomsoever shall proffer both the necessary fine gold and a sum of currency
equal to the face value of the coin.
The institution of the currency-as-seigniorage system would mean that,
so long as gold continues to be mined and coins to be traded, there would be
a demand for currency - or, if the currency collapsed, the States would
again have free coinage.

US ISSN 0017-4076
Head Office: 565 Fifth Avenue, N e w York, N.Y. 10017 • Mailing Address: P.O. Box 174, Princeton, N e w Jersey 08540
Phone (609) 921-6594

Telex 84 34 01

European Head Office: 12 Petersham Place, London S W 7 5PX, England

Vol. XVI


No. 18

See p. 2-i

September 23, 1981

T h e rally in the price of gold carried the spot metal to the $450$460 area, with an intraday high of $459.70 reached on September 14 on Comex in
New York, and a high London fix of $459 on September 17.
Therefore long gold
positions, which were acquired at an average price of $393, and then again at $415,
should have been liquidated at an average price of $454.50, for a profit of $61.50
and $39.50 per oz. respectively.
A s of this writing, September 18, the afternoon
fix in London was $447 and spot gold on Comex closed at $450.90.
The question now arises where to enter the market again. We believe that
one should try to buy back in the $433-$438 area basis spot, for a potential rally to
the $470-$480 area. However should the price of gold decline below $410, we would
abandon long positions.
O n the other hand, if a rally starts from current levels
without any further pullback, we would be inclined to buy if the London fix or spot
gold in New York exceed their recent highs (intraday high on Comex), in which
case we would look for a $15-$20 profit only. With one caveat, as mentioned in previous issues: should the Soviet troops enter Poland, by "invitation" or otherwise,
then we would maintain long positions without any specific objective, or, if not yet
long, we would buy at the market.
On September 17, 84,885 contracts of gold were traded on Comex, the largest
volume this year and the third largest volume ever. Despite this substantial volume
having been posted on the downside, the on-balance-volume figures are still constructive and point to an extension of the rally after some consolidation. A s of this writing,
the open interest on Comex stood at 202,342 contracts, out of which 8,118 were in
the nearby October delivery. O n IMM in Chicago, as of September 17, the open interest stood at 58,767 contracts. A s of September 18, gold stocks in Comex-approved
warehouses stood at 2,781,735 oz.
During the month of August, South Africa's gold production amounted to
1.80 million oz. # which compares with 1.79 million oz. in July and 1.82 million oz. in
August of last year. South Africa's production during the first 8 months of this year
amounted to 14.12 million oz., versus 14.58 million oz. in the same period of last year.
During the month of August, South Africa sold not only its entire new production, but
an additional 19,000 oz. from its reserves as well. In August the Soviet Union was
a net seller of gold to the West; so far this year Soviet sales are estimated at about
70 tons, which compares with 90 tons in the entire year 1980, and 200 tons in 1979.
The fact that half of the Soviet sales this year happened during the last six to eight
weeks indicates that some were made just about at the time when prices were bottoming out before the current rally.
The sales of U.S. gold medallions are going very poorly, and the Treasury
is considering changing the sales procedure; in the future the medallions may be made
available through banks and dealers, rather than through U.S. post offices as is the
case now.

Economic News Agency, Inc. - 1981




Vol. XVI, #18


- 2-

O n September 18, the 17-member U.S. Gold Commission held its second meeting; a clue to what can be expected from its deliberations is the fact that the panel is
even split on whether to extend the deadline for the Commission's report to Congress
from October 8 to March 31 or June 30, 1982...
The gold standard is currently the subject of a profusion of press articles,
most of which^r^nTssm^frie*point. Whatever the pros and cons of the gold standard,
and even assuming that the gold standard is the solution to all our economic problems
(which it is not), there is no practical way to implement a gold standard system within
a reasonable time; therefore the discussions on the subject are, in our humble opinion,
a waste of time. In today's world, no country can establish and maintain a gold standard alone. W e have an international monetary system, which is governed by IMF statutes;
those statutes can only be changed by negotiations and agreement among all members of
IMF. Those who remember how many years it took to get rid of gold as the numeraire
of the monetary system will appreciate that even if negotiations were to start next year,
after the report of the Gold Commission has been completed — assuming that it will be
in favor of restoring the gold standard — we will be well into the 1990's before the new
system could be ratified.
A n d that certainly would be too late in order to lower the
interest rates, which the supplysiders believe the introduction of the gold standard would
Today's gold standard proponents must have a very poor opinion of the members of the Interim Committee of IMF, and of IMF's entire body of central bankers and
finance ministers, if they believe that all the arguments which they are now advancing
in favor of the gold standard were not mulled over a thousand times by those experts,
and considered wanting.
The bill introduced in the U.S. Senate proposing the return to a gold standard is based on the premise that the price of gold should be fixed at whatever it will
be in the world markets six months after the United States announces its intent to return to the gold standard; that bill is the "Laffer stock" of the gold cognoscenti.
Professor Laffer believes that when the United States announces its intention of fixing
the price of gold in terms of dollars or vice versa, the price of gold will decline to
some "reasonable" level, somewhere in the $250-$300 area. With due respect to all the
gold standard proponents, the very day the United States announces its intent to return
to the gold standard and to peg gold at whatever the price will be six months after
that announcement, gold will embark on an alpine climb, and the 1980 gold Everest of
$875 will be easily left behind.
A further premise of the Senate bill is to forbid the Fed and the Treasury
to intervene in the foreign exchange and gold market during that six-month period. With
the Fed and the Treasury out of those markets as a stabilizing factor, can anyone really
believe that the price of gold will go anywhere but higher? There is an enormous vested
interest in gold; not only Swiss banks and their clients, not only German banks and
their clients, not only South African mining companies, not only the Soviet Union, not
only O P E C countries, not only Far East interests, but millions of people v.-ho own gold
and who would be only too glad to see its price go higher rather than lower, and who
would bet on it.
But let us assume that Professor Laffer is right, and that the price of gold
will decline to $250 - $300, or whatever level below current prices, and that the price
of gold will be fixed at that level. That price would then constitute a floor, and the
same thing would happen which happened in 1968, when the gold pool of the central
banks operated by the Bank of England had to stop its sales because the demand for



Vol. XVI, #18


the yellow metal at the official price was much too large. Incidentally it was in these
pages in December 1967 that the two-tier gold system was first proposed. It met with
a great deal of incredulity from the U.S. Treasury, but when the chips were down, in
March 1968, the two-tier system became a reality.
Ultimately it gave way to a free
market entirely, and that is exactly as it should stay.
Whenever the gold standard was in force, the assumption was that fixed
exchange rates would last forever.
Since forever did not last, a restoration of the
gold standard cannot be achieved; the gold standard is like virginity, once lost, it
cannot be restored.
The proponents of the gold standard point out that the run-up in the price
of gold has benefited the Soviet Union and South Africa most.
What they overlook'is
that the $850 peak price on the London fix did not last longer than one hour, and that
the intraday high of $875 for spot gold on Comex did not last more than one minute,
so that no large quantities of gold were sold at those lofty prices, either by the
Soviet Union or by South Africa.
A s a matter of fact, the average price of gold last
year was $613, and in 1980 the Soviet Union sold only 90 tons of gold.
the free gold market, as opposed to pegging the price of gold, does not permit gold
producers to sell large quantities at peak prices; whereas should the gold standard be
restored, then producers would have a ready outlet at a fixed price.
The Soviet Union has the world's largest unmined gold reserves, in excess
of 5 billion oz. Should the price of gold be pegged at for example $800 per oz.. that
would give the Soviet Union potential assets of "four trillion dollars! With that kind of
money, over the years, they would not have to bury us, as Khrushchev once said,
they could buy us out...
^ — —
SILVER In our last Comments, when spot silver was selling at $10.00, we
specified that the objective for the upmove was $10.78 basis spot. That objective was
not only reached but exceeded, when on September 14 spot silver traded at an intraday high of $11.35 on Comex.
Therefore short term traders are presumed to have
taken profit on their long positions, and are now looking for another point of entry.
Long term positions should be maintained until the price of silver exceeds $16, which
we expect to happen some time in 1982.
After establishing its new intraday high of $11.35, spot silver on Comex
declined to an intraday low of $9.60 on September 17, on the "news" that G S A would
start auctioning silver in October. Whoever was in the silver market and did not know
that Congress had approved a bill authorizing the sale of 46.5 million oz. of silver in
fiscal 1982, which starts October 1, deserved to lose his money... But what made the
incident more bizarre was that the news was first published on September 16, without
causing much of a ripple, since on that day the price of silver declined only 19.7C.
It was only when the news was repeated on September 17 that spot silver collapsed to
$9.60, for a decline of $1.24, or 11.2% in one session.
O n September 17, all other
months beside the spot month declined by the permissible daily 50C limit, and then
by another limit on September 18. There may still be some pressure from margin calls
on Monday, September 21, but after that the pressure should be off and the market
should embark on some kind of a sideways move before the next upward leg begins.
Short term traders can now go long again.
W e expect that once the market has bottomed out, the price will move swiftly to the $13 level; after establishing long positions
traders should maintain them until that objective is reached.
As far as GSA's auctions are concerned, 1.25 million oz. of silver will be
offered each week; the minimum allowable bid should be for 8,000 oz.
The silver to




Vol. XVI, #18


- 4-

be auctioned is currently stored in Government facilities in West Point, N e w York and
San Francisco.
T h e bars weigh 1,000 oz. each and are of .999 fineness.
The first
auction will probably not take place before October 21, since G S A still has to print
the bid forms, mail them to potential bidders, and give them some time to respond.
Despite the fact that the weekly amount offered for sale will be 1.25 million oz., instead of 1 million oz., as originally contemplated, the total amount to be offered for
sale in fiscal 1982 will remain the same, 46.5 million oz.
Also, G S A will have to announce what will be the minimum deposit required for bidders, in order to prevent
"fancy" bids from being submitted such as were submitted during GSA's previous
silver auctions.
There were rumors flying around that if the United States proceeds with its
auctions, Mexico and Peru would withhold 50 million oz. of silver from their new production. It was then stated that during the summit in Grand Rapids between Mexico's
President Portillo, Canadian Prime Minister Trudeau and President Reagan, the matter
of silver sales would be discussed, but no details are available as yet. Peru's Minister
of Mines, Mr. Pedro Pablo Kuczynski, disclosed that President Portillo would propose
to President Reagan that the United States postpone its sales of silver, in which case
Mexico and Peru would try to stabilize the market by refraining to export part of their
new production.
Mexico and Peru believe that their stabilization efforts could bring
the price of silver to about $20 per oz., at which level they suggest that the United
States could start gradually selling its stockpile silver; at that level, they too, would
gradually dispose of the silver withheld from the market.
On September 17 the daily trading volume on Comex reached this year's high
of 14,105 contracts.
It was the highest trading volume since 34,622 contracts were
traded on March 28, 1980. A s of September 18, silver stocks in Comex-approved warehouses stood at 77.7 million oz., and the open interest amounted to 34,686 contracts,
out of which 1,295 contracts were in spot September. O n the Chicago Board of Trade,
as of September 17 the open interest stood at 20,380 contracts in the old 5,000 oz. contract, and at 7,079 contracts in the new 1,000 oz. contract. T h e combined silver stocks
in CBT-approved warehouses amounted to 21 million oz. as of September 17. On September 15, Comex increased the silver margin for speculative accounts from $3,000 to
$3,500 per contract, and for hedgers from $1,800 to $2,500. During the month of August, 17.1 million oz. of silver were traded on the London Metal Exchange, which compares with 18.2 million oz. in August of last year. T h e cumulative volume for the first
8 months of this year amounted to 201.9 million oz., versus 290.1 million oz. in the
same period of last year.
In August the average price of spot silver on the LME was
488.8 pence per oz.
According to the Silver Institute statistics, in July the U.S. production of
refined silver declined to 10.4 million oz. from 11.5 million oz. in June.
The monthly
average production for the first 7 months of this year was 11.5 million oz., which compares with 15.5 million oz. in the same period of last year. A s of the end of July, silver stocks held by U.S. refiners dropped to 2.3 million oz. from 3.5 million oz. at the
end of June. As of the end of July, silver stocks of foreign refiners increased slightly
to 6.8 million oz. The monthly average production rate of foreign refiners for the first
7 months of this year was 18.8 million oz., versus 21.9 million oz. in the same period
of last year.
The gold/silver ratio, which declined from 51 to 1 to 41 to 1 recently, as of
September 18 had widened to 45.5 to 1. However we expect that this ratio will narrow
again, to somewhere between 32 - 35 to 1, by the end of next year.

US ISSN 0017-4076
Head Office: 565 Fifth Avenue, N e w York, N.Y. 10017 • Mailing Address: P.O. Box 174, Princeton, N e w Jersey 08540
Phone (609) 921-6594 Telex 84 34 01
European Head Office: 12 Petersham Place, London S W 7 5PX, England


Vol. XVI

No. 20


October 21, 1981 A •. Vl

J*e /> 9
SILVER On October 14, GSA held the first silver auction in the 1982 fiscal
year, despite last minute efforts to stop it by the Governor and Congressional representatives of the State of Idaho. Against most expectations — although not ours —
the auction was extremely well bid, and G S A received bids for 5,856,000 oz., while
it was offering only 1,250,000 oz. (see details on page 2). Excluding two "jokers",
who bid for 8,000 oz. each (the minimum allowable) at $1.82 and $2.00 respectively,'
semi-serious and serious bids were in the range between $7.00 and $9.41.
It is our opinion that all those who bid below $9.00 did not really want to
buy, and submitted their bids merely for the fun of it, or perhaps because they had
a poor idea of the strength of the silver market and hoped to get some bullion at bargain prices. A s far as the serious bids are concerned, they were in the range of
$9.00 and $9.41, and amounted to a total of 3,768,000 oz.
At 11 o'clock on October 14, when the bids were opened, spot silver on
Comex traded at $9.35.
Therefore it is surprising that G S A decided to sell only
160,000 oz. at prices ranging from $9.3310 to $9.41, for an average of $9.38. Republic National Bank of New York was one of the only two successful bidders, who was
awarded 104,000 oz. at $9.41; Mocatta Metals Corporation, the other one, was awarded
four lots of 8,000 oz. each at $9,371, $9,361, $9,351 and $9,341, and 24,000 oz. at
$9,331, for a total of 56,000 oz. However the 1,250,000 oz. offered by G S A could
have been sold at prices ranging between $9.41 and $9.20, which is only 13 cents
lower than the cutoff price decided upon by G S A : there were bids for 1,432,000 oz.
between $9.20 and $9.41.
Of course we realize that GSA, mindful of the criticism
from the mining industry in this country and of the ire of Peru, Mexico and Canada,
was anxious to prove that it did not really want to disrupt the market by accepting
prices that were too low, but to decide not to sell the entire amount offered because
of a 13C differential appears to be slicing it a bit too thin. Besides, this is a kind
of judgment that only few of the most experienced silver traders could make, and we
doubt that such experienced silver traders work for G S A .
The net receipts from the auction amounted to $1,501,976, whereas if the
total had been sold at a cutoff price of $9.20, the proceeds would have been $11.6
million. GSA's action in selling only 160,000 oz. also placed the serious bidders in
a precarious position, because once the bids had been opened those who had put in
reasonable bids figured what they thought would be the likely cutoff price and immediately hedged the silver they expected to be awarded by selling on Comex. It was
only after the close that they discovered that because the cutoff was much higher
than anticipated, they had bought nothing and found themselves with net short positions on Comex.
A s it happened, no harm was done, because on the next day the
price of silver declined by 20C, so presumably they all were able to cover their shorts
with profit.
After the results of the auction were announced, Idaho state officials disclosed that they would monitor the silver auctions and might take action if they felt

Economic News Aaencv. Inc. - 1981


Vol. XVI, #20


that the sales are hurting Idaho's interests. An aide to Congressman Larry Craig
(R-ldaho) suggested that the cutoff price at the first auction should now be considered the minimum acceptable price by GSA, adding that if that minimum price
should drop in subsequent weeks Idaho officials would sue the Federal Government
or take other legislative action. Not to be left behind, the Silver Users Association
announced that it, too, planned to closely watch GSA's silver auctions, and implied
that the cutoff price at the first auction was too high.
Rarely, if ever, have we
agreed with Walter Frankland, SUA's Executive Director, but this time we do not
want to argue with him for a 13C difference...
There were some grumblings among traders that if GSA continues to sell
only a portion of the 1,250,000 oz. offered every week, then the accumulating excess
would present a new overhang problem, because GSA must sell 46.5 million oz. in
this fiscal year. That is not correct. First, there are 52 weeks in a year, and at
the rate of 1,250,000 oz. a week, only 37 weeks would be needed to sell the entire
amount adjudicated for sale this year. Secondly, as William Campbell, Deputy Commissioner of GSA remarked, GSA is under no legal obligation to sell the 46.5 million
oz. during fiscal 1982.
GSA SILVER AUCTION 10/14/1981 - 1.25 million oz. offered
Bidder's Name
Monex International, Ca.
Bank of Nova Scotia, Toronto
Gold Standard Corp., Mo.
J.W. Harris Co. Inc., Ohio
Rhode Island Hospital Trust National Bank

Amount Bid

Price Bid


$9,260 - $8,888


$9,018 - $7,810


$8,400 - $7,350

Metal Traders Inc., NY


$8,980 - $8,780

Phillip Bros. Inc., NY



Amax Copper Inc., NY





S. Habib, NY
Continental Coin Co., Ca.


$9,263 - $9,033

Republic National Bank, NY


$9,410 - $8,410

SCI Container Service, Maine



Credit Suisse, NY


$8,700 - $7,900

Samuel Montagu Metals, Inc., NY


$9,000 - $7,000

Sabin Metals, NY



Mocatta Metals, NY


$9,371 - $9,231

Metals Quality Corp., NY


$9,221 - $9,121


$9,260 - $8,430

J. Aron 8 Co., NY
Joseph P. Gibson



S. Alexander



Total Amount Bid For



Vol. XVI, #20


- 3 -

O n October 15, the Peruvian Congress began a debate on how best to protest GSA's silver sales. It was disclosed during the debate that Peru had asked the
United States to postpone sales until such time as the price of silver exceeded $12.00
per oz., and then to spread the sales over a 5-year period, instead of over a 3-year
On October 15, the Senate Banking Committee voted to approve a bill to
mint $425 million face value coins to commemorate the 1984 Olympics.
However the
bill as approved authorizes the use of silver left over from the minting of the Eisenhower silver half-dollars. There are 38.7 million oz. of silver left in the Mint, which
would be more than enough for the proposed $10 silver Olympic coins. Since in our
silver price projection for this year and next we took in account the demand for the
minting cf Olympic coins, we will have to modify our projection, but for the moment
subscribers should maintain previously established long positions; traders should take
profit between $14 and $14.50, and long term investors should patiently sit on their
positions until the price of silver exceeds $16. A s of this writing, October 16, spot
silver on Comex closed at $9.41.
As of October 16, the open interest on Comex, which at the beginning of
the month stood at 29,063 contracts, had climbed to 31,021 contracts, out of which
12,402 were in the nearby December delivery. A s of the same date, silver stocks in
Comex-approved warehouses stood at 76.1 million oz. O n the Chicago Board of Trade,
as of October 15 the open interest in the old 5,000 oz. contract stood at 15,656 contracts, and in the new 1,000 oz. contract at 6,974 contracts. A s of the same date,
silver stocks in CBT-approved warehouses stood at 21.02 million oz.
On October 15, silver trading began on the Sydney Futures Exchange in
The first day of trading showed a reasonable volume of transactions.
Prices were at a .premium of about 25 cents over the Comex close. The Sydney contract represents 1,000 oz. of .999 quality.
During the month of September, 29.5 million oz. of silver were traded on
the London Metal Exchange, which compares with 41.9 million oz. in September of
last year.
The cumulative volume so far this year amounted to 231.4 million oz.,
versus 332.1 million oz. in the same period of last year. During the month of September, the average price of spot silver on the LME amounted to 533.48p.
A few months ago, we stated that the marketing of the 1-oz. silver "Sunshines" would start in August. However production has been delayed, and we have
been informed by the company that the silver Sunshines will now be available only
some time before Xmas.
GOLD Subscribers are long gold at an average price of $435 basis spot.
Our objective remains the same, $505 basis the London fix, and a little higher for
spot gold in New York. However we would take profit between $480 and $500, and
raise the stops from $420 to $431 basis the London fix or the Comex close for spot
gold. The reason for increasing the stop protection is the sluggish performance of
gold in the last two weeks, despite the assassination of President Sadat and the
heightened tention in the Middle East. T h e on-balance-volume figures are now negative, and gold is merely following the path of silver or of Treasury bills, rather
than acting on its own. Still, we are not willing to give up the long side of the
market unless stopped out as indicated above, in which case we would stay aside.
On the other hand, if a rally brings the price to the $480-$500 level, where long
positions should be sold with a profit, w e would think in terms of establishing short




Vol. X V I , #20


positions between $490 and $505. A s of this writing, October 16, the afternoon fix
in London was $443.75 and spot gold on Comex closed at $440.20.
As of October 16, gold stocks in Comex-approved warehouses amounted to
2,689,607 oz., and the open interest stood at 193,722 contracts, out of which 841 were
in the spot October delivery. O n IMM in Chicago, as of October 15, the open interest
stood at 51,078 contracts, out of which 7,368 were in the nearby December delivery.
On October 5, Mexico introduced a new series of 1-oz., £-oz. and £-oz.
gold coins in order to better compete with the South African Krugerrand. Since 1977,
when aggressive marketing of the 1.2-oz. Centenario gold coin began, its share of the
market, by comparison to the Krugerrand, was 6%, whereas this year it was running
at about 40%. With the three new units, Mexico hopes to at least share the U.S. market equally with the Krugerrand.
During the first three quarters of this year, the
sales of Krugerrands represented 2.46 million oz. of gold, which compares with 1.86
million oz. in the first three quarters of 1980, and 3.75 million oz. in the same period
of 1979.
As of the end of September, South Africa's official gold holdings amounted
to 12.36 million oz., an increase of 116,000 oz. during that month, which means that
the South African Reserve Bank withheld that much from new production.
A s of the
end of September, the total value of South Africa's official gold holdings amounted to
Rand 4.64 billion, accounted at the average of the last ten London fixes less 10%, and
converted into Rands at the prevailing foreign exchange rate (1 Rand = $1.05).
On October 6, Senators Steven Symms (R-Idaho); Barry Goldwater (R-Ariz.);
Jesse Helms (R-NC); and James McCIure (R-ldaho) introduced legislation to mint gold
coins of four different sizes: 1 troy oz. (31.1 grams); 1 oz. (28.3 grams); 10 grams
and 5 grams. The 1-troy oz. coin would bear the likeness of John F. Kennedy; the 1oz. coin that of Abraham Lincoln; the 10-gram coin that of Thomas Jefferson, and the
5-gram coin that of A d a m Smith, with the words "Liberty", "In God W e Trust", and
the year of minting. T h e reverse of each coin would bear the inscriptions "E Pluribus
Unum" and "United States of America", with the indication of the coin's weight. This
is the same bill that was introduced by Congressmen Ron Paul (R-Tex.), and Daniel
Crane (R-III.) in the House on June 4, 1981, H R 3789, entitled "Free Market Gold Coinage Act."
Our readers certainly remember that we severely criticized another bill introduced by Senator Jesse Helms to restore the gold standard, based on the fantasies of
Professor Arthur Laffer. However the Free Market Gold Coinage Act is an improvement,
even though parts of it must be changed, particularly the paragraph referring to
how the Treasury should compute the price of gold when buying or selling the coins,
and it could help reduce inflation by absorbing excess liquidity (if and when there is one).
T h e Treasury would use its 264 million oz. gold hoard to nwnt the coins, which would be
sold at the market value of gold. T h e bill could be amended to provide for use of the
proceeds to balance the Federal budget, and theoretically the Treasury could collect
over $100 billion from the sale of those coins. However the difficulty is to determine
the price at which the Treasury should be selling or buying those coins at any given
time, and whether it should be entitled to a seignorage, and if so, how much. There
is one more question to ponder: if the Treasury is obliged to buy any quantity offered
or to sell any quantity demanded, wouldn't that be like giving the Treasury the major
say in what the actual price of gold will be?
O n balance, the reintroduction of U.S.
gold coins is an acceptable idea, provided that the Treasury will just mint them, and
will not be obliged to maintain a market (i.e. will not have to buy them back).

US ISSN 0017-4076
Head C"; _e: 565 Fifth Avenue, N e w York, N.Y. 10017 • Mailing Address: P.O. Box 174, Princeton, N e w Jersey 08540
Phone (609) 921-6594

Telex 84 34 01

European Head Office: 12 Petersham Place, London S W 7 5PX, England

Vol. XVI No. 21


Je.c f>. 5

November 4, 1981

O n Thursday, October 29, silver made a key reversal on bar
charts and other technical indicators, thereby giving a major buy signal. The onbalance-volume figures are now positive, the daily trading volume is expanding on
rallies and shrinking on declines, and the open interest is increasing. A s of October 30, it stood at 31,597 contracts on Comex in New York, out of which 11,929
were in the nearby December delivery. O n the Chicago Board of Trade, as of October 29, there were 14,882 contracts open in the old 5,000 oz. contract, and 7,183
contracts open in the new 1,000 oz. contract. Spot silver on Comex, after declining
to an intraday low of $8.95 on October 27, rallied to an intraday high of $9.27 on
October 29, and as of this writing, October 30, closed at $9.15.
We believe that we are now on the verge of a major upside move in silver,
and consider the prevailing skepticism about silver's upside potential as reassuring.
The best bull markets have always been built on skepticism, and by the time the last
bear will have disappeared from the horizon, it will be opportune to get out of the
market. Traders should sit on their long position until the $14.00 - $14.50 level is
reached; long term investors should patiently maintain their position until such time
as the $16.50 level is exceeded, some time next year. Day-traders should now trade
from the long side only, buying into occasionally recurring weakness.
On October 28 GSA held its third silver auction, and sold 448,000 oz. at
an average price of $9,023. T h e range of all submitted bids was $8.60 to $9,075.
The details of the three auctions conducted so far are reproduced on page 2; they
make for very interesting reading.
T h e first observation is that the total amount
bid for declined from 5.8 million oz. at the first auction to 2.7 million oz. at the
third auction. However at the first auction only 160,000 oz. were sold, whereas at
the third auction 488,000 oz. were sold. But those two factors are not really important. What is important is that at the first auction the differential between the high
and the low bid was $7.59; at the second auction, it was $1.22; and at the third
auction, it was only 47C.
This shows that the bidding is getting more competitive
and that people who at the first auction were looking for bargains have now given
up on the idea.
The study of the results of those three auctions also shows that GSA
made a major error, which we pointed out in our last Comments, setting the cutoff
price too high at the first auction.
During the three auctions, a total of 832,000
oz. was sold at an average price of $9.07, whereas if, at the first auction, G S A had
accepted bids between $9.41 and $9.20, as they should have, they would have sold
at the first auction already 1.25 million oz. at an average price of $9.25. T h e price
per oz. received would have been higher, and the amount of silver sold larger. Be
that as it may, we still expect the auctions to proceed at a "brisk" pace, with
gradually larger sales at higher prices at each consecutive auction.
Economic News Agency, Inc. - 1981

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XVI, #21

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Despite the fact that Congress authorized the sale of
46.5 million oz. during fiscal 1982, it is possible that the auctions will be stopped, since the General Accounting Office (GAO)
the investigative arm of Congress, is presently working on a
report on the subject of the silver sales, to be submitted to
Congress before the end of this year; preliminary findings
indicate such a possibility.
O n e of the suggested options is
to use the silver in the stockpile for minting legal tender $10
silver coins (in addition to and separately from the $10 Olympic coins), which would generate more money for the Government than bullion auctions, would prevent any complaint from
friendly silver-producing countries, and would afford the public at large a better chance to purchase silver. G A O maintains
that Congress intended small investors to participate in the
silver sales, but the minimum lot size of 8,000 oz. per bid
restricts the auctions to bullion dealers and other professionals
On October 22 the Peruvian Senate passed a motion
stating that the U.S. sales of silver from the stockpile constitute "an aggression to the Peruvian economy".
Peru intends
to protest the sales by accusing the United States of violating
the international trade agreement ( G A T T ) which provides that
accumulated government supplies of minerals can only be sold
after consultation with producing nations. In the case of the
U.S. silver sales, the decision was unilateral.
Interior Secretary James Watt, after recently visiting
Idaho and the soon to be closed Bunker Hill smelter in Kellogg,
let it be known through a spokesman that at the next meeting
of President Reagan with his Cabinet he would suggest that
the silver sales be postponed, because of the "low silver prices"
at present.
On October 28, Eastman Kodak disclosed that it has
the technology to build an electronic camera, but that the
company had not yet decided whether such a device could be
commercially exploited. Our readers certainly remember that
about two months ago Sony made a similar announcement. The
electronic camera makes still photographs which are displayed
on a television screen rather than printed on photographic
paper. Since it does not use film, the electronic camera could
reduce the demand for silver if it ever became popular. However it would take at least until the second half of this decade
before such a camera could be mass-produced, and most experts
doubt that it would make big inroads into the sales of filmusing cameras, because on a T V set people expect to see
moving pictures, not still photographs.
Therefore the scare
created among silver traders, first by the Sony announcement,
then by Kodak's, was, to say the least, premature. Basically,
we expect that during this decade the increased demand for
films will more than offset any lower consumption of silver
which may be caused by use of the electronic camera.
On October 28, the speculative margin requirement
for silver on Comex was reduced to $3,500 from $5,000 per



Vol. XVI, #21


- 3 -

contract, and to $2,500 from $3,000 per contract for hedgers. A s of October 30, silver stocks in Comex-approved warehouses stood at 75.8 million oz., and those in C B T approved warehouses were 20.9 million oz. During the month of October, the average
price of spot silver on the London Metal Exchange was 502.26p, which compares with
a September average of 533.48p. O n page 4 our readers will find the silver statistics
for the first three quarters of this year, as compiled by the Silver Institute.
GOLD Subscribers were long gold at an average price of $435 basis spot
and were advised to liquidate their long position should spot on Comex close at $431
or below. O n October 23, spot gold on Comex closed at $430.30; therefore long positions are presumed to have been liquidated, at a loss of approximately $5.00 per oz.
At present, we would prefer to stay aside, and to use the funds freed by the liquidation of the long gold position for the purchase of silver.
Gold is still technically
weak, but if basis London the recent low fix of $422.25 is not broken on the downside,
then some kind of a rally could be expected. Basically, for those w h o "have to" trade
gold, it can be bought if and when spot on Comex exceeds $431, or when the London
fix is over that level, with a stop at $421, where we would also go short. O n the other
hand, we would liquidate long positions acquired above $431 between $470 and $480.
As of this writing, October 30, spot gold on Comex closed at $427, and the London
afternoon fix was at exactly the same price.
On October 26, the U.S. Gold Commission held its second public meetinc, and
the majority or the panel showed its color — which was not yellow! No individual tally
of the members was made, but the majority endorsed the continuity of the current exchange rate system and opposed the reintroduction of the gold standard. T h e Commission
agreed to a suggestion by Federal Reserve Governor Henry Wallich that its report, to
be prepared by March 31, 1982, should break down the various gold policy options into
those that would: 1. reduce the role of gold; 2. increase the role of gold; and 3. maintain the status quo. T h e next meeting of the Commission, at which public hearings will
be conducted, will take place on November 12-13. Those who wish to comment are invited to write to The Gold Commission, c/o Mr. Ralph Korp, Director Office of International Monetary Affairs, Room 5050, Treasury Department, Washington D C 20220.
During the month of October, 765,951 contracts of gold were traded on
Comex, which compares with 1,063,449 in September and 863,537 in October of last
The cumulative volume for the first ten months of this year amounted to
7,433^455 contracts, which compares with 6,038,285 in the same period of last year.
As of October 30, the open interest on Comex stood at 204,678 contracts, out of which
45,026 were in the nearby December delivery.
A s of the same date, gold stocks in
Comex-approved warehouses stood at 2,598,218 oz.
In October, the average monthly
price of gold on the London afternoon fix was $437.76, which compares with $443.75
in September and $661.14 in October 1980. O n October 28, Comex reduced the speculative margin for gold from $2,200 to $1,500 per contract, and from $1,500 to $1,000
per contract for hedgers.
Because of low gold prices, the South African Rand continues to be under
pressure, and as of October 30 it stood at $1.03 to one Rand, a 23% depreciation against
the dollar during this year. T h e pressure on the Rand and the balance of payments
deficit that South Africa will have this year may force the South African authorities
to resort to gold swaps, as they did in 1976 and 1977, when they made two gold swaps
of about 4 million oz. each.
If new gold swaps are concluded in the near future, it
may be beneficial for the price of gold, since rather than selling its entire gold production, South Africa may then be able to withhold a large part of it from the market.
Incidentally, the Soviet Union, which last year sold only 90 tons of gold, has already
sold over 200 tons this year.


Vol. XVI, #21


- 4-

Production and Disposition of 999 Silver Bars by All Known Refiners in the United States
From Primary (ores & concentrates)
From Coins
From Old Scrap (used photo film & other products)
From N e w Scrap (in-plant clippings, waste)*
T O T A L PRODUCTION Less New Scrap*


From Refiners' Own or Purchased Materials
Refined on Toll for Others
Converted in Plant (consumed in fabricating, etc.)
Shipped Out: O w n materials
Against Tolls
S T O C K S (Production Minus Disposition)


Aug Jan-Sep Jan-Sep FuUYr
































+ 1.5 -0.8



0.0 +



-0.0 + + 0.3



Production and Disposition of 999 Silver Bars by All Known Refiners in Australia, Canada, Mexico, Peru,
South Africa and Sweden; and some other Refiners in Europe and Asia.

Aug Jan-Sep Jan-Sep FuUYr
1981 1980
12.1 12.1



From Old Scrap (used photofilm& other products)
From N e w Scrap (in-plant clippings, waste)*
T O T A L PRODUCTION Less New Scrap*







From Refiners' Own or Purchased Materials
Refined on Toll for Others











Converted in Plant (consumed in fabricating, etc.)
Shipped Out: O w n materials
Against Tolls


S T O C K S ^Production Minus Disposition)


From Primary (ores & concentrates)

From Coins


















19.7 19.3







+2.4 +2.3



* P R O D U C T I O N From N e w Scrap is 999 silver made from in-plant clippings, spillage, sweepings, etc., generated during
manufacturing processes; since it is in continuous cycle from new scrap to 999 silver, to new scrap, some like to see the
production and disposition totals after deducting the new scrap from both

1200 15TH ST., N.W., SUITE 402.WA5HINGTON, D.C. 20005
A Non-Profit Organization for Research, Analysis and Dissemination of Information on Money and its Manifestations

November 18, 1981

Gold Commission
C/o Mr. Ralph V. Korp
Director, Office of International Monetary Affairs
Room 5050
Treasury Department
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
The following statement is submitted in response to the Commission's
general invitation of October 22nd for comments on its task.
1. The task facing the government is that of restoration of
integrity to the monetary system that has been steadily corrupted, particularly since 1934, with closing of the mint to free coinage, the suspension
of gold convertibility, the sequestration of all monetary gold, and the
repudiation of all gold debt obligations, beginning with those of the
government itself.
2. The monetary standard should be as fixed as that of the weight
of a kilogram or the length of a meter; neither the standard nor the
circulation should be subject to bureaucratic control; to adjust either by
official action is as futile, and as disreputable, as to change the weight
of a bushel in the interest of a stable supply or price of the corn crop.
As a resolution of this Institute, taken by its trustees in 1970, states:
RESOLVED, That the essence of the money problem is moral more
than technical - that as money is the standard of economic
value and measure of commerce the manipulation of money is evil,
whether in the interest of creditors or debtors, industry or labor,
producers or consumers, government or taxpayers; that the integrity
of money should be maintained by clearly defined content and
composition, and by adherence to the definition.
3. Just, as the prosperity of a merchant depends upon the quality
of his merchandise and the reliability of his undertakings, so the weal of
a great power is equally affected by the quality of its money, and the
integrity of the standard. The Byzantine empire, though shrinking
politically, was for seven hundred years the dominant commercial power
of Europe and the Middle East, a position contributed to by the integrity
of its coinage; Great Britain became the ascendant commercial power of
Europe after the opening of its mint to free coinage in 1666, and that
Chartered 1960 Under the Laws of the District of Columbia
Elgin Groseclose, PhD Fxpcutive Director; Ellice McDonald Jr.. Chairman, Charles H Mnson. III. Piesident. Walter K Graham, Vice President. K A McNaniara, Secretary Scott P Crampton.
T R U S T f X S Boudinot P Alterbury. He.iry L Day. Edmond du Pont. Henry H.izhtt. H E Ingraham, John H L J.ihnson. Jr , D Dean nhcaJs. Goorge P W.U'en, Ji

- 2 -

dominance was enhanced when it became the first and leading power to
establish its monetary standard on gold. The decline of U.S. economic power
and international prestige is a direct result of the wastage of this
precious asset.
4. The current world-wide inflation from decay of monetary integrity
may be due to U.S. influence and adoption of U.S. monetary practices,
beginning with widespread imitation of the Federal Reserve System, and later
with the establishment of fiat international exchange through the International Monetary Fund and the various international institutions like The
World Bank that have promoted an excessive burden of debt.
5. A reformation of the monetary system demands restoration of
credibility to U.S. monetary policy. This requires the following actions:
a. Abolition of the Federal Reserve System with its power to
create legal tender currency based on debt.
b. Reopening of the mint to the free coinage of gold, as existed
from 1792 until 1934, with the establishment of a gold coin standard
of value, at a mint value of the dollar at somewhat more than the
current world market price of gold.
c. Constitutional amendment declaring only gold coin, or official
warehouse receipts for gold held in government depositories, as
legal tender in payment of public dues or private obligations
denominated in dollars.
d. Constitutional amendment declaring monetary gold to be free of
government seizure except in payment of taxes duly levied by
6. Fear of insufficient circulation under a gold coin standard and
free coinage is groundless. Mo metal or other commodity in commerce is in
more abundant supply in relation to annual production than gold. Under free
coinage, gold appears in circulation, or disappears, in response to market
demand, and not as determined by a government bureau.
7. A free coinage gold standard is not designed to guarantee stable
prices, nor should be so used, for prices are the result of a multitude of
forces and influences, among them primarily, the emphasis or mood of the
market; nor will a gold standard prevent credit crises, which are also an
effect of subconscious rather than overt influences and under bureaucratic
management of the currency are often promoted by bureaucratic action. A gold
currency will only do what it is intended to do, that is, provide a standard
by which other goods and services can be measured, and a store of value for
future payments.


Home (212) 751-9191
Business (212) 754-8776

Beekman Place (2B)
New York, N.Y. 10022


7 December 198I
Ihe Members
The Gold Commission
United States Treasury Department
15th St. and Pennsylvania Ave. NW
Washington, D.C. 20220

Dear Sir or i-ladame,
As good as flold
In the current debate on a gold standard the stumbling block is the
fundamentally wrong premise in the quest to fix a price for gold. It is
not possible to fix a price for gold in terms of any existing currency.
Far better to consider not a price but a value. Gold has a value as a
medium of exchange, in other words as a currency. Consider the implications
of using gold as money.
Assume all gold reserves minted into coins of standard weight and fineness,
At a given date equate the number of coins so available with the figures used
internationally in representing the price of goods and services in circulation.
One coin will be found to equate to many hundreds of dollars.
Now start using only gold coins to pay for goods and services. Note
the dramatic fall in the numbers on the price tickets (the first skirmish
in the war on inflation). Continue to mint all newly-won gold into the
standard coins. Charge the weight of gold going into industry or jewellery
at the value of the equivalent number of coins. Paychecks would of course
come down accordingly. Checks and all paper transactions could be continued
but only against deposits in the equivalent number of coins. Gold money thus
on deposit would pay interest whereas gold now in the bank does not.
The result would be a stable currency and stability of values. Ihe
gold-producing countries would not get any richer (you can't eat gold) whereas
countries with exports of commodities or manufactures, instead of suffering
from "lack of hard currencies" would find that their products are as good as

- 2 -

This desirable state of affairs would continue as long as the 6upply
of coins was adequate to satisfy the needs of international commerce.
However the rate of increase of the net worth of the world is historically
greater than the rate of increase of gold production and is likely to remain
so. In this situation the remedy would be to have a periodic re-valuation
of the value of the coin. Clearly this value is going to tend upwards and,
as a concomitant, the numbers on the price tickets will go down - the very
reverse of inflation. Gold thus produces capital gains.
The return to gold usage (rather than a gold standard) will thus have
far more than a romantic or emotional appeal. It would provide a solution
to currency and exchange problems and, since the money supply would be finite,
a cure for inflation and a clear directive for monetary policy.
Yours faithfully,

John H. Harris


by Henry Hazlitt

It is extremely important that the Gold Commission's studies
should rest throughout on a sound theoretical basis. Unfortunately,
there is a danger that the Commission will get off to a seriously
misleading start if it accepts the definition and explanation of
the gold standard submitted to it by Dr. Anna J. Schwartz on
October 6, 1981.
That we are on slippery ground is evident in the first page
of her memorandum (numbered paragraph 1 at the bottom):
"Do they (members of the Gold Commission) favor a return
to an international gold standard?

Will they recommend convening

an international monetary conference to obtain the agreement of
three-fifths of the members of the IMP with 85 percent of the
votes to restore a fixed price for gold and the definition of each
currency as a fixed gold weight?
gold be determined?

How would the fixed price of

Will gold coinage be restored?"

Several questions must be raised immediately about Dr. Schwartz1!
questions. The central problem being posed to the Gold Commission
is whether it favors a return to a gold standard —« not necessarily
an "international" gold standard.

The Commission could consider

also the restoration of a gold standard in the United States
whether or not this will be later adopted by other countries.
Dr. Schwartz's second set of questions takes for granted the
necessity for convening an "international" monetary conference
under specific rules.

It speaks of restoring "a fixed price

/my italics / for gold" though it also speaks of "the definition
of each currency as a fixed gold weight" /my italics__/. Her next
question raises the first word again: "How would the fixed price
of gold be determined."

*+ 2 ••

The belief that establishing a gold standard means setting
a fixed "price" for gold is a serious misconception. What is being
fixed is not a "price" at all, but a conversion rate. When the
so-called "price" of gold is set at $35 an ounce, for example, this
is merely a misleading way of saying that the paper dollar is
being defined as one«thirty«fifth of an ounce of gold.

This is a

conversion weight, not a price. The word "price" embodies an
additional misconception.

This is that the "price" of a gram or

an ounce of gold is being fixed in terms of the paper money.


suggests that the value of gold is being stabilized by nailing
it to the value of the paper money.

This is turning the gold

standard upside down. When a fixed conversion rate between a
paper money unit and a round weight of gold is fixed, what is
being fixed is the value of the paper unit in terms of gold, not
vice versa. The paper unit now has a definite and stabilized
value in the market, but only because it is now convertible on
demand into gold at that fixed legal rate.
In our Civil War, after our government had suspended gold

conversation of banknotes, a gold^market grew up.

The prices

of gold bullion changed every day, and went up at one time to
more than double what it had been. But nobody outside the United
States thought that the real value of gold there was wildly
fluctuating every day, nor did any informed person inside the
United States. In terms of^pounds and other gold currencies,
the^price^of gold remained stable throughout the period. It was
recognized on both sides of the Atlantic that it was the paper
dollar that was wildly fluctuating.

The world commodity value

of gold was not at a dramatic premium; the paper dollar was at a
dramatic discount0

- 3unce Having presented a false conception of what a gold
standard means, Dr. Schwartz attempts to apply it consistently,
and so falls into deeper and deeper confusions. Thus in the two
paragraphs at the top of her numbered page 2, under the head
"International Gold Standard" she writes:
"The international gold standard is a mechanism to
ensure uniformity of price level movements between
countries and hence to constrain the monetary policy
of any one country."
This is a strange definition.

The international gold standard

was not adopted as any "mechanism" to insure "uniformity of price
level movements between countries".

It was adopted to fix a

dependable value for the currency of the country that chose it.
The gold standard did not insure any uniformity of "price levels"
(which are merely a statistician's fiction) but it did insure a
recognizable equality of prices of the same commodity.

For example,

with a gold standard in both countries, a bar of silver or a bushel
of wheat would have the same value in England and the United States
(transportation costs and foreign exchange conversions allowed for)
because both would be priced in gold and the gold would have the
same value in both countries. The money policy of each country is
"constrained" primarily to insure the continuance of gold conversion
in each, but not to preserve any "price level uniformity" between
the two countries.

"Price level uniformity" exists simply because

prices, given free markets and the same weight of gold in the currency
unit, are the same in both countries (allowing for differences in
transportation costs).

Price "levels" are "uniform" only because

individual prices are in effect the same. But price "levels", as such,
cause nothing; and nothing is gained by dragging in the concept*.

-kOne sentence of Dr. Schwartzfs memorandum reads:


external value of the currency under such a /gold/ standard is
fixed in terms of gold."

I quote this merely to remark that a

gold standard does nothing to the "external" value of a currency
that it does not also do to its "internal" value.

Both values

are, in fact, the same ~- in the absence of legal tender laws or
currency controls.
But now Dr. Schwartz launches on a sentence which reads as
if she had suddenly seen the light:
"Consider the reason the external value of a dollar
in terms of a pound sterling was $1^.8665 before World War I
and from 1925 to 193U

The dollar was defined as 23.22

grains of fine gold and a pound sterling as 113<>0016 grains
of fine gold, hence !j.e8665 was the multiple of the weight
of gold in a pound sterling compared with the weight of
gold in a dollar.

This was a fixed oxchange rate because

the gold weight of each currency was fixed or, equivalently,
the price of gold per ounce was fixed."
The only change it is necessary to make in the foregoing excerpt
is the omission of "or, equivalently" and the phrase following it.
But just when we think that Dr. Schwartz is at last on the
right track she goes on to write: "If the United States had adopted
one price of gold and the British another price, obviously, the
equivalence between the exchange rate and the respective weights
defining each currency would have disappeared.

A variable price

of gold among countries would have meant variable weights of gold
represented by each currency."

- 5Here is where her error in substituting the phrase "price of
gold" for "weight of gold" throws her off entirely.

If we keep

in mind that her word "price" really means weight, and nothing else,
then all that has happened is that one country, say England, has
fixed a different weight for the paper pound unit than before.


all this means is that Britain has adopted a different definition
for the pound.

If the comparison of the values of the two currencies

is then made again, the pound goes in at a different rate and
therefore has a different value in dollars.

But the difference in

value is determined entirely by the difference in gold weight«
If we substitute the word "weight" for "price" in Dr c Schwartz's
sentence beginning "A variable price of gold", we get a mere tautology:
"a variable weight of gold among countries would have meant variable
weights of gold represented by each currency*"
So Dr. Schwartz's belief -«« which unfortunately seems to be the
belief of most "monetarists" «-- is that the gold standard consists
not in the undertaking to convert paper promises on demand into
specific weights of gold, but in fixing "the price of gold" in
terms of paper.

This makes it look as if the gold standard consisted

in a mere legal technicality, and as if it were the government that
was giving value to gold by making it worth so«and-so~many dollars.
But the monetarists, by this concept, are confusing mainly

No matter what "prices" are fixed for "gold" in any

two countries whose currencies are convertible into gold, they will
differ in value from each other precisely by the difference in their
officially defined weight of gold, no more, no less*,

About Tom Holt
T H O M A S J. H O L T is the Editor-in-Chief of The Holt
Investment Advisory. He is also the President of T. J. Holt
& Company, Inc., one of the fastest growing firms in the
entire investment and business advisory field.
Born in Hong Kong and educated abroad and in
the U.S., Mr. Holt holds college degrees in both economics
and engineering. "Perhaps because of m y engineering
training", he once said, "I can't tolerate fuzzy thinking and
doubletalk. To effectively research economic and monetary
prospects, one must analyze free-market forces with logic
and common sense."

Courage to Stand Alone
• Back in 1967, foreseeing a long decline in the
U.S. dollar and a breakdown of the $35 fixed
gold price, Holt publicly predicted that "the
gold price must soar"—a prediction jeered at
by most Establishment experts.
•In September 1976, after gold had dropped
from about $200 to $100 and when many
gold advocates began throwing in the towel,
T. J. Holt & Company, Inc. backed up its
conviction by buying gold bullion at the IMF
auction for its own account.
•In early 1980, after 13 years of consistently
recommending gold investments, Holt advised
subscribers to sell all gold holdings. While
both conventional experts and hard-money
advocates were talking about $1000 or $2000
targets, Holt stated, "the $850 peak reached
in January 1980 will stand as the high for gold
bullion for a long, long time." He went on to
predict an extended retreat to the $250-350

•In spring of 1980, when private and institutional investors were rushing to buy bonds to
"lock in" record high yields, Holt stood
almost alone in warning that interest rates
would go still higher and bond prices still
lower. Holt stressed that " . . . a monumental
crunch still lies ahead. For now cash is king."
• A year later, in May 1981, powerful voices on
Wall Street started heavily promoting bond
purchases. But again Holt stated: "The surge
in interest rates won't abate any time soon.
It's way too early to move into bonds."

Before he left Shanghai for the U.S. in 1947, Mr. Holt
witnessed firsthand runaway inflation devastating the
Chinese currency. As a result, he is probably more aware of
the pitfalls of proliferating paper monies than most
American observers.
But he has also uncovered a basic difference between
the American economy today and the situation in China
then, as well as those in France and Germany a couple of
generations back. Thus, while some soothsayers now talk of
a total collapse of both the U.S. economy and the U.S.
currency, Mr. Holt has repeatedly stressed that it is "simply
impossible for a severe depression in this country to go
hand-in-hand with runaway inflation" in the coming
decade. (In fact, for months Holt has been advising his
readers to phase out INflation strategies and start
anticipating DEflation ahead.)
In the late 1940's, young Holt suddenly found
himself a refugee having to borrow to continue his
education. The Communists took over China and his
family lost all its belongings. From the bottom, Holt
worked and learned his way up in the world of investment
and economic research.

Responsible Alternative
By 1967, he was convinced that the conventional
wisdom had become obsolete. To provide a Responsible
Alternative, he started publishing The Holt Investment
Advisory. Through the semimonthly, he called attention to
developing changes in the economic and investment climate
and advised investors how to implement a more flexible
capital-building program therein.
This flexible approach was so well received that
many investors urged Holt to broaden his services to
include personal portfolio management. In response,
he launched Strategic Money Management in 1971.
A few years later, he launched a low-cost newsletter
for the general public—The Holt Executive Advisory—which
analyzes not only economic and financial movements but
also national and international developments of importance
to the decision maker.
More recently, Holt has completed a new b o o k — H o w
To Survive and Grow Richer in the Tough Times Ahead
(Rawson, Wade Publishers, $11.95)—thoroughly setting
forth his economic and investment thinking along with his
clear-cut forecasts and projections through the 1980s.
If you'd like to know more about any or all of Holt's
services, just write: T.J. Holt & Company, Inc., The Holt
Building, 290 Post Road West, Westport, Conn. 06880.


Too Early For Gold
O N L Y T E N Y E A R S after President Nixon w a s forced

Besides restraining politicians, gold-being a c o m -

to close the gold w i n d o w , discussion about going back

modity m o n e y - h a s the added advantage of enabling

to a gold standard has suddenly b e c o m e respectable.

free-market forces to maintain relatively stable prices



over the long term. Should the purchasing p o w e r of

have sparked a flurry of debate -in the media. But given

gold in terms of other goods rise too high, for instance,

the membership

the marketplace would shift resources into n e w gold
production while non-monetary gold would be melted

meetings of the U.S. Gold

of the commission, n o one really

believes that it will m a k e a favorable recommendation.
Still, the idea that something must be done to

d o w n and converted into m o n e y . T h e resulting increase

restrain the inflationary habits of politicians has gained

in the monetary gold stock would then lower the purchasing power for the metal.

an acceptance that w a s unthinkable just a few years

Conversely, should the purchasing p o w e r of gold
fall too low, m u c h gold production would be directed

ago. It is not difficult to see w h y . Since the last ties
between gold and the dollar were severed in 1 9 7 1 ,
consumer prices have increased by 1307c, the m o n e y
supply has tripled, interest rates have skyrocketed, real
income and savings have declined, u n e m p l o y m e n t has

to non-monetary uses. Such a decrease in the monetary
gold supply would then restore the purchasing p o w e r

risen, and the total debt burden has climbed to almost

Practicality. T h e fact that the gold standard is
desirable, however, does not m e a n that it can be rein-

of bullion.

S5 trillion.
Advocates of a gold standard believe that only by

stated any time soon. O n e must take into full consideration the current monetary condition and, m o r e

reestablishing the link between gold and the dollar can
we reverse the postwar trend of an ever-increasing rate
of inflation. O n c e convertibility of the dollar into gold

importantly, h o w such a state has c o m e about to begin
Actually, the seed for the recent inflationary mess

at a fixed price is restored, they say, inflationary expectations would quickly fall. Prices would then stabilize, interest rates decline precipitously, and real growth
return to the e c o n o m y .
Discipline. W e d o believe strongly that a monetary
system built on a "hard" base is the only w a y to prevent
the Government from printing m o n e y willy-nilly. T h e
base could

be almost

any non-perishable, widely-

accepted c o m m o d i t y . But as it has in the past, goldbeing durable, storable. portable, easily divisible, and
above all. scarce-can probably play this role in the
future better than anything else.





Producer Price Index (1967 = 100)










Gold Price $/oz






During the period 1834-1933, when a gold standard existed, arid when the gold price was S20.67, tl Producer Price Index averaged 38.
therefore, the
They are now eight times higher. A similar increase for gold would peg its price at only SI65. In terms of all commodities,
mptal ic cfill ^,,o,~,;„o.-)
metal is still overpriced.

Copyright, 1981, T. J. Holt & Company, Inc.

had been sowed long before Nixon closed the gold
window. Under the modified gold standard, the Government was restrained from inflating the m o n e y supply by
the legal requirement that 257c of Federal Reserve
liabilities be backed by gold. But in 1965, the gold cover
for Federal Reserve deposits was lifted. Three years
later, that for Federal Reserve currency was eliminated.
It was those moves that paved the w a y for the subsequent credit expansion excesses.
Excessive credit expansion hasn't resulted only in
rampant inflation. It has also brought acute illiquidity
to both the private and the public sectors. Until these
imbalances are corrected, reinstating the gold standard
can do more harm than good.
What price? For the sake of argument, let's assume
for a m o m e n t that w e can indeed return to gold at
present. The question then is what should the gold price
be. The best way. of course, is to let the free market
set the price.
In this vein, one proposal n o w receiving some
attention would have the Go\ernment announce a set
date several months hence w h e n it would start to buy
and sell gold at a fixed price. That official rate would
be based on the market quotation prevailing just before
that deadline. During the interim period, supposedly,
the free market would do its thing.
The problem with such a plan is that no free
market for gold would really be in existence during
this interim period. For one thing, the huge supply
held b\ central banks wouldn't be available for sale.
Meanwhile, speculators could drive the price sky high
by buying as m u c h of the gold as possible, knowing
full well that at the end of the period, they could
unload their hoardings to the Government at huge
profits. There's no risks imolved whatsoever.
Super inflation. Note, moreover, that when the
Government absorbs this vast influx of gold at lofty
prices, it would inject billions of dollars of n e w reserves
into the monetary system. Banks could then use these
additional reserves to effect a n e w wave of credit expansion. The m o n e y supply would then skyrocket, and
runaway inflation would surely follow.
If no true free market is available to set the right
price, can't the Government simply fix a rate high
enough to support the dollars n o w outstanding or to
cover the nation's foreign liabilities0 Not really. For
one thing, such an arbitrary rate must be set far above
recent market quotations. It would have the superinflationary effects noted earlier. The e c o n o m y cannot
go through a runaway inflation without risking a total
collapse thereafter
Moreover, as noted earlier, the current illiquid
state is the result of decades of excessive credit expansion. Freezing the existing condition into a n e w m o n e -

tary system would in effect prevent the free market
from correcting the mess.
Fairly low. In the final analysis, a return to the
gold standard is possible only if the metal is fairly priced
relative to all commodities. This is the only way the
purchasing power of gold-and, therefore, of the m o n e y
it backs-can benefit from the self-stablizing feature of
a hard m o n e y system discussed at the outset.
What, then, is a fair price for gold in terms of its
purchasing power, relative to all commodities? Since
1934, w h e n gold was fixed at S35 an ounce, producer
prices have increased by about 6107c A comparable increase for gold would give us a price of S270 an ounce.
For those w h o prefer to look at gold over a m u c h
longer period of time, the 100 years w h e n gold was
fixed at S20.67 an ounce m a y be a more appropriate
base period. During that century, the producer price
index (1967=100) averaged 38.4. Currently standing
just below 300, it has multiplied roughly eightfold. A
similar increase for gold would bring a price of onlySi 65 an ounce.
In terms of its commodity purchasing power, then,
the next official gold price should be somewhere in the
range of S150-S300 an ounce.
H o w would a return to a gold standard n o w at such
an official rate affect the economy? Terribly disruptive.
Right n o w , the public is still highly inflation-conscious.
If the Government agreed to sell the metal so far below
the current market price, it would surely lead to a run
on the U.S. stockpile. Tens of billions of dollars could
thus be drained out of the banking system, sharply
decreasing the monetary base on which the nation's
m o n e y supply is rested. In short: The overall effect on
the economy would be drastically deflationary
It goes without saying that Washington will never
willingly deflate the economy to such a degree. Hence,
restoring the gold standard in the near future is out of
the question.
Natural deflation. All this does not m e a n that
some kind of gold standard won't eventually be reestablished. The last time this country severed gold
from the monetary system, in 1861, inflation also
became rampant thereafter. But by 1878, free-market
developments had pushed commodity prices d o w n w a r d
by more than 50C( from their Civil W a r peaks. The U.S.
was then able to return to the gold standard and put an
end to the so-called "greenback era"
A similar opportunity m a y present itself late this
decade. Free-market forces are n o w already at work to
bring about a switch from inflation to deflation. Widespread price declines are n o w a fact for all financial
assets, including gold and collectibles. A n d they are
beginning to emerge in the real estate sector. Soon, this
deflation will spread to other sectors of the economy.


S o m e time later in this decade, deflation, along
with credit contraction and a worldwide depression, will
have run its course. The price of gold m a y well have
dropped to its fair value-perhaps below $200. Governments all over the world will then be more than anxious
to reflate their economies. A n d they m a y well decide

that the gold standard should be restored to purposely
effect inflation. They will want to buy gold, thereby
pumping m o n e y into the system. A n official price that's
higher than the then current quotation will have to be
set. Still, chances are that the next official gold price
will be less than $300 an ounce.

statement of:

LIBERTY LOBBY, 300 Independence Ave,, S.E., Washington, D.C.

Submitted to:





The Historic Role of Specie Currency
Abuse of Fiat Currency and Results
Wisdom of Our Founding Fathers
Federal Reserve Act Unconstitutional
Tragedies of Inflation
Irresistible Temptation to Inflate
Can a Managed Fiat Currency Escape Inflation?
Monetary Principles of Jefferson
Ludwig von Mlses on Fiat and Specie Currency
Philosophy of William Hazlitt
Paul Bakewell, Monetary Scientist
Returning to the Gold Standard



November 27, 1981
Mr. Chairman and Members of the Commission:
I am Dr. Martin A. Larson, Tax Policy Consultant of LIBERTY LOBBY.

I appreciate

this opportunity to submit for the record my views on this subject on behalf of
LIBERTY LOBBY'S 30,000-member Board of Policy, as well as for the approximately
1 million readers of its weekly newspaper, The SPOTLIGHT.
Historic Role of Specie Currency
No doubt the role of gold, and to a lesser extent, that of silver, has been
fundamental in the monetary systems of all countries since the dawn of civilized

This remains true because

a reliable and stable medium of exchange is

a basic necessity in every economy, especially in one consisting of advanced and
sophisticated production.

Gold and silver alone have ever served in this

crucial capacity.
Abuse of Fiat Currency and Results
We note two historical facts:

No nation or monetary authority has ever had the power to

issue fiat

money without abusing the power and thus causing destructive inflation; and

Such abuse has always been succeeded by the most serious consequences.

Sometimes, the result has been a dictator or the utter breakdown of the social

In others, where wisdom and statesmanship have supervened, reforms were

effected which placed the nations involved, not only on the course of recovery,
but gave them long periods of prosperity and tranquility.
One of the first great monetary, crises in recorded history occurred in ancient

However, it was resolved when the great lawgiver Solon, about 594 B.C., in-

stituted monetary

reforms which established a solid currency consisting of precious,

metallic coins. As a result, Athens enjoyed several centuries of unparalleled power
and glory.
In Sweden, the military adventures of King Karl XII in the early 18th century
virtually bankrupted the nation and created a ruinous inflation.

Then monetary re-

forms were accomplished under the leadership of Emmanuel Swedenborg which placed its

-zeconomy on a sound foundation and made possible the stability and prosperity which
Wisdom of Our Founding Fathers
Perhaps the most important historical instance of great statesmanship was
that of our Founding Fathers, who had, from bitter experience, learned the inevitable
results of inflation (in that case unavoidable because of the Revolutionary War).
After the various irredeemable currencies issued by the colonies or states, as well
as the Continentals, fell below a ratio In value of 40 to 1, they ceased to circulate;
and those who prepared our Constitution were determined that no such devastation
should ever recur in the U.S.
They therefore enacted two provisions in that instrument, one of which states,
"Congress ^alonej shall have power to coin Money, regulate the Value thereof, and of
foreign Coin;" and that "No State shall . . . make any Thing but gold and silver Coin
a Tender in the Payment of Debts." This means simply that there shall be no currency
except specie issued by Congress (or notes redeemable in such medium); and that every
state must pay its obligations with solid metal.
Federal Reserve Act Unconstitutional
The Federal Reserve Act is therefore unconstitutional since it confers upon a
private banking system the power to issue our currency; and, since there is now none
other except the fiat notes it issues, every state is in violation of the Constitution
whenever it disburses any payment whatsoever*
Tragedies of Inflation
Let us consider the devastation caused by inflation not subsequently solved by
statesmanlike reform.

Perhaps the most important example is that of the decline and

fall of the Roman Empire. As its powers waned and tributes no longer flowed in from
the conquered provinces, there was no employment for millions of slaves who had previously produced goods for export or served in the mansions of the wealthy. Once
emancipated, they had to be supported and entertained; thus, bread and the circus.
However, since taxes were insufficient to pay for such welfare, the government
attempted to meet the problem by Issuing vast amounts of debased currency; and,
although Draconian laws were enacted to compel its acceptance at face value, it
ceased, in due course, to circulate at all. This was one of the basic causes leading
to the period known as the Dark Ages, during which life expectancy fell to 30 years
and the entire population of Europe was threatened with extinction.
In 1717, the French Regent adopted a scheme proposed by William Law under which
lands it* America were to become reserves for huge issues of currency. Within two
years, France was in a state of almost universal starvation, and forced to adopt the
most drastic reforms*
After the Revolution of 1789, the French National Assembly began Issuing fiat
Assignats under the belief that the recently confiscated lands could guarantee their
exchange value. However, by 1797, when they had fallen to about 17. of face, they were
burned in city bonfires, and Napoleon took over as dictator. While marching his
armies all over Europe for 16 years, he met all his obligations in gold, which certainly proved that there was no shortage of this metal even under those conditions.
In 1922-23, a destructive inflation occurred in Austria and Germany, which
finally increased £he price of a loaf of bread to a trillion marks. However, anyone
with an Jtaerican $20 gold piece could purchase a hotel or a shopping center; the
middle class was utterly impoverished, a development which brought Hitler to power
and gave the world the Second World War, with costs beyond comprehension.


After that war, inflation in France and Italy destroyed the assets of the
middle classes and caused the proliferation of communist movements in both countries,
which threaten to overthrow the last vestiges, of republican or responsible government.
Irresistible Temptation to Inflate
As long as any monetary authority has the power to issue fiat currency, the
temptation to abuse the power is almost irresistible.

It is so much easier to print

paper money to be used for wasteful and extravagant expenditures, than it is to extract taxes from an angry and restive populace. We recall how Mr. Carter promised
early in his Incumbency to give us a balanced budget in his fourth year, but how
the deficits grew ever greater and greater. Mr. Reagan ran largely on his assurance
that he would balance the budget by 1983 or 1984; but now the information is gradually leaked to the media that the same failure that occurred under Carter will
probably recur—at least, unless there are massive new tax programs.
This is the road to national suicide!
Preceding are only a few of the lessons of history which it behooves Congress
to consider carefully, for upon it alone rests the responsibility for the future
welfare of this nation.
Can a Managed Fiat Currency Avoid Inflation?
Some economists and honest members of the federal legislature believe that,
in order to avoid inflation, we need only limit the federal budget to current Income,
restrict the issuance of currency to actual need, and exercise a strong fiscal

But, as we have noted, we know of no historical instance in which any

monetary authority has had the power to issue flat currency without abusing that
There was inflation In this country during World War II and it continued

But it became much worse after the last silver coins were minted in

1964; and after the gold window was slammed shut even on foreign banks in 1973,
our rate of inflation soared to unprecedented heights—and has continued ever since.
For example, a room in a hospital could be had for $8 in 1940; now, similar
accommodations are sometimes priced at nearly $300. A house which sold for $25,000
in I960 is now generally priced at $150,000. A hotel room which rented for $2 a night
in 1925 may now bring $60, with taxes added which* far exceed the total cost when
the hostelry was new.
In the meantime, taxes and interest rates have gone into the


In 1940, only $5,481,000,000 of Federal Reserve notes existed) in 1980, the total
was about $140 billion. At the former date, every such note could have been redeemed
in gold four times over; in 1980, the total gold reserve in the hands of the Federal
Reserve System was about $11 billion, at $42.23 an ounce.
Monetary Principles of Jefferson
The writings of Thomas Jefferson, certainly the greatest American statesman,
are studded with declarations proposing and supporting a solid and dependable currency. He proposed the system of coinage which Congress adopted in 1792, under which
our official unit of exchange, a silver dollar, was established, containing 412.5
grains of standard silver. Throughout his life, he considered that:
• A debt-free national government was one of its highest priorities;
• It alone should have the power to issue currency;
• This should be in the form of specie or in notes so redeemable;
• During war or in other national emergencies, the government should have

-4power to issue interest-bearing notes, and, if necessary, others also, in small
denominations, bearing no interest.

Following this policy, he was convinced

that the federal government could fight any war and meet any other situation without
borrowing money or Imposing any additional taxes.
In a letter to his son-in-law, Rep. John W. Eppes, dated Nov. 6, 1813, he
One of the great advantages of specie as a medium is that, being of
universal value, it will keep itself at a general level . . .
... The banking companies have banished all our gold and silver
medium, which, before their institution, we had without interest,
which never could have perished in our hands, and would have been
our salvation in the hour of war; instead of which, they have given
us $200 million of froth and bubble, on which we are to pay heavy
interest, until it shall vanish into air . . .
Specie is the most perfect medium, because • • • , having intrinsic
and universal value, it can never die in our hands, and it is the
surest reliance in time of war; that the trifling economy of paper,
as a cheaper medium, weighs nothing in opposition to the advantages
of the precious metals; that it /a paper currencyj i* liable to be
abused, has been, is, and forever will be abused, in every country
in which it is permitted; that it is already at a term in these
states, which has never been reached in any other nation, France
excepted, whose dreadful catastrophe should be a warning against
the instrument which produced it • . .
On Sept. 30, 1820, he declared in a letter to Charles Pinckney:
I should say, put down all banks /which issue paper currencyj, admit
none but a metallic circulation that will take its proper level with
like circulation in other countries, and then our manufacturers may
work in fair competition with those of other countries . . .
Ludwig von Mises on Fiat and Paper Currency
The great monetary scholar Ludwig von Mlses declared in his Theorie des Geldes,
first published in Austria in 1913 and in translation in the U.S. in 1950: "The
eminence of the gold standard consists in the fact that geological conditions strictly
limit the amount of gold available. This has, up to now, made the operation of the
gold standard possible." He added that gold achieved its historic monetary predominance by an automatic and inevitable development, for the simple reason that it met
ail social and economic needs and was the only element known to man that could do so.
Two classes of people, he'declared, oppose the use of sound money: first, the impractical moralists to whom all life-processes appear in monetary form, and who, therefore]
blame all crime on the existence of money. Even less worthy of consideration, however.
are the arguments of those who insist on substituting fiat for specie currency.
The fact is, he continues, that the gold standard did not collapse, as proinflationist propaganda would have us believe.

It was abolished by schemers who

violated our Constitution and used the government to accomplish their nefarious objectives by deceit, force, and violence.

Some day the gold standard must return

because it will become a social necessity.
Sound money, he emphasizes, is libertarian, because It is affirmative,in approving commodity choice in a free marketplace; it is negative only in preventing
the government from meddling with the economic and monetary systems.

In practice,

the classical gold standard is the only effective curb on the power of government
to inflate currencies and thus enslave the people by destroying their life savings;

-5its abolition renders ail other legal and constitutional safeguards useless.


demonstrates that whenever government cannot negotiate loans and dares not Impose
additional taxes, it resorts, if possible, to the dishonest use of fiat currency.
Thus it is that Wall Street pundits and Washington politicians oppose a return
to the gold standard, because it will prevent their manipulation of the economy, enrichment of themselves, enslavement of the people, and their own perpetuation in
power and office.
Philosophy of Henry Hazlltt
Henry Haziitt, for a long time a veil-known syndicated columnist, published a
book in 1963 called What You Should Know About Inflation, in which he defines the
phenomenon simply as an Increase in credit and the money supply.

Fiat money, he

declares, means slavery; a redeemable currency means freedom, together with a thrifty
and responsible government.

He states:

The monetary managers are fond of telling us that they have substituted
a "responsible monetary management" for the gold standard. But there is
no historic record of responsible paper-money management . . .
record . . . is one of hyperinflation, devaluation, and monetary chaos.
And as for any integrity in paper-money management, we need merely recall
the record of Sir Stafford Cripps, who, in a two-year period preceding his
devaluation of the pound sterling on Sept. 18, 1949, had publicly denied
any such possibility no fewer than a dozen times.
This is what happens under monetary management without the discipline of
the gold standard • • • jfwhich ls7 important . . . as an Integral part
of the whole economic system* Just as a "managed" paper money goes with
a statist economy in which the citizen is at the mercy of bureaucratic
caprice, so the gold standard is an integral part of the free-enterprise
economy under which governments respect private property, economize in
spending, balance their budgets, keep their promises, and above all
refuse to connive in inflation • • •
Mr* Hazlltt then suggests four steps by which inflation may be halted and five
others by which a return to the gold standard may be achieved without injury to anyone
or a disruption of the economy.
To halt inflation:

The budget must be balanced;


The banking system must no longer be permitted to buy or peg government

securities at fixed prices, or be used aa a dumping ground for new issues;

The Federal Reserve must impose discount rates to penalize borrowing by

member banks; and

A legal gold reserve of 40% must be re-established.

To restore the gold standard, he offers these suggestions:

The administration should announce its intention of such restoration by a

series of steps, of which the first will be the establishment of a free market in
gold (this was done in 1976);

The government must then announce the rates at which gold convertibility

will occur;

On and for six months after such date, all holders of current dollars will

be permitted to convert them into gold bars;

At the end of this period, the country will return to a full gold bullion

standard; and


One year later, the country will return to a full gold-coin standard by

minting such specie and permitting their free conversion.

-6Paul Bakewell, Monetary Scientist
Many ott}er leading scholars, economists, and institutions have set forth in
detail their contentions that a return to the gold standard is imperative.


these are Edwin Earl Groseclose, Percy L. Greaves, Harry Browne, the American
Institute for Economic Research, and the Constitutional Alliance, Lansing, Mich.
However, ve can here take time only to discuss the proposals of Paul Bakewell,
who wrote extensively on the subject and whose 13 Curious Errors about Money certainly
ranks as a classic in the field.

He proposed that a national commission be established

by Congress for the purpose of recommending legislation, or, if necessary, an
amendment to the Constitution which would:

Require Congress to "fix" a permanent metallic standard of value;

(b) Require Congress to coin money and regulate the value of all coins
by measuring their value by the pure metal contained in them against that
of a fixed standard;
(c) Limit legal tender to coins of full value, or the currency which the
government redeem upon demand, in cdhe of full value.
Such legislation or amendment, if enacted, declares Bakewell, "would restore
the system of coined money mandated by the Constitution, and under which the
nation prospered.

They would prevent a recurrence of the existing situation.

They would abolish the system of managed, but unredeemable paper currency, which
has brought the greatest inflation the U.S* ever had."
Writing in 1962, when inflation had approximately doubled prices as measured in
gold dollars

containing 15-5/21 grains of gold, Bakewell proposed that:

Paper currency be recalled and exchanged for new currency having a face

value 507. less than that surrendered, but redeemable upon demand in gold coin;

All existing obligations at that time be dischargeable in new currency

upon payment of 507. of their face value with new currency;

Wages, salaries, etc., should be paid in fixed rates at 50% of their

former amounts, in the new currency; and

All domestic obligations contracted after the specified date be discharged

by payment of the specified amounts of the new currency.
The economy of the nation would, he declared, quickly adjust itself to the new
medium of exchange, and such adjustment would be reflected in new prices based upon
Returning to the Gold Standard
Now* of course, proposals like those of Bakewell would involve new dollars worth
probably 10 times as much as those recalled.

Or, as a variation, new redeemable

currency could be Issued, to replace the old, having a unit gold-value of perhaps
1.5 or at most 2 grains of standard metal.

Old obligations and new contractual

debts would be discharged in the manner described by Bakewell.
After many years of study and research in this field, I find myself in agreement
with those who advocate the gold standard; and I can see no impediment to its return
except the opposition of powerful political and economic interests who wish to continue the present manipulation of the currency in

a monetary system which,permits

and encourages the continuation of unbridled inflation and the gradual destruction
of all personal intangible assets.
Let us see how this could be accomplished.

At present about $140 billion of

currency exists, of which, however, about $30 billion is held in reserve by the Fed
for its member banks.

In 1979, Federal Reserve notes totalled $125.9 billion,

-7including about $30 billion held in such reserves.

This left about $95 billion of

notes outstanding, in addition to about $10 billion in minor and other coin—with
a total of about $105 billion in circulation.
At the same time, the Fed held about $11.4 billion in gold certificates with a
metallic value pegged at $42.23 an ounce, which, at present market of at least $425
an ounce, would make it worth about $114 billion. Thus, every fiat dollar presently
in circulation could be redeemed at full value and still leave the Fed with a
reserve of unused metal*
In addition, we know that American citizens are now holding an amount of gold
in private hoards probably equal to, or exceeding, what still remains at Fort Knox*
Thus it is obvious that there is no shortage of gold in the U.S.
Under & proposal similar to that of Mr* Bakewell, new currency with gold re-

serves of 1007. could be issued to replace the present circulation of Federal Reserv
notes, including all subsidiary coin.
Under a system in which everyone would be able to exchange notes for gold, no
one would store or hoard this metal (or at least very few) for the simple reason
that doing so involves various costs and risks and offers no return whatever on the
investment, except in the case of further and drastic inflation. We can be certain,
therefore, that millions of individuals would exchange their gold for gold certificates, issued by the Treasury, which are easy to handle, can be put to an infinity
of uses, and be made to pay handsome and constant returns without the slightest
danger of devaluation*
Thus, we would soon have not only a stable, but also an ample currency*
There would be no danger of inflation even if there were more gold certificates
and coin than are necessary to carry on all the usual functions of trade,
business, and government, for the simple reason that, as Jefferson and many
others have pcfcited out, gold retains its constant value, which is determined
by the amount of labor and capital necessary for its current production or
replacement* As we noted earlier, In 1940, the gold reserve was then four
times as great as all the Federal Reserve notes in existence; yet prices
were even lower than in the 1920*s, when the notes and their reserves stood
at an approximate equilibrium.
As a member of LIBERTY LOBBY, I offer herein only my personal conclusions
and convictions* The organization as a whole has not taken a position on this
controversial question, and there are sincere and well-informed members who may
differ* But X believe that if this issue were put to a vote, the majority would
agree substantially with my position*
For these and related reasons, I urge the Gold Commission, established by
the Treasury Department, and its Secretary, Donald Regan, to consider carefully
the material herein and give serious thought ,to the need and expediency of returning to the gold standard—to the constitutional mandate—before the continuing inflation shall have brought this nation to the very brink of
economic catastrophe*
Thank you again for the opportunity to submit this statement for the record.

To object to the gold standard because it will not brin;: serenity,
freedom from poverty, unemployment, depression nnd war, is surely
the setting up of a straw man easily demolished. A gold standard,
like a huge flywheel, gives stability to the monetary system and
helps prevent dilution of the monetary unit by government.
The permissive way to a gold standard is to authorize (not to require)
banks to accept a new type of account denominated in weights of gold,
alongside their present dollar accounts. A gold unit, or g-unit,
might be one-five hundredths of an ounce, which, when the current
gold price is say iAljO an ounce, is v/orth 900.
At the same time anyone is permitted to buy gold from the U. S. Treasury (his bank would do so at nominal charge) at the market price, provided he pays for it in currency (paper dollars) which are simultaneouslydestroyed. The purchaser is given the choice of gold, gold certificates or a check in g-uejits. The gold certificate is backed 100,J by
gold; the check when deposited is backed by gold reserves at the i'ed
to the same degree that dollar deposits are now backed at the Fed.
These steps at first would cause no immediate clamor tojopen gold
accounts except on the part of a relatively few who see at once that
when dollars lose say 10,» of their purchasing power yearly, a gold
deposit in a savings institution, even at no' interest, is a better
Soon bank loans would be made in gold at much lower rates of interest.
As this proceeds, and gold takes the place of dollars, the number of
dollars would shrink enormously, since they are the creation, largely,
of bank loans.Corporations would borrow from the public at much lower
rates when interest and principal are payable in gold. There would
be problems until prices and wages are paid in gold, and with long-term
dollar commitments which might be resolved by a final fixing of the
dollar price of gold or by mutual agreement between the parties.
To the argument that more monetary units are needed with the growth
of population, the answer, in the worst case, is that prices will
slowly fall, which is not so bad. To the argument #hat other
countries might be adversely affected, the answer is: Go thou and
do likewise.
Just imagine the effect of much lower interest rates on mortgage
loans and on auto loans.
The concept is simple: it requires two moneys for awhile. It is true
that it is complicated. It deprives the Fed of most of its powers.
But how can anyone object to the free play of the marketplace?
November 14, 1981 1-Iitchell S Lurio

6351 N . Oakley Ave.,
Chicago, 111. 60659
Gold Commission,
c/o Ralph V. Korp,
Office of International Monetary Affairs,
Room 5050,
Treasury Department,
15th and Pennsylvania Avenues, N.W.,
Washinton, D . C . 20220
Dear Gold Commission Members:
Enclosed are my comments on the proposal of a gold standard to revitalize
our economy:
Did you ever really look at a tree? Do you know what it is? Do you know
how important it is to our survival? It gives us shade in the summer and
in the winter warmth from a fire place. It gives us shelter in a house and
it gives us communication through our newspapers and letters.
We over exploit this wonderful "gift of nature" by destroying oxygen producing
forests, that help us to survive, and turn them
into thin sheets of paper,
worthless paper , stamped with ink and the words "legal tender" as if to give
them some value that nature didn't.
This bad paper is called "money." Originally this money was accepted as
having value when it was exchangeable for so much of nature in the form of
gold or silver. Then it was good paper. Good paper was a check on our
plunder of nature as it represented certain resources of nature such as gold
and silver in a ratio to other resources of nature such as trees and therefore
we could not so readily devastate these trees.
What we have now is "legal tender" paper that can be exchanged for other
"legal tender" paper — in other words for nothing. But we use this "nothing"
as falsely representing a resource of nature that isn't there to plunder another
resource of nature that is there but it won't be there long at the rate w e are
plundering it. Our blind fascination with this "legal tender" bad paper carries
us to our self destruction. Young eskimos were given so much bad paper as
payment for working on the Alaskan Pipe Line that they went and bought out
their own whaling fleet to plunder the endangered Bowhead whale with the
latest weapons of destruction and carnage. The elder eskimo whaling captains
were so appaled at this paper funded war on whales that they set up th6ir own
organization to control it — they were closer to a barter economy or value
oriented economy. The eskimos claim that they need the whale to survive but
bad paper led some to destroy the very basis of their survival.

The rain forests of the world are being destroyed by the leverage of bad paper.
The rain forests give us our oxygen — the natives call them the "lungs of the

— 2 —

In parts of South America where unbacked paper money is dropped like
confetti inflation is so rampant that tourists have their eye glasses
torn right off of their faces by the natives for the gold content of the
Our bankers have dropped so much confetti on Poland that Poland is
exporting food from the mouths of their citizens to try and pay off their
debt not realizing h o w their natural wealth w a s ripped off by confetti.
But this Disney Land Empire of Bankers is awakening to the fact that
the followers of their "paper cross" are diminishing and that they
themselves are also losing faith in it.
So to boost their religion they are seeking gold relics and turning to
the "gold cross" of the infidels and their barbaric worship. To help
them do this they got a "bail out" insurance to give their confetti,
they just can't seem to give up this "opiate of the bankers,"substance in the
form of the Bank Control Act. N o w they have a direct path to Fort
What this means is that you and I, as usual, the tax payer is to further
subsidize their further blunders as well as our o w n self destruction.
While w e choke on paper the bankers, like the South Americans, go
after our eye glass frames.
To save ourselves let's cut off the bankers' paper supply and return
to a gold standard with a free circulating gold coin currency so that
w e can keep our eye glasses as well as our shirts.

Nature-ly yours
* -' Tony Mallin


sen** *

7737 North Kendall Drive #C201
Miami, Florida 33136

November 3, 1981

Gold Commission
% U.S. Treasury
Washington, D.C. 20220


Before reading this presentation, please read the attached resume, Exhibit 1 of
the writer's 60 years extensive business experience in U.S. and world Commodity
markets, and in financial markets.
I understand your commission's duty is to make a comprehensive study with the
view of deciding whether the U.S. should return to the Gold Standard.
My presentation will consist of three parts:
Part I

Events leading to our going off the Gold Standard, March 1933 -

Gold was then $20.67 per ounce.
Part II

The inflation that followed at first slowly, then with increased

velocity, finally resulting in record-breaking high interest rates causing slump
in home building, automobile sales,-etc.
Part HI

Suggestions for returning to the Gold Standard.

EVENTS L E A D I N G T O O U R G O I N G O F F T H E G O L D S T A N D A R D - ' M A R C H 1933
During 1928-29 business was good but there was terrific speculation in the
commodity and stock markets. In September 1929 the Dow-Jones Industrial Average
high was 386. Bank credit had reached dangerously high proportions. I was aware that
A T & T sent their large stockholders a special fort-nightly letter on the entire U.S.
economy and was able to procure such correspondence on a regular basis commencing
in August 1928.

I was impressed with their opinion that bank credit was greatly

overextended and would have to be drastically reduced. Each A T & T letter continued
to stress the importance of further liquidation of bank credit. Finally, in their letter




opinion . was






liquidated. The end of the great U.S. and world depression was July 1932, details of
which will be discussed further in this presentation.
N o w reverting to that period 1928/29 to 1932 - some think the stock market is
simply a gigantic gambling pit and hasn't the ability to forecast future business
conditions. The Dow-Jones 30 industrials represent 30 large corporations, and most
are the largest in their particular industries; i.e., A T & T , IBM, General Motors, Exxon,
General Electric, etc. Although approximately 1,800 stocks are traded daily and the
Dow-Jones 30 Industrials represent less than 2 % of the number of companies traded; in
Dollar value they represent approximtely 33 1/3% of the total Dollar value of all
stocks traded. Moreover, the top management of these Dow-Jones companies are in
touch with business conditions daily and plan their operations and investments of new
capital years in advance. So disregarding daily or weekly fluctuations, and watching
the main trend, the Dow-Jones stocks do forecast future business conditions. From
the September 1929 high of 386, the average declined to a low of 41, a decline of 89
1/2%, and the low was reached July 8, 1932, coinciding with the low of the depression.
The conditions at that time showed that all basic indices were at depression
lows, such as automobile production, electric power produced, steel production, paper
production, carloadings, retail store sales, building construction, lumber production,
wholesale food prices index, and consumer price index. Specific prices such as wheat
was 35 cents per bushel; raw sugar, 1 cent per pound; cotton, 5 cents per pound; cotton
print cloth, 3 cents per yard; cocoa, 3 1/2 cents per pound; and rubber, 3 1/2 cents per

Most important, bank credit was thoroughly liquidated by July 1932 and

unemployment was at a record high rate.
During July/August 1932 the recovery commenced, and, as usual, this recovery
continued month after month.

By September 7, 1932 the Dow-Jones Industrial

Average had recovered to 80 — an advance of 100% over the July 1932 of 41. Prices
of commodities also made sharp recoveries—cotton print cloth, for example, moved to
6 cents per yard, an advance of 100%.

All basic indices likewise shared in this

recovery. Their message was loud and clear: The backbone of the great depression
was broken; the economy had started its recovery. And as usual, when the economy
starts a recovery from such a low depression level, that recovery continues for a long
This is the picture of how things stood four days prior to President Roosevelt's
inauguration, March 4, 1933. On that day he made his inaugural speech by radio. It
lasted about three hours. Some salient points taken from his first inaugural speech


A. The U.S. would go off the Gold Standard.

The official price of gold was increased from $20.67 to $35 per ounce.
(At $20.67 per ounce the Dollar has 23.222 grains of gold backing; at $35,
13.714 grains. This represented a devaluation of 40.943% or a Dollar
with a reduced value of 59.057 in terms of its gold backing.)


The U.S. repudiated its promise to pay in gold to; holders of its gold


The U.S. Government ordered all citizens to turn over to the U.S.
Treasury all gold certificates, gold coins, and all gold in their possession,
with threats of indictments and imprisonment for non-compliance.

Senator Carter Glass of Virginia, who was regarded as the top man in the U.S.
in monetary affairs, and who was credited with the formation of the Federal Reserve
System in 1913, was shocked at President Roosevelt's action in going off the gold
standard. He delivered a most eloquent speech on the floor of the senate stating that
such action was immoral and unjustifiable.
There were no qualifying conditions printed on those gold certificates; what
was printed was, "The U.S. Government will pay bearer on demand $20 gold". During
my 12 years experience as a purchasing agent, only in very rare cases was "force
majeure" invoked by any seller.

Such rare cases would be caused by unexpected

extenuating circumstances such as outbreak of war, etc. But in March 1933 there
were no extenuating circumstances to justify such shameful repudiation of a written
promise by our government. The facts indicated that the world depression was ended
by July 1932 and the economy had started a vigorous recovery. And the pity of this
departure from

the Gold Standard was the beginning of inflation because the

redeemability of U.S. Dollars into gold was officially revoked.

The great printing

presses started then and have continued to this day.

INFLATION T H A T F O L L O W E D A F T E R O U R D E P A R T U R E F R O M T H E G O L D S T A N D A R D - M A R C H , 1933
For the past thirty years, I have closely watched, and have been greatly
concerned with the rapid acceleration of inflation and the depreciation of the U.S.
Dollar. During that period I have read numerous books and magazines on inflation. I
consider the best is the one entitled "Fiat Money Inflation in France", written by Dr.
Andrew White (Cornell University), distinguished American scholar, author and

covering the events leading up to and the depression that followed the

French Revolution.


It is interesting to note some important remarks made during the great debate
during September 1790:

By the French statesman Mirabeau on irredeemable currency - "a nursery
of tyranny, corruption and delusion; a veritable debauch of authority in
delirium; a loan to an armed robber; that infamous word paper money
ought to be banished from our language".


Articles in the leading Paris newspaper Monitor - "It is then evident that
all paper money which cannot, at the will of the bearer, be converted
into specie, cannot discharge the function of money.

Moreover paper

money is the emetic of great states".

Dupont de Newours in a pamphlet to the Assembly - "Doubling the
quantity of money or substitutes for money in a nation simply increases
prices, disturbs values, alarms capital, diminishes legitimate enterprise
and so descreases the demand both for products and labor, the only
persons helped by it are the rich who have large debts to pay".

In 1933 the price of gold was officially increased from $20.67 per ounce to
$35. In 1968 Congress eliminated the requirement that the Federal Reserve hold Gold
Certificates equal to at least 2 5 % of the value of Federal Reserve Notes.


removed the last tenuous domestic connection between the Dollar and gold. Then, in
1971 Foreign central banks began demanding U.S. Monetary Gold in exchange for their
Dollar deposits with the Federal Reserve.

When their demands became insistent,

President Nixon, in August 1971, declared that the Dollar would no longer be redeemed
in gold. This removed the last tenuous foreign connection between the Dollar and
gold. Gold, silver and other domestic and foreign commodities started to skyrocket.
1971-80 Note the following steep advances:
Commodity Research Bureau Futures Index (27 markets)

Chart A


Reuter's Price Index

Chart B


B.L.S. Wholesale Prices Index (2000) commodities

Chart C



Chart D



Chart E


Note the following comparisons:


(Billion Dollars)

Federal Debt









975.0 (est)

Interest on Debt

(Billion Dollars)










100.0 (est)



Federal Spending - since 1965 U.S. Federal spending has increased more
than fivefold. The largest portion of the increase has been caused by
skyrocketing welfare transfare payments (note the following):



Welfare Spending

(Billion Dollars)











Deficits - except for 1969, w e have had deficits every year since 1960.
The total deficits for the past ten yers is $348.0 Billion. Moreover, the
deficit figures shown on Chart I attached are only the tip of the iceberg
"official deficits".

They do not include "off budget" borrowing and

spending, which since the early 1970's have increased from a few billion
Dollars annually into high double digit billions. Also, the official do not
include unfunded

Federal liabilities for military and civil service

pensions, etc. aggregating hundreds of billions of Dollars annually. The
real Federal debt is in excess of $1,000.0 Billion. Congress recently
raised the debt ceiling.


See the following Charts:

Federal spending - 1970-81

Chart F


Depreciation of the U.S. Dollar

Chart G


Inflation - 1749-1974

Chart H


Consumers Prices - 1972-81 (June)

Chart I


Prime interest rates - 1974-81 (Oct)

Chart J

Total Private and Government t>

$500.0 Billion


$3 Trillion


$5 Trillion, which is three times more than the value of all
c o m m o n and preferred socks listed on all stock exchanges in
the U.S.

By comparison, in 1968 the total value of all

c o m m o n and preferred stocks listed on all stock exchanges in
the U.S. was equal to the total private and government debt.
H o w ironical that 190 years after the great French inflation of 1790, the
catastrophic results of which are well known to all our leading economists, that
despite this, we have followed, and are still following the same path as France
followed. Naturally, the end results for the U.S. will be the same as France, unless we
take immediate steps to break the back of this inflation.


PART ni
Why is the Gold Standard so important?
Because it assures that only a definite percentage (decreed by Congress) of
redeemable paper money can be issued against the government gold holdings. Thus, it
prevents the government from printing and circulating unlimited quantities of paper
Why is gold considered so important?
Because for the past 300 years, it has maintained a stable purchasing power.
Of interest are the remarks made by Vermont Royster in the October 28, 1981 issue of
the Wall Street Journal, "Thus, history makes a solid argument for a return to a gold

Wherever and whenever it's been held to, the people have prospered.

They're induced to save money, trusting it to retain its value.

Commerce is

encouraged because a price bargained today will be good tomorrow.

Industry more

readily expands because it can calculate today the cost of a plant to be finished five
years hence. The laborer knows today's wage will suffice for tomorrow's food." See
the following excerpts from m y letter of July 26, 1980:
You may be interested in some facts about gold, related in Times of London
December 12, 1979.

In 1900 average weekly earnings of British workers were equal to one
half ounce gold.


In 1979 (after two world wars, a world slump, a world inflation) the
British worker's average weekly earnings were equal to one half ounce of
gold, the same as in 1900.


Professor Roy Jastram of University of California has calculated, on an
index with 1930 as 100, that the purchasing power of gold in England was
124.8 in 1600 and 129.2 in the year 1900. Note the stability during those
300 years.

4. The recent movement of gold price suggests that gold and oil prices are
closely linked at somewhere between 17 and 19 barrels of oil to one
ounce of gold.

Since 1968, the price of gold in terms of dollars, has risen about 12
times; therefore the value of the dollar in terms of gold has declined by
more than 9 0 % in 12 years.


The forces which have knocked the dollar down against gold, are far


stronger at the beginning of the 1980's than they were at the beginning
of the 1970's.

It is expected that the purchasing power of the dollar in 1990 will be 5 0 %
less than it is today, which means an inflation rate compounded 7 % each
year for the next ten years."

W e realize that no country in a world community can unilaterally establish a
new monetary policy that does not take account of the international economic system
of which it is a part. No country can dissassociate entirely its monetary system from
that prevailing in other countries. Therefore, if the U.S. decides to return to the Gold
Standard, it should do so in association with other important countries, such as Great
Britain, West Germany, France, Switzerland, Italy, Belgium, Holland, Canada, Japan,
The facts have clearly demonstrated the breakdown of monetary discipline
after the U.S. departed from the Gold Standard in March, 1933, and finally closing the
Gold Window in August, 1971. Please note also the following:
Billions of Dollars



1980 (est)

Foreign Exchange


















Euro currencies - (est.)

(Above from Wall Street Journal 9/30/80 - Robert A. Mundell's article) -Exhibit 2 ^ ^
Since the breakdown of the U.S. Gold Standard, the U.S. monetary^ has
produced more dollars than in the entire previous history of the U.S. Never before in
U.S. history has the Treasury had to pay 1 5 % for 30 year bonds year bonds, implying an
incredibly pessimistic outlook with respect to inflation. It is these considerations that
prompt a most careful study of the policies needed to restore convertibility of the U.S.
Dollar to gold.
Recently, I have read newspaper and magazine articles stating the Soviet
Union would have a strangle hold on the Western economies, if w e decided to return to
the Gold Standard. To refute this is a splendid article by Professor Roy W . Jestram,
School of Business Administration, University of California. This article appeared in
the Wall Street Journal, August 6, 1981, a copy of which is attached hereto as Exhibit
Should the U.S. decide to return to the Gold Standard, it is most important to
determine the stabilization of the Dollar price of gold. Attached are three Charts, K,


L, and M , showing gold prices from January 1968 through August 3, 1981. Note the
record high of $850.00 on January 21, 1980. That same day, London P.M. fixing for
spot silver was 2150d or $50.00, thereby establishing that day a gold/silver ratio of 17
to 1.
From August 1979 ($300.00 per ounce) to January 21, 1980 ($850.00 per ounce)
terrific speculative trading took place, finally resulting in a steep reaction to a low of
$388.50 (August 3, 1981). Many small moves have since taken place, and will continue
to do so, until ultimately gold will settle down. At that time w e can determine the
stabilization of the dollar price for gold. One thing is certain; when gold does settle
down, it will continue to reflect its stable purchasing power in relation to basic
There are two indicator to watch:

U.S. Bureau


Statistics - monthly


prices (2000)

commodities (see Chart C); from 1971 to 1980 -index advanced from 550
to 1400 - an advance of 155%.

Reuter's Daily Index - for internationally traded commodities; see chart
B; from 1971 to 1980 - index advanced from 500 to 1866 - an advance of

Reuter's Commodity Index during 1932/33 was 125 (1931 base is 100); its high
of 1866 on January 21, 1980 was 14.93 times its 1932/33 price; its recent low of 1666
on October 15, 1981, 13.33 times the 1932/33 price.
The average price of gold in 1932/33 was $27.83& per ounce. The high of
$850.00 on January 21, 1980 was 30.54 times its 1932/33 averge price; the low of
$388.00 on August 3, 1981, 13.94 times. Note the proximity of the Reuter's low on
October 15, 1981 to the gold low on August 3, 1981.
The Possibility of Establishing a Bi-Metal Gold/Silver Standard
In 1925 I received from Handy and Harman and assembled separately the silver
and gold production figures in periods of 5, 10, 20, 40, 60, 80 and 100 years. I then
compared silver and gold production for each of the above periods. To m y surprise in
every period the ratio of silver to gold production was 16 to 1. I then remembered
Bryan, the perennial presidential candidate and his famous "Cross of Gold" speech. H e
was advocating a bi-metal standard -gold/silver using the ratio of 16 to 1.


January 21, 1980 record high gold $850.02, silver $50.02 or a ratio of 17 to 1.
When we return to the Gold Standard there will be times, wars or political
upheavals in other countries, which will cause sharp advances in commodity markets.
Our government might then proclaim an emergency and temporarily suspend the Gold


Standard for the "duration". In such events, the government could fall back on silver
as a substitute just for the "duration". They could use a basis of about $20.02 for
Silver. In this way, during the "duration" paper Dollars could be redeemed for silver,
which would maintain the principle of redeemable paper Dollars.

Why is a Gold Standard so important?
Why is gold considered so important?
I have submitted much data to justify a return to the Gold Standard. Senator
Carter Glass of Virginia considered highly knowledgable in monetary affairs and who
was credited with the formation of the Federal Reserve System in 1913, was a firm
believer in the Gold Standard. Also Dr. Andrew D. White of Cornell University, in his
book "Fiat Money Inflation in France" outlined the evils resulting from departure fe&m
the Gold Standard. The latter was strongly opposed to irredeemable paper money.
There are many economists here and abroad who also firmly believe in the Gold
Standard and a balanced budget.
I a m not a college graduated economist, but just a pragmatic business man who
has learned his economics through the college of hard knocks. During the past 60
years I have done considerable research work on practical business problems. There is
no substitute for experience. Over a period of time, one can acquire much knowledge
in various fields.

But this knowledge must be combined with wisdom or good old

fashioned horse sense. So when problems arise, one tries many possible solutions until
he finds the right solution by trial and error. The bottom line is whether it works. If
any method after being fully exploited should fail, it should be discontinued.
C o m m o n sense and prudent business judgment call for an immediate drastic
change. That change should be to the Gold Standard.
Past history proves that it works very well indeed, forcing a monetary
discipline upon governments.
governs the governments.

When money is anchored to gold, the Gold Standard
It limits their political power because they cannot

manufacture all the money they would like to spend. Moreover, a return to the Gold
Standard will serve as the indesctructible foundation upon which will be built the
powerful superstructure, a truely reborn U.S.A.
If I can be of any assistance to your Committee, please do not hesitate to call
upon m e .

Respectfully submitted,




1901 Born, London, England

1909 Emigrated to New York City

1924 Became member National Association of Purchasing Agents;
Bought for 10 large Cuban sugar mills (freight cars, locomotices, jute
sugar bags, etc.)
Purchases made on international markets located in India, Burma,
Indo China.

1936 Vice President, General Manager, largest sugar firm in New York
Member N e w York Coffee & Sugar Exchange; N e w York Coffee &
Sugar Exchange Clearing Association.
Chartered 225 ships for transportation of sugar annually.
Dealt with 5 largest N e w York City banks.
Handled foreign exchange in connection with sugar dealings.

1943 Retired.

1951 Reentered business world as commodity specialist for Merrill Lynch
in Havana, Cuba.

1960 Transferred by Merrill Lynch to their Madrid, Spain office.




I Gold WouldServe Into the'21st Century
By Roman- A. MUNDELL

I want to begin with an enormous platitude- No country in a world community
ran establish a monetary policy that does
not take account ol the international economic system of which it is a part. N o
country can dissociate entirely its monetary system from that prevailing elsewhere. There is no such thing as a closedeconomy monetary policy except the monetary policy of all the nations making up the
world system.
It is unfortunate that two of the 20th
Century's most influential monetary economists, Keynes and Friedman, wrote their
major theoretical works for a closed economy with scant attention to the problem of
international Interdependence. Both economists generally assumed a national closed
economy on an inconvertible paper standard, generally ignoring that in the 1930s
as today gold represented the principal external monetary reserve. I a m aware, of
course, that both m e n wrote on international monetary arrangements, Keynes favoring a fixed, but adjustable exchangerate peg, and Friedman a "clearly floating" exchange-rate system, but their theoretical masterpieces did not develop international interdependence into their systems of policy.
Keynes wrote the "General Theory" for
a closed economy on an inconvertible paper-currency standard. This assumption
was important for elucidating theoretical
matters, but it misled his followers, and
Keynes himself, on matters pertinent to
economic or monetary policy.
Keynes had advocated adjustable exchange rates earlier in his "1923 Tract on
Monetary Reform" to preserve price stability on lines not dissimilar from his older
American contemporary Irving Fisher
back in 1912. In the "General Theory,"
Keynes attacked fixed exchange rates:
the City of London gradually
devised the most dangerous techniques for
the maintenance of equilibrium which can
possibly be imagined, namely, the technique of bank rate coupled with a rigid
parity of the foreign exchanges. For tite
meant that the objective of maintaining a
domestic rate of interest consistent with
full employment was wholly ruled out.
Since, In practice, it is impossible to neglect the balance of payments, a means of
controlling it was evolved which, instead of
protecting the domestic rate of interest,
sacrificed it to the operation of blind
forces. Recently, practical bankers have
learned much, and one can almost hope
that in Great Britain the technique of bank
rate will never be used again to protect the
foreign balance in conditions in which it is
likely to cause unemployment at home."
This astonishing passage is good poetry
but bad economics-it is confused, illogl
cal, inconsistent and irrelevant. It reveals
how and
in the

It Was His Aim to Elucidate
Keynes's assumption of a closed econo m y let him sidestep discussion of the foreign sector, the merits of fixed versus flexible exchange rates or of the degree to
which international credit positions, trade
imbalances, reserve losses or speculation
would alter the real wage, employment
and output positions which it w a s his aim
to elucidate.
Nevertheless he recognized explicitly
the need for flexible exchange rates in an
open system if money w a s to be stabilized,
as the following passage shows:
"In the light of these considerations I
a m how of the opinion that the maintenance of a stable general level of moneywages is, on a balance of considerations.
the most advisable policy for a closed system; whilst the same conclusion will hold
good for an open system, provided that
equilibrium in the rest of the world can be
secured by means of fluctuating exchanges."
Keynes explicitly rejected, however, the
idea of fixing the quantity of money or its
rate of growth:
"If, indeed, labor were always in a position to take action land were able to do
so), whenever there was less than full employment, to reduce its money demand by
concerted action to whatever point was required to m a k e money so abundant relatively to the wage-unit that the rate of interest would fall to a level compatible with
full employment, w e should, in effect, have
monetary management by the Trade
Unions, aimed at full employment, instead
of by the banking system.
"Nevertheless while a flexible wage policy and a flexible money policy come, analytically, to the same thing, inasmuch as
they are alternative means of changing the
quantity of money in terms of wage-units,
in other respects there is, of course, a
world of difference between them. . . ."
Keynes's system thus takes into account
the wage rate, the money supply, the price
level and the exchange rale, and the need
to anchor the system by choosing a "numeraire" or a "standard"; he chooses
wage rates. This accounts for the support
of "wage policy" by his influential disciples.
By contrast, Friedman's system, while
endorsing flexible exchange rates rejects
the idea of wage policy and (after an earlier flirtation with 100rV reserve money expanding or contracting with budget deficits
and surpluses) now focuses attention on
fixing the rate of growth of the supply of
There are several arguments against
the Friedman policy system. One is that
money is too elusive a concept to define,
measure and predict, and is therefore of
little use as a guide for rational expectations
M Iaccount
A in
2 liqor

markets despite the confirmed role these
markets play in contributing to inflation.
More important, the facts have clearly
demonstrated the breakdown of monetary

The U.S. is still the dominant economy and the hegemonic super-power in the
- free world. The dollar is
still the major currency reserve and gold %s the only
other major component of
international reserves.
discipline after the collapse of the gold ex
change standard. ^urpdpUars incjea&ejj
from $150 billion in 1970 to more than 10
times that amount In 1981. A comparison of
the weak gold discipline of the Bretton
Woods period with the floating rate period
is even more revealing in connection with
international reserves:
Billions of U.S. Dollars
1970 1980 (est)
Foreign Exchange
56.4 X 8 2 . 4
Eurocurrencies (est.K
2&.0 163.0 1,600.0
Since the breakdown of the U.S. gold
standard the U.S. monetary system has
produced more dollars than in the entire
previous history of the republic. The prices
of gold, oil, silver and other commodities
have risen more than tenfold and, barring
a drastic change in the monetary system,
prospects are for more of the s a m e in the
Never before In U.S. history has the
Treasury had to pay 1 5 % for 30-year
bonds, implying an incredibly pessimistic
outlook with respect to inflation. It is these
considerations that prompt a consideration
of the policies needed to restore convertibility of the U.S. dollar to gold.
If there is a stable international money.
there is no conflict between fixed exchange
rates and the goal of internal price stability for a single nation state. Under fixed
exchange rates the price level of the individual nation state has to converge to the
price level of the world as a whole provided that commodity markets are sufficiently integrated internationally.
The monetary authorities of small countries have usually observed this fact and
accepted its implications. Purchasing
power parity areas, where the L a w of O n e
Price holds, imply a geography of inflation
rates based on currency areas. Currency
areas determine c o m m o n Inflation rates
O n azones
m a pcorrespond
of the world
o m minterest
n fixed

EXHIBIT 2 (cont'd.)
If there Is a stable external currency
area a count 17 has the convenient option of
fixing Its own currency to It, or scheduling •
Its exchange rate at a pre-arranged rate of
devaluation or appreciation. In the world
of the 1980s countries that have historical
inflation rates above that of the U.S. would
benefit by fixing their currencies to the
U.S. dollar and adapting their monetary
policy to m a k e that exchange rate an equilibrium one.
This assignment implies a monetary ap* proach to the balance of payments, with
the cential bank allowing its purchase and
.-sales of foreign exchange reserves to reduce automatically the high-powered
money base of the banking system. T h e
monetary approach to the balance of payments does not leave m u c h room for neutralization or sterilization operations; the
idea instead is to take full account of international impulses In the formulation of domestic monetary policies.
Our experience with this kind of system
!s instructive, since It w a s precisely this
kind of monetary arrangement that constituted the Bretton Woods system from 1948
to 1971. Except for the great devaluations
of 1949, the quarter century of this regime '
was exemplary In Its stability, growth and
world economic development, perhaps unmatched at any time outside an Imperium.
such as the R o m a n Empire. There w a s
never any doubt that the cen-tral tendency
of the Bretton Woods era w a s the U.S.
economy, and the dollar was the dominant
The Bretton Woods system broke down
for two reasons. First, the gold base of the
system, at a price of $35 an ounce, had become too narrow to sustain the mounting
liquidities in the U.S. and outside In the
Euro, Asian- and Caribbean-dollar markets. Gold had been artificially in surplus
after 1934 because Americans had been deprived of the right to own or hold gold, but
the "surplus" vanished as a result of
World War II inflation.
After the Korean W a r inflation, gold became undervalued, and after the opening
of the London gold market in 1954, dollar
Interest rates had to rise steadily to tempt
central bankers and foreigners from holding gold and reaping the capital gains expected when .the anticipated upvaluatlon of
goid occurred. Thus interest rates, which
in 1916 had been less than 47c rose above
lOli by 1969.
The second reason Bretton Woods broke
down was the revolt against U.S. leader
• ship that occurred In Kurope. partly"be
cause of t|u> Vietnam war. The DcO.nille
led movement toward the gold standard in
the 1960s had wider support than within
France; the German objections to holding
the overhang of excessive dollars, however, were suppressed by the U.S. counterthreat of troop withdrawals.
What Britain's Prime Minister Wilson
described as a "monetary war" broke into
the open when in the spring and s u m m e r of
1-'71 the Kuro|»eans stuffed excess dollars
Into the Eurodollar market while the U.S.
' economy
Kold after
15, prohibition

gold holding by M.S. citizens in 1975, gold's
price marched irregularly upward, reaching at one point in 1980 nearly JK50 an
ounce, 25 times its 1970 value, before dropping to the S4()()-$r,(K) ra.'ge.
The underlying economic conditions in
1981 and prospects for the next two decades are not as different from the 19fi0s
and 19tWs as they m a y appear. The U.S. is
still the dominant economy, and the hegemonic superpower of the free world. The
dollar is still the major currency reserve
and gold is the only other major component ot international reserves. A rerun of
the monetary structure of the 19r.0s and
19M)s, without the deadweight difficulties of
undervalued gold would piobably serve us
well into the 21st Century.
An 11 Point Proposal
The basic ingredients of a restored
KiimUlirium MlnnHrum Pnaficum would
involve the following elements:
t. Stabilization of the dollar prjce_ of
gold. p r o b a l ^ j n J h M M ^ ^
to "be
(TeTT'i mined by the U.S.ln consniTation with
ILS allies.
2. Issuance of a gold coinage (various
fractions of an ounce) with a face value.
equal to the stabilized gold parity.
3. Stabilization of other currenciesparticularly the D M to the dollar in the
DM1.80 to DM2.20 range.
4. Attention to the gold "discipline" by
the U.S. such that the U.S. money base is
allowed to Increase or decrease with gold,
purchases and sales.
5. Attention to the balance-of-payments
discipline by the non gold-pegging countries such that the national money base
nses or falls with increases and decreases
in holdings of gold and foreign exchange.
6. Co-ordination of Interest rates to prevent excessive disparities from developing
between money market centers and gales
of hdt m o n e y disrupting confidence and
purchasing power parity relationships of
exchange rates and price levels.
7. Multilateral surveillance of the balances of payments problems and exchange
rate policies of the major countries within
an O E C D - O P E C institutional framework,
along with multilateral discussion of antiinflation policies and unemployment-stagnation problems.
8. P r o g r a m m e d adjustment of dollargold portfolios of major reserve holders to
encourage more expansive or restrictive
monetary policies in the center reserve
country or countries (Initially the U.S.).
9. General budgetary policies and If
necessary, incomes policies, should be employed to mitigate the business fluctuation,
with tax cuts and extra government expenditures to stimulate aggregate demand.
and reduce unemployment during reces
sions, and budgetary surpluses to restrain
aggregate spending in periods of Inflationary boom.
10. Reform of tax rates and structure in
the U.S. and other countries to enhance incentives for more employment saving, productivity and growth of potential output, to
offset distortions arbitrarily produced by
be considered.
tax by
a 2 0 % value

11. Balance of government budgets over
the cycle at levels of deficits necessary to
keep debt ratios at realistic proportion to
G N P , thus making central bank finance of
the government-sector deficits unneccs
These 11 policy guidelines would repre
sent hold first steps toward a workable
managed gold standard. They are not In
compatible with the policy aims of the
Reagan administration and they would in
duce. if adopted by Britain. Germany.
France, Italy and Japan Improvement In
their economic management on a scale not
experienced since the heyday of the Bret
ton Woods era. I see no political barriers to
their adoption If economists can overcome
their present love affair with flexible ex
change rates, Indefinable monetary aggie
gates and the unemployment approach to
stopping Inflation.
Mr. Mundell is professor of economics
at Columbia University.


lussia's Gold Will Not Clobber a Gold Standard
major central banks, excluding China, the
USSR and as^ciatfidj^iimtries^
With the appointment of tyeJ^dComOfFclal Gold Holdings
Hisslon_we are likely to hear "a more seriSeptember 30.
ous discussion of a return to a gold stanUnited
dard than we have for 50 years. Every
time this possibility comes up In a popular
forum, the Red Peril will be advanced to
rounter the gold discipline. The fear is that
Russia will clobber the new monetary sysGerman Federal Republic
tem with vast outpourings of gold. $/
Most recently, one of our news magaJapan
zines had this to say: "The Soviet Union
holds an estimated 60 million ounces of
tj9\d and has unmlned reserves of perhaps
i3 million ounces more. At today's prices/ South Africa
tfrat would give the Soviets a $146 blllloy
stranglehold on the Western economies." *
Such gee-whi2 figures are supposed to
Other Asia
Gurry the day without further proof. But let
Other Europe
uS put them In their proper proportion by
Other Middle East
•taking a look at the gold holdings of the
Other Western Hemisphere
Rest of world ....
. 320
113 _

On the important matter of the net outflow of gold from the Communist sector
they give the following figures in tons for
the last decade:
Set Outflow
; 220
, ' 149
1980 ....
The highest figure In recent times was
for 1978 when net outflow from the Russian
sphere amounted to 1.2% of the governmental holdings of the free world. Last
year this percentage was hardly worth calculating.
Astute analysts of Russian gold activity
believe that net outflows from that region
ZJ3.1VI- occur only to obtain essential foreign exchange. When the Soviets can fund their
foreign exchange needs from other/exEuropean Monetary
ports, they prefer to do so.
Cooperation Fund
This trble, taken from ttie Annual Bullion Review I W O
Looking directly at production, Consoli<H Samuel Montagu 8, Co., Ii based on IMF statistics.
dated Gold Fields estimates that h 1980
The Soviet Union's 60 million ounces
the annual output of the Russian gold minconverts to less than 1,9 0 tons. This is
ing Industry for all purposes was 280 to 350
less than one-fourth of the gold the
tons. Russia could produce at this upper
United States holds all by itself. And, It
figure for a century and just build up to
amounts to about 7 % of the holdings of
quantity of gold the central banks of
the Western economies, depending
world already hold.
upon your definition of the latter. Even
the 250 million ounces of "unmlned regold
serves"-^ highly speculative figure•vreck a gold-based monetary system?
is less than this country already has
sitting In Fort Knox in nice, neat, yelv" How much could it gain by increasing the
tons of ore processed? One answer is sug/
low bars. Some stranglehold.
N o w let's get down to serious matters. gested by data from South Africa.
In 1966 the Soviet Union ceased selling gold
openly on the world markets. Due to offigold
cial secrecy, plus a penchant to dissemble
whenever complete secrecy is Impossible, ounces per ton; a nationwide average for
perhaps the most efficient producer of
( the amount of gold forthcoming from that them all.
region can only be approximated. The
most authoritative published estimates
come from Consolidated Goid Field3 Ltd. able to swamp the world with jrold even if
it dared
sorely tried
v recated
of London,
is fascinating
are to
to gathering
sophisti/workpho- of

£V///C*T i__
"jlAT MONEY INFLATION IN F ANCE «By Dr. Andrew P. White, Cornell University
,a,e 66 - HOW IT CAME -It came by seeking a remedy for a comparatively small evil in
an evil infinitely more dangerous. To cure a'disease temporary
in it's character, a corrosive poison was administered, which
ate out the vitals of French prosperity.
It progressed according to a law in social physics which we call
the "lrw of accelerating issue and depreciation" It was comparatively easy to refrain from the fint issue; it was exceedingly difficult to refrain from the second; to refrain from tte
third and those following was practically impossible.
MAT IT BROUGHT - It brought, as we have seen, commerce and manufactures, the mercantile interest, the agricultural interest, to ruin. It also
brought on ther.e^the same destruction which would come to a
. Hollander opening the^ykes of the sea to irrigate his -arden in
a dry summer.
HOW IT ENDED - it ended in the complete financial, moral and political prostration of France - a prosftration from which only a Napoleon
could raise it. Later, when Napoleorjwas hard pressed financially,
and it was proposed to resort to paper meno.y; he wrote his
He never did, and France, under this determination, commanded
all the gold she needed.



If we glance at the financial Uistory of France during the
Franco-Prussian War and the Communist struggle, in which a far
more serious pressure was brought upon French finances than
our own recent Civil War put upon American finance, and yet with
no nationel stagnation or distress, but//ith a steady progress
dm prosperity, we shall see more clenrly the, adyantagg-Jaf mp.eMng
a financial crisis inJin^ju^nc^^an^^raj.ght forward way, and bv
.methods sanctlonedpy the world'3 most costly experience^ rather
by yielding to dreamers, theorists, phrase-mongers, declaimers*
schejmers, soecu 1 ators^_or Jbo^^a^ j3qrt_gJL^Re_fj
__" th e las t refuge of afl^oynjj
There is a lesson in all this which it behooves every
thinking man to ponder.

Please note the following Table showing the prices of Gold per troy ounce,
starting with the Coinage Act of 1792 enacted nearly 200 ye*rs ago:
No. of years
Price Range
1792-1834 42 $19.42


38.00 to 7165.00
13).00 to $850.00

For centuries, especially during times of turmoil, "old was sought, after by people
throughout the "orld as a means to preserve canital. That's lx>rnn«P for ronturles
t e
^ i Price of pjold was remarkably steady. A few years ago, however, bullion started
rising smartly and then-coinciding with the upsurge" of r^ inflation in the U..J,
i'UOCiiliDED TO GO "CRAZY", (the above frou HOLT'S , arket letter) - Marsh 1981.





. |%0














1931 = 100


















"11 /


t /

- -J1250
- J1200











i ll















THE 2,000 COMMOOirr
B.L.S 1967 .ICO






















1980 '81




198S 86

O O U A I I nt oajHci


nr v.

Federal Spending, 1 9 7 0 - 8 1

N o l e ' •••< I Q / b a"<1 e.i' ,(-d'S c - | P , ] J u n e i'> f?r 1. } 7 7 ,)i<1
later Sei 'er'itifi 3 0 Tula1 v a iej a'^a m ( Imles de'Til . ' i i i
t)'il'nn n liansition ppftvl o' Ju'» sciilf'ititv ] 9 .' f





1971 ' 1972 ' 1973 ' 1974 ' 1975



I 1 1979
Q 7 Q I'
I Q1980*
«n« I 1
1978 <


Depreciation of the U.S. Dollar


.-a Esl'"-ales



— G E O R G C ONOR1CEK '/ Wnrri H*r<


tHrtrti- IfUXfti-'o


A Statement Prepared for
the Gold Commission

Will E. Mason

Professor Emeritus of Economics
The Pennsylvania State University
University Park, Pennsylvania
November 27, 1981


A reconstituted gold standard is being proposed by "supply-siders,f as the
only means of giving the central bank the power over the money supply presumed
by monetarists. It is also advocated as the way to strengthen our national defense without "busting the budget" and aggravating inflation. The latter paradox is resolved by the decline in the purchasing power of gold that is expected
to follow adoption of the gold standard. Never mind the domestic deflation this
implies; it would, allegedly, constrict the "foreign adventurism" that the postgold-standard rise in the price of gold permitted the Russians to pursue. In
short, the gold standard is offered as the salvation of capitalism, the cost of
which will be born by communism!
Before we allow such fantasies to lead us through the looking glass, we
had better take another look at the gold standard and see what it has meant—and
might mean in the real world of today. It is not clear whether revival of the
gold standard always was the keystone in the "supply-siders1" economic arch, or

suddenly became a desperate expedient to salvage their crumbling ediface.


"gold bugs" are coming out of the woodwork to feed on the litter left by the apparent
failure of Reaganomics and the consequent disintegration of the monetarist/"supplyside" axis. They are encouraged and legitimized by the support of some reputable
economists and the availability of the prestigious forum of the Congressionally
mandated -Gold.Commissian. Something can certainly be learned from the venerable

Such partisans (whose names will be mercifully forgotten) are apparently
unaware of their own inconsistency, as the purchasing power of gold (which is,
incidentally, not exclusively produced by the Soviet Union) would not fall,to the
extent that other prices fell, too. The fact is, that the fall in the price of
gold is linked to that of other prices (i.e., to the rise in the goods value of


history of the gold standard, and the current situation may be desperate enough to
justify its re-institution. Serious reconsideration of the gold standard is in
order, but it is profoundly to be hoped that the efficacy of the effort will not
be destroyed by the excesses of fanatics. There is no psychological miracle or
costless mechanical gadget available to solve all our problems without sacrifice
by anyone. The word "economics" is derived from the necessity for economizing our
resources in order to maximize our satisfactions. Economic progress involves
decisions as to what we are willing to give up to get what we want. Wasn't it
the Republicans who used to insist, "There is no free lunch"?


The following pages will demonstrate that "the gold standard" is a euphemism
for a variety of arrangements involving an increasingly loose connection with gold
that became less well understood with the passage of time. As the relationship
between gold and money became more ambiguous, the monetary system became more
volatile. Gradual inadvertent de facto severance of the connection between gold
and money led to de jure abrogation. Crises were followed by collapse. The alleged
automaticity of the gold standard, which some people think will solve our problems
for us, is a myth.
Historical experience includes several different gold standards. The
customary classification, embracing the gold coin, gold bullion, and gold exchange
standards, is purely mechanical. Based on substance, we can distinguish the preclassical, classical, neoclassical, and pseudoclassical gold standards in a
descending order of precision. One of the reasons for the ultimate failure of the
gold standard was the confusion of mechanics and substance that increased with
time. The nature of the gold standard was not precisely known because no one had


bothered to ask the prior question, namely, what is a monetary standard?


species of the monetary standard were identified before the genus, and we are
still paying the price for this elemental mistake in scientific procedure.
Metallic standards (including gold) antedated the science of economics, and
economists have been struggling (unsuccessfully) to catch up with the facts ever


Definitions of species,.in context, will, however, imply the generic
concept the author had in mind. Perusal of the contemporary literature will reveal the changing—and progressively amorphous—nature of the monetary standard
represented by "the gold standard" (Mason 1963, pp. 13 ff.).
The pre-classical monetary standard was the material constituting standard
money. From antiquity to modern history gold, silver, copper, and other coins
circulated as media of exchange (money) for large, intermediate, and small payments. Legal designation of standard money determined the coin to be used in
settling contracts that did not specify the means of payment. The monetary standard
question prior to the eighteenth century was a mere matter of convenience (Mason
1963, p. 39).
By "monetary standard," the English classical school of the nineteenth
century meant the material constituting the standard of value. The issue was not
merely one of convenience for classical economists, but, rather, one of substance,
namely, which metal would be more stable in value—particularly with respect to
labor, which they regarded as the standard measure of value. By this time the
Precious metals had triumphed over others on grounds of convenience (particularly
portability), and the issue of the monetary standard had shifted to the relative


stability of value of gold and silver (Mason 1963, p. 32). Because of the stable
technology of mining and refining gold, a given amount of gold represented, for
classical authorities, the closest approximation to a given quantity of labor.
Gold was, therefore, regarded as the nominal standard of value representing the
real standard measure of value, labor, in the day-to-day transactions of the
marketplace (Mason 1982, pp. 6-7). This implied that wage rates should be stable
and that the fruits of the improved productivity! of labor in producing things other
than gold should be distributed via lower prices instead of higher wages (Mason
1982, pp. 7, 9).
Formulation of the principle of marginal utility in the 1870s rendered
the classical notion of the standard of value obsolete (Mason 1982, p. 10). If
the value of something is diminished merely by acquisition of additional units of
it, then nothing can be a standard measure of value because nothing can possess
a given amount of value, as it can a certain weight or length. The difficulty was
circumvented by the implicit postclassical view of the monetary standard as the
material constituting both standard money and the standard of value. Here standard
money (i.e., specie, or full bodied gold coin) was the standard of value for other
moneys rather than for goods. Thus, the value of nonstandard money was presumed
to be determined by standard money in accordance with the quantity theory of the
value of money, the quantity of which was explained by the cost of producing (or
obtaining) money, defined as specie (Mason 1963, pp. 34-35, 37, 55).
Classicists would have had no trouble with this doctrine because they denied
that either the government or central bank could affect the aggregate volume of
exchange media in the long run (Mason 1977, pp. 479-482). They argued that as
long as convertibility of nonstandard money into standard money (gold coin) was
maintained, issue of credit money would, via the quantity theory, raise domestic
prices (discouraging exports and encouraging imports) until the increased credit


money was offset by diminution of standard money through exportation of gold to
pay for the net imports, which would return the domestic value of money to status
quo ante. When neoclassical economists recognized that credit money supplemented,
as well as substituted for, standard money, their quantity theory compelled them
to recognize (if not acknowledge) that the causal order between the values of
standard and nonstandard money was the reverse of the classical assumption
(Mason 1963, pp. 36, 37; 1982, p. 13). This precluded the view of the monetary
standard as the material used as both standard money and the standard of value.
The concept of a standard of value could no longer be applied to money any more
than to goods (Mason 1963, pp. 35-37).
In the confusion that resulted from these developments, the term monetary
standard became synonymous with "monetary system" (Mason 1963, pp. 64 ff.).
The standard was, therefore, confused with policies associated with it. For
example, in neoclassical literature the gold standard was defined as a monetary
system characterized by (1) a fixed mint price for gold, (2) unlimited treasury
purchases and sales at the fixed price, (3) unlimited convertibility of all moneys
into gold, and (4) unlimited exportation and importation of gold. The purpose of
all these policies was to ensure that the money supply was determined by the gold
stock; consequently an additional policy was required to implement the gold
standard. That was the absence of any policies that would obstruct denomination
of the money stock by the supply of gold. The universal failure to list this requirement among the policies alleged to identify the gold standard represented a
misspecification of the standard, confounding the standard with its policies and
forgetting the purpose of the policies (Mason 1982, pp. 10-11).
In this intellectual environment the classical distinction between the
monetary unit (dollar, franc, etc.) and the monetary standard (gold), was lost,
and money, per se,became the conventional "standard of value." In short, the
standard of value became nothing more than the abstract unit of account (Mason
1982, pp. 13-14). This was precisely what the antibullionists had argued for in


opposition to the classical school's determination to restore the gold standard
after the Napoleonic Wars (Mason 1963, pp. 24-25). Thus, the neoclassical gold
standard lost its specificity. It no longer linked the quantity or value of
money with either the quantity or value of gold. In sum, the distinction between
a gold standard and a paper standard was, in effect, erased while people thought
they were on a gold standard. The so-called "paper standard" advocated by opponents of the gold standard has always been a negative concept meaning only the
absence of a concrete standard of value or identifiable criterion of monetary
policy (Mason 1963, pp. 18-19, 105).


The gold standard, which in classical analysis was a proxy for the labor
standard of value, was inadvertently replaced by a goods standard of value
(Mason 1977, pp. 485-486). The goal of stable prices triumphed over that of
stable wages, and productivity gains_ became increasingly reflected in rising wage
rates instead of falling prices (Mason 1982, p. 10). This shift was facilitated
by declining price competition and organization of labor, business, and agriculture
(Mason 1958, pp. 154-158). In due time stable prices gave way to rising prices
as well as wages, and this was permitted by a growing elasticity of the money
supply accounted for by financial innovations circumventing the gold standard
limitation on the money stock concomitant with a waxing fuzziness of the limitation. "... Instead of constituting the standard, gold was being made to conform
to some other unspecified standard, /which_/ . . . amounted to a de facto departure
from the neoclassical gold standard /the classical gold standard having already
been abandoned_/ despite the apparent maintenance of the mechanics of convertibility (Mason 1982, p. 15).


Recurrent depressions aggravated by prolonged periods of deflation resulting from reimposing the prewar gold standard after the Napoleonic Wars in England
and the Civil War in the United States, reoriented people generally to look with
favor on the stimulus of rising prices. This attitude was reinforced by the
reflation following gold discoveries in Alaska and South Africa, which fortuitously
settled the bimetallic issue in favor of gold and temporarily associated the gold
standard in the public mind with rising prices and prosperity (Mason 1977, p. 485).
By the time production of goods overtook the production of gold, other criteria
of monetary policy had replaced gold so that the latter was not allowed to deflate
prices in accordance with the falling real costs due to improved productivity.
Ways were found to make gold "more efficient"—support more money by a given volume
of gold reserves. An example was the innovation of the gold exchange standard in
the twenties, which enabled the then less developed countries to enjoy the advantages of a gold standard without the cost of acquiring and maintaining gold
reserves. Increasing the demand for an asset is a strange way to overcome its
scarcity, and this hastened the day when the gold reserves were insufficient to
pay the gold-denominated debts.
Predictably, but unexpectedly, the gold standard collapsed in the 1930s.
The only reason the gold standard lasted as long as it did was that bank demand
deposits were not recognized as money till well into the twentieth century;
therefore, they were not subject to the limitation of the gold standard till other
ways of getting around the restriction were discovered (Mason 1977, p. 482; 1982,
PP. 14-15).
The collapse of the gold standard and its catastrophic effects were results
of ignorance. By this time, neither the public not its public servants knew even
what the gold standard was supposed to be, let alone what it was. It is generally
thought that the gold standard was terminated by its breakdown and legal abrogation.


This was merely the formal burial of the corpse that had been dead for some time.
People thought we were on the gold standard as long as the mechanics of currency
convertibility were legally available. When circumstances motivated mass conversion
into gold in the thirties, it could not be done. Gold reserves were adequate where
unneeded but inadequate where needed. De facto departure from the gold standard
began in the nineteenth century as nations increasingly interfered with the specieflow, price-level-shift mechanism for equilibration under the gold standard, obstructing determination of national money stocks by national gold reserves.
Without acknowledgment—legal or otherwise—monetary systems became managed more
and more on criteria other than gold (Mason, 1977, pp. 483-484). So much for the
objective, nondiscretionary automaticity of the gold standard that some people
think can now solve our problems for us (Mason, 1977, pp. 482-483). This falsa
hope is the result of a persistent confusion of the gold standard with a truncated
view of the policies necessary for its implementation.
Of the nations that left the gold standard in the thirties, only the United
States made any pretense to return to it. After devaluation of the dollar in 1933,
the U.S. established what was called an administratively controlled gold bullion
standard. Its relationship with gold was purely pro forma—a partial' revival of
some of the mechanics of limited external convertibility of currency into gold.
Substantively, the money supply was managed independently of our gold reserves,
and the effect of international gold movements were offset by sterilization and
open market operations. We had been able to afford this ever since World War I
when we acquired a substantial share of the world's gold supply, which was later
augmented by the flight of capital from Europe in anticipation of World War II.
When gold losses in connection with ou"r balance-of-payments difficulties in the
fifties and sixties finally threatened to require a reduction of our monev stock which
might aggravate recession and/or preclude inflationary financing of the Vietnam War, we


forthwith terminated the last formal connection of our money supply with gold by
eliminating the heretofore required gold-certificate cover for Federal Reserve
notes and deposits.
Meanwhile it was—and still is—thought that the International Monetary
Fund (IMF) Agreement established a new version of the gold-exchange standard
(Mason 1977, p. 486). Because the Agreement defined the currencies of the member
nations in terms of gold and the American dollar, which was, in turn, defined as
a certain quantity of gold, it sounded like an atavistic return to the preclassical
notion of the monetary standard as the material constituting standard money.
Some might have regarded this provision as an international salvaging
of the concept of standard money that had disappeared from the domestic scenev
Gold was—and still is—the nearest available approximation to international money,
but the IMF Agreement had neither the purpose nor effect of specifying gold—or
anything else—as either the international standard\ money or standard of value.
Even with a fixed price of gold and pegged exchange rates, wide disparities of
price-level movements made a mockery of the concept of an international standard
of value. Furthermore, the price of gold (gold content of the monetary units)
and the pegged exchange rates were to be adjusted for the purpose of removing
fundamental disequilibrium. The criterion of international monetary policy embodied in the IMF Agreement was balance-of-payments equilibrium, not gold. The
implicit monetary standard was a balance-of-payments standard, not a gold standard
(Mason 1963, p. 107). The Agreement related to gold (and exchange-rate) policy,
not to a gold standard (Mason 1963, p. 118).
However, until the War-devasted economies of Europe and Asia were rebuilt,
determination of equilibrium exchange rates was impossible. Consequently, no
attempt to adjust exchange rates for this purpose was made until 1958. By this


time the international financial bureaucrats in the Fund and the member-nation
central banks had become accustomed to the pegged exchange rates. Their reluctance
to modify exchange-rate parities was not removed by this experience.
Exchange rates became more pegged than adjustable, reviving the illusion
of a gold standard. But this eliminated the equilibrating mechanism for meshing
the international financial gears because the IMF did not have the power to impose
the domestic monetary discipline on member countries that would have been called
for by a gold standard. The result was chronic balance-of-payments deficits of
some countries and surpluses of others, which should have been removed by parity
adjustments. Although the Fund was designed to provide credit to cover only temporary deficits, it came to extend credits to cover chronic imbalances, which required
recurrent enlargement of the Fund. Neither expanding nor supplementing the Fund
with "paper gold" (which turned out "fools' gold") was enough to preserve
the IMF as the ersatz gold standard it had inadvertently become (Mason 1963,
p. 117).


Institutional developments made the gold standard increasingly inoperable
throughout the latter nineteenth and early twentieth centuries. Waxing fuzziness
of conception precluded workable adaptation of the gold standard to the changing
circumstances. The priority of external over internal stability represented by

A former IMF officer once confided to me that his (their) opposition to
flexible exchange rates was based on the fact that he (they) did not know how to
administer such a system. They have since been forced to learn how to do so, but
unfortunately my friend did not live long enough to participate.

the maladministration of the IMF was incompatible with the peoples' Preference for
internal stability. An international financial system, operated for the convenience
of its appointed bureaucrats rather than the welfare of the people who paid their
salaries,could not be expected to last. About all we can be thankful for is that
the so-called "gold-exchange standard," which the IMF had come to represent, came
to an end before OPEC oil


hit the fan"!

Is the gold standard,presently promoted to salvage the supply-side economic
miracle,any more compatible with contemporary institutions than before? If so,
its partisans must have something different in mind, and if that is so, they are
obliged to specify what it is.
Can the gold standard be revived in a world of noncommodity money? If
not, "can we find a market-determined rule to guide monetary policy in place
of the 'golden rule' of the past . . ." (Mason 1977, p. 487)? Can we find a workable compromise between the internal stability universally desired by the public and
the external stability preferred by official "monetary authorities"? Can we
learn from past experience? Experience indicates a negative answer (Mason 1977,
pp. 487-488). H. G. Wells suggested that man (in modern terms, person) learns
only from unmitigated catastrophe. If so, the learning should begin any time now.


Details and documentation of the author's ideas may be found in the
following sources, which have been referred to here and there in the text:
Mason, Will E., "The 'New Inflation' and the Middle-Class Crisis," Problems of
United States Economic Development, Vol. 2 (New York: Committee for
Economic Development, 1958), pp. 153-159, Clarification of the Monetary Standard: The Concept and Its
Relation to Monetary Policies and Objectives (University Park, Pa.:
Pennsylvania State University Press, 1963).
, "Winners and Losers: Some Paradoxes in Monetary History Resolved
and Some Lessons Unlearned," History of Political Economy,Vol. 9 (Winter
1977), pp. 476-489.
, "The Labor Theory of Value and Gold: Real and Nominal Standards
of Value—and Implications for the Current Reconsideration of the Gold
Standard" (Forthcoming in the History of Political Economy, 1982—meanwhile available from author).
, "Reactions to Weintraub's Proposal for Restoring the Gold
Certificate Reserve" (available from author).



Lyndon H. LaRouche, Jr.
Advisory Council

Warren H a m e r m a n

Ken Dalto
Executive Director

Barbara Boyd

Post Office B o x 2 6 • M i d t o w n Station, 2 3 3 W . 38th Street • N e w York, N e w York 10018 • (212) 927-4444

September 22, 1981

A Gold Policy To Stop Depression
Even at this late hour, the re-introduction of gold into
the world monetary system can prevent a major financial
crisis and economic depression. T h e Federal Reserve's
incompetent, destructive monetary policy has already
pushed the U.S. economy into the second stage of a
depression that began immediately after Chairman
Volcker's "Saturday Night Massacre" of Oct. 4, 1979.
Between n o w and year-end, unless appropriate countermeasures are adopted, the U.S. financial system will endure a liquidity crisis on a scale worse than that of 192933.
This is a war for the survival of the United States, n o t —
as the Fed has argued—payment for the past sins of
largesse committed by previous administrations. America's
banking system is already under the dictatorial control of
the "offshore" money markets, which the Fed has transformed into the only source of liquidity available to
American borrowers. Remonetization of gold is the step
required to win the war on behalf of American productivity
and living standards.
Step one is to remove the gold issue from monetarist
incantations over "market perceptions," "inflationary expectations," and "monetary control." Those disciplines
which the American financial system requires m a y be
reduced practicably to a single overriding constraint: w e
must restrict the expansion of credit to those uses which
will improve productivity, output, and exports. That is, w e
must do the opposite of the Federal Reserve's supposedly
"restrictive" program, which has added $25 billion per
year to federal debt service costs and deficit financing
needs, and a debt service burden to the private sector that
forced a 35 percent annual rate of credit expansion during
the first eight months of this year.
The proper use of gold is to build such a constraint into
our financial system, through our financial relations with
other nations. The specific measures required to bring
about this arrangement are straightforward and clearly
understandable to a majority of the American population,
once we agree that monetary controls exist to address the
real problem, the state of the economy's productive base.
Below, w e outline the requirements of a return to goldbased monetary stability, and explain w h y the competing
monetarist versions of the gold standard have no hope of

/. Remonetize American Treasury gold reserves at $500
per ounce or the market price, whichever is higher.
In current capital-goods and labor costs, $500 per ounce
is the marginal price of gold, i.e., the price at which n e w
gold mines m a y be brought into production on sufficient
scale to assure an adequate supply of new monetary gold.
2. Establish the value of the U.S. dollar as a fixed weight
of gold, e.g., I/500th Troy ounce of gold, and agree to
exchange gold in payment for current account deficits or
surpluses with nations who follow a similar monetary policy.
By agreeing to exchange gold with nations to balance
our current account payments (merchandise trade plus
shipping, insurance, tourism, and similar services), w e are
making a commitment to pay our o w n way in international
However, w e will do this only with nations that adopt
the same program. In practice, there is little question that
most of the nations that n o w belong to the European
Monetary System, a gold-reserve and fixed-currency agreement a m o n g the eight leading European countries, as well
as Japan, would join such an agreement enthusiastically.
B y making the dollar as good as gold on international
markets, this action would immediately bring d o w n interest rates, by eliminating hundreds of billions of dollars in
currency speculation and hedging in foreign markets,
which consumes the biggest portion of credit generated
3. Issue a new series of U.S. Notes against our gold
reserve, through participations in productive-investment credits in the banking system.
T o m a k e good our promise to pay gold to cover our
international accounts with our trading partners, w e must
simultaneously ensure that the credit w e issue at h o m e
expands productivity and output. At present the Federal
Reserve "prints m o n e y " by adding funds to the N e w York
m o n e y market, i.e., to the large international banks. Under
this system the American banking system opened up $49
billion in credit lines for inflationary, speculative corporate
takeovers, but lent on net virtually nothing to basic
The Federal Reserve's method of creating credit is
inflationary. W e propose, instead, to return to the m o n e tary policy of the Lincoln administration—U.S. Notes
issued for productive purposes, and backed by America's

ability to back the dollar with gold.
Instead of an independent agency with unlimited discretionary powers to create money, the Federal Reserve
should be reduced to a mere agent of the U.S. Treasury,
by a m e n d m e n t to the Federal Reserve Act. All discussion
at the Federal Reserve or otherwise about "monetary
targets" and "desired rates of m o n e y growth" at the
Federal Reserve or elsewhere is pure bunk. W e can create
as m u c h credit as w e want, provided that Americans can
absorb it into new investments in industry, agriculture,
mining, construction, and transportation, i.e., activities
that add to the nation's tangible wealth.
T h e Treasury will lend out U.S. Notes at 6 percent
interest for investment or working-capital purposes in
manufacturing, agriculture, mining, construction, and
transportation, according to this procedure: any private
banker m a y apply to the local Federal Reserve banks,
acting as the Treasury's agents, for a U.S. Notes' participation in a credit for these designated areas. Only when a
private corporation will initiate such investment, and a
private bank will take at least half the credit risk, will the
Treasury issue U.S. Notes.
There is no great complexity or threat of bureaucracy in
this program. Presently, local bankers have to turn to the
mirror-world of the m o n e y centers, e.g., overnight repurchase agreements, federal funds, correspondent loans, and
so forth to raise funds, and turn their operations upsided o w n with every new patch of regulation or "de-regulation" introduced by the Fed or Congress. W e will reduce
bankers' sources of funds to two: deposits generated by
business activity in their localities, or direct infusions of
low-interest loans of U.S. Notes where required.
Although monetarists will throw up their hands at a
distinction between "productive" and "nonproductive"
credit, despite the insistence upon such a distinction in all
economics up through and including A d a m Smith and
David Ricardo, every local banker will understand precisely what is involved. A n y intelligent banker knows that
certain types of business put "real tax-base" into a community, e.g., manufacturing, agriculture, and mining. H e
knows that a community which invests exclusively in fast
food restaurants, high-rise office towers, and the other
staples of the late 1970s U.S. economy will go broke.
Gold backing for this credit issue constitutes a basic
discipline on our actions. America's slippage into trade
deficit during the 1970s is a consistent and accurate
measure of our declining productivity, brought on largely
by the malfeasance of the Federal Reserve. Correction of
these policies and restoration of our productivity growth
will also revive our export potential; otherwise our gold
will flow out to foreign nations.
4. Prevent inflationary credit from undermining the U.S.
Notes program.
The principal source of inflationary credit in the U.S.
economy is not the "printing-press" m o n e y of the Federal
Reserve but the accumulated "book-money" of the Eurodollar market. With no reserve requirement, the foreign
branches of the Wall Street banks, along with the British
and Canadian international banks, create unlimited bookcredits a m o n g each other. This $1.5 trillion mass of
fictitious paper is the world's principal source of inflation.
Inflows of Eurodollar book-credit account for virtually all

the speculative credit lines for corporate takeovers in the
Monetary inflation can be eliminated overnight by two
simple, long-overdue measures:
(1) T h e Federal Reserve shall cease to be a net issuer of
credit, and act only as the Treasury's transfer agent for
U.S. Notes. U.S. Notes will gradually replace the unconstitutional issue of Federal Reserve notes as circulating
currency of the United States of America.
(2) T h e Treasury shall institute a policy of transparency
of sources of credit to prevent the influx of inflationary,
Eurodollar book-credits. O n e rule will suffice: as a matter
of simple banking safety, no substandard paper will be
permitted to circulate in the American banking system. A
Eurodollar loan to an American company is a right to
draw on a Eurodollar account unbacked by any reserves,
contrary to American banking law. N o such fictitious
m o n e y m a y be lent into the United States, period.
Such action will immediately break the stranglehold
over world credit n o w exercised by the Anglo-Canadian
banking cartel, the main beneficiary of the Federal Re-*
serve's unconstitutional policy of money issue.
5. Except for participations in productive credits, the
Treasury will create U.S. Notes on only one other condition,
to buy gold from U.S. citizens presented to the Treasury.
The Treasury will buy such gold at the pricefixedat the
outset of such a program.
6. The United States and other nations participating in
this gold-reserve system will trade gold among each other at
a fixed price, regardless of the behavior of the free market
price. No U.S. monetary policy shall be subject to the whims
of gold speculators.
Since the basis for determining the fixed price of gold is
the required production-price of new gold supplies, this
price Fixing will endure—provided that credit issue contributes to anti-inflationary gains in productivity. Any attempt
by speculators to push the price above the level at which
central banks exchange gold a m o n g each other might,
temporarily, produce a "two-tier" gold price of the type
seen between 1968 and 1971. However, we have no doubt
w h o would c o m e out the victor in this sort of economic
T h e flaw in the various monetarist proposals for gold
restoration (e.g., Laffer, Lehrman, Wanniski, Ron Paul) is
elementary. The United States must conduct a form of
economic warfare against an internationalfinancialcartel
whose principal objective is to have the carcass of the U.S.
economy to pick over. Their ally is the Federal Reserve,
and their chief operator is Federal Reserve Chairman Paul
Volcker. Without the two fundamental safeguards described above, i.e., transparency of sources of credit, and
priority for productive credits, the United States monetary
authorities will have little say in the management of the
monetary system relative to the London and Cayman
Islands offshore centers. Either, as the Federal Reserve
proposes, the monetary authorities will bring about a
deflationary collapse of the credit system by tightening
credit to prevent gold outflow, or the U.S. will simply lose
its gold stock to speculators.
By making the dollar "as good as gold" through the
above plan, the United States can return to international
economic pre-eminence.

Authorized and paid for by the National Democratic Po

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The diet practised universally since pre-historic times has

superior city-form, will be built for the n e w agrarian based

been negated by accidental discovery which reveals for the
first time in recorded history that most of the world's ills

communities and as Rejuvenatariums wherein the rejuvenating world populations will live to remove the fatal effects

are attributable to a heretofore u n k n o w n dietetic flaw.
(Please see Exhibit A 2 ) .

of Degenerage diets. (Degenerage refers to pre 1980 civilizations.)

The proofs submitted in support of this discovery are plain

Current manual, respiratory, postural and body mechanical
educational practices are responsible for a host of serious
disorders. (Please sec Exhibits A 5 and A 6 ) For example it
is not as yet k n o w n to the world that right handed people

and simple. W h e n the diet c o m m o n to all civilizations since
pre-historic times is abandoned and another called Trudiet
is observed an epidermal process of opening wrinkles, skin
lines and pores occurs, ultimately revealing the soft pink
skin of youth ( Photos of process attached), ( p h o t o


The substances all society has heretofore ingested under the
mistaken belief that such was food precipitates a demonstratable process which causes a m o n g m a n v other things, a
pecular epidermal pathology to ensue. T h e process is typified by wrinkles, skin lines, and pores involuting, shrinking
and compacting over the years, superimposing laver upon
layer of such structures over the skin of youth. This process
also occurs internally, fatally clogging and obstructing every
cubic centimeter of the ingestees body.
Since the substances of Trudiet are not available in our markets unauthorized release to the public of the substances
comprising Trudiet would concievably cause unalterable

die mainly from disorders affecting only the organs and
m e m b e r s of the over-mechanically-used right side of their
bodies (Exhibit A 6 presents an innovative manual system of
education which prevents such lopsided degeneration of
the organs and members of unidexterous people. T o inhale and simultaneously "pull in the t u m m e v " as taught
by all domestic edocationa! authorities causes compressive
strangulative disorders ot the adjacent abdominal cavity's
organs, arteries and nerves. Such domestic educational
authorities must be advised that the natural excursion ot
the a b d o m e n is outward with inhalation Degenerage diets
did not provide the energy required to hold the body in
proper postural allignment. Regeneragc's Trudiet will. As
for body mechanics: the bodies weight should no: tall on
the leading foot vet. evervonc walks otherwise.

world panic for nutratives that visibly and literally rejuvenate.
T o finance the implementation of Trudiet. the new IsoThe world's first Rejuvenatarium has been built and is stand- lite Citv-form, the United States Repelling Magnetic Fields
Transportation System. Truhanded Education. Truposture.
ing on Greenman Hill R o a d in West Scephentown. N e w
and Trubody Mechanics all referred to hereinYork, ready to receive those m e m b e r s of the judiciary and
necessarv for the innovator of these
such ministerial agents of constitutionally (constituted
access to world surplus capita! eargovernment as care to regard it their duty to take cognizance
marked for investment. Accordingly in 19~2 said innovator
of all things portending encyclic social change. Directions to
established in law and commerce, through Colhns &. Dav
the Rejuvenatarium; N e w York State Highway called Route
trading, for the first time in recorded commercial his20 to N.Y.S. Route 66 North, right at Hoags Corners
tory, contracts for deferred deliver of c o m m o d i t y exand right at G r e e n m a n Hill Road to sign bearing, " Green
empt from government regulation: Coal. P k w o o d . Cement
man Hill Rejuvenatarium". Telephone 518 794 - 8922.
Rubber. Petrolium. Chemicals. Firewood. N:v. York Su:..Apples. Gold. Silver. Steel. Copper etc. The lncredibie
World-wide implementation of Trudiet will require fundesuccess said innovator enjoyed from an unbelievibU vast.
mental restructuring of commerce, transportation and agrin e w and untapped market was soon eclipsed by the Colculture.
lins and Day' workers, ail of w h o m the innovator sum-

For example;
The hills comprising the basin East of the Adrondack Mountains will be cleared, the w o o d sold off to an international
market in firewood through the N e w York Firewood Ex-

m o n e d before the N e w York State Supreme Court. Count\
of N e w York, in proceedings for receivership and accounting after they determined to use the company's profits

change (Established 1980) and the reclaimed land planted

for their o w n

with sufficient Trudietary items for a world market.

purposes. O n April 30. 1973, said innovator filed a com-

personal gain rather than for charitable

m o n law trust with the County Clerk of the County of
Current transportation systems can not transport the subJtances of Trudiet. A n e w transportation system operating
exclusively on repelling magnetic forces will carry Trudietary cargo at speeds in excess of 1000 miles per hour.
(Exhibit A 4 ) .

N e w York, indexed M 5 1 7 - 7 3 M A C A N C O ;

M a n n e r ; .d

Controller of Non-Regulated C o m m o d i t y Trading Svstem
Trust), (Exhibit A 1 4 ) . and in 1973 and 1974. filed with
the Secretary of State of N e w York, certificates of incorporation for a system of exchanges for exempt


ities replete with clearing houses, an appointed Federal

Oolites, (Please see Exhibit A3) a new and manifestly


ejrulatory Agent and an Association for E x e m p t


lodity Contract Merchants

" N e w Y o r k Futures Exchange", along with the innovative
financial system.
(See p h o t o 2 )
5. A n entity using a contraction of the N e w Y o r k State

According to United States Department of Agriculture reports and statements m a d e by the executives of the securit-

corporate n a m e of the innovator's N e w Y o r k Gold and Silver Futures Exchange w h o claims that since the N e w Y o r k

,es industry at the hearings held in Washington, D . C , concerning the above mentioned innovative financial system,

State Attorney General's Office (Securities Division) regards the innovator as "worthless" it can use the name, N e w

taid system gained control of speculative investment capital

Y o r k Gold and Silver Exchange with impunity.

in 1973
The on-going gold and silver market was created by the

The enormity of the impending benign improvements to be

above innovator for the previousely stated purposes. H o w -

wrought by Trudiet u p o n world society are without prec-

ever instead of being the orderly determinative mechanism

ident. Firstly world agraria, and it's food processing systems
must adjust to transport, produce and process Trudietary

for world currency prices and said innovative E x e m p t Comodity Futures Exchange prices, unauthorized entities
selling gold and silver entered the precious metals market
with manipulative practices and succeeded in bringing the
world economic system to it's current perilously inflated
History records more nations failing from inflation than
from any other cause.

substances that have never before entered into commerce.
We are about to witness 50 to 100 years of earthlife being
devoted mainly, almost exclusively to the task of removing
the effects of degenerage diets described in the American
Psychonutranalysists Association's "Report on Discovery of
Fatal Universal Dietetic Flaw" Exhibit A2;.

It will take a minimum of 30 years to provide world society
In order to aid constitutionally constituted government sur- with sufficient supplies ot Trudietary substances.
mount the on-eoine inflationary d e l e m m a caused bv unauthorized competitors daily raising the price of precious metals
to cover their previous days sales the above innovator, in
Federal case. Civ 1 0 2 0
80 U S D C S D N Y . transferred
to the United States of America, 7 0 % of the N e w York
State Corporation franchised in 1974 to m a n a g e and control gold and silver futures trading: T h e N e w York Gold
and Silver Futures Exchange.

A benign compassionate psychology will have to be created
to induce world society to abandon an infantile addiction
for orally stimulative non-nutritaves which dement the psychic with hate, delusion and obsession and suffocate the
bodily life processes with a buildup of myridinaJ adhesive.
involutive shriveling, shrinking minut; structures which
alone are responsible tor the chronic disease inexplicably
rampant in all society's since pre-historic times.

At the present time the above innovator, hoping to spare
the world from the economic and financial rape entertained
by those w h o seek to wrest such innovative and lucrative
financial system from the innovator for non-charitable self
serving purposes, has instituted actions in the N e w


States Supreme Courts and the United States District Court.
Southern District of N e w York against the following entities who plainly collude with one another to deprive said innovator and the world of the financial system singularly
created to tund benign changes in world societv.

Our current city form must be altered to accomodate shifting our tecno-city-form to an agrarium city form, lsolite Cities are manifcstlv superior to anv structure heretofore erected. Mass production of Isolites to accomodate the forth
coming agrarianization of society presents no special problems except one. their placement.
The United States Repelling Fields Magnetic Transportation
Svstem. which alone is capable o{ adaquately transporting
Trudietary cargo presents no engineering problems mainlv
because it is capable of constructing it's o w n rail bed.

1 Securities Division of the New York State Attorney General's Office and the N e w York C o c o and Sugar Exchange.
*• Comex, which refuses to answer orders of the N e w York

World populations vkUl experience a critical upsurge once
the major cause of ageing and chronic disease

State Supreme Court to s h o w cause w h y it should not be re-

(degenerage diets,, is removed

trained from selling futures contracts in precious metals.
J- The Daily N e w s and the N e w York Times, w h o plainly

Our need for hospitals, prisons, mental institutions and


police forces will disappear proportionate!) to Trudictjr\

New York State Attorney General's Office to debase such


d manifestly colluded vuth the Securities Division of the

innovator in the eyes of the public by printing demonstratJ

olf falsehoods about said innovator.


Our revered prophets and current theraputic systems, both

The N e w York Stock Exchange, which claims, in effect


it has the authority to usurp the n a m e said innovator


»s widely oublicized as the innovative system's n a m e .


of which encouraged ingestion ot non-nutrati\ es which dement the mind and fatally disease the bod\. are nhout :o be
confronted by a world mass m a d e irreverent and disrespect-

if them by the rejuvenative effects of Trudiet. Nurses
carried out a therapeutic system based on total error
ie exempt from changing attitudes.
consideration that should remain foremost in our minds
e fact that man, not w o m a n , is weak and easily cored. The body of literaturebf degenerage should be sealff in ill libraries otherwise the evidence of the causes
effect of degenerage will be expurgated and distroyed
u authors. N e w libraries should be created to contain
influx of massive new literature reflecting '.ociety's re: from the subnormalizing effects of degenerage diets.

T o advise the world mass of the constituents of Trudiet and
its rejuvenative effects would serve only to create serious
and irreversable panic for rejuvenative nutratives not as
yet available.
Rapid Social and Technological advancement will accompany increased production of Trudietary substances.

With the implementation of the United States Repelling
Magnetic Fields Transportation System our dependance on
petroleum powered vehicles will become obsolete. O u r
laudable system of highways will be converted into Pedesrian Roads funneling Trudietary production to the United
lingular and solitary defence this civilization had against
States Repelling Fields Magnetic Transportation System.
It is suggested that the oncoming n e w age called " R E Ktion by Science, Politics, C o m m e r c e and Social CusJ U V E N A G E " allow any one to o w n as m u c h land as they
which encouraged ingestion of non-nutratives which decan put under cultivation of Trudietary items. This means
ted world societies with increasing severity over the centhat the owning of land for speculative financial purposes
swas it's body of laws administrated by a brave judiciary.
m a y become unhealthy. At this time it appears that the best
irhere in history has this world's rampant hate, delusion,development of a Trudietary Agraria would begin from
ssions and noncongenital diseases been attributed to
along the edge of our roads and highways proceeding inNor has anyone in all history, except the innovator
wards to the interior.
in possessed irrefutable proof that the diets practiced
ersally since pre-historic times are d e m o n s t r a b l y fatal.


PHOTO 2 (1973-81)
•Vv.'f/g&DTO I '.-


American Association of Psychonutranalystets

$10 for one y e w mb*crip«i«wi.

Number Seven


Contributors and Associated research institutes;

An astounding, incredible discovery of unparalleled magnitude supported by plain visible
proof is hereby claimed in the name of the
United States of America, which establishes for
the first time in recorded history that abstention
from the diet common to all civilizations since
pre-bibiicai times and ingestion of another called
"trudiet" causes skin lines to open revealing a
hitherto unseen and unknown pathogenic prt>
cess of myridinal compactions of minute, pinpoint size, involuting, dry, scaly, adhesive structures pitting the! center of the opened skin line
which burst open releasing a softer, lighter skin
that had heretofore been shriveled and
shrunken—INVOLUTED—inside such pitted
structures since earlier years.
After opening, the wrinkle which springs
apart revealing such thin, hard chalky line of
myndinal adhesive pitted structures also presents, on the walls of the open wrinkle, an
exhumation of other similarly constituted wrinkles, which had been submerged by adhesiogenic
processes of seeming dietic origin, these also
burst open exhuming more wrinkles of like




American Association

of Psychonutranalysfrsts
BOX 658 NYC 10013

After these compactions are removed w e
are confronted with the soft, supple primal skin
of youth.
An apparent life-long effusion of animate.
inorganic, adhesiogenic, hostlike particles of
broken-down ingested non-nutritives emitted
from surface epidermal pores and canals (SKIN
LINES) of the perspiratory system adhering to
the adjacent epidermal surface, chronically, by
their adhesiogenic nature, draw the skin adjacent to the particle over the particle thus
superimposing layer upon layer of obdurate-dry
adhesive structures over the soft supple primal
skin of youth.

The unusually dry and scaly appearance of
e skin liberated from the adhesion suggests
at these particles, whose existence is an
sumption, are H I G H L Y water absorbent.
This pathogenic process, of seeming dietec origin, which makes its appearance after an
dhesive substance coating the wrinkle is removed and which presents itself as a dry,
halky, thin, crystalline-hard, razor-thin line conisting of myridinal adhesive pits of involuted
hriveled skin causes, aside from mortal vascuv and perspiratory impairment; aside from
le-long subliminal nureaJ agony aegendered by
lese hard, dry adhesive structures oppressing
indertying nureal structure, a cosmetic disfiguraon which makes surface skin appear dark,
irittle, dry, scaly and hard.
This suspected dietary adhesiogenic pro*ss is in greatest and minutest density under
ind around the entire edge of the fingernail with
he cuticles' comers presenting the greater
tensity of compactions. It is from the cutide
»mers that a complex network of dogged
perspiratory canals fan out into the fingers and
entire epiderrnus suggesting that the cutide
corners perspiratory systems are major
eliminatory organs. It is from these cutide
corners that the removal of the adhesive pitted
structures must begin.
The joints, next to the cutide comers, s e e m
be the second primary sites for the greatest
tensity of these minute adhesive structures.

The following phenomena concerning these
adhesive structures point to a dietetic component for the etiology of arthritis (a) thermal
responses are dramatically improved in joint
areas where these adhesions are removed; (b)
the removal of these adhesive structures around
joints improves theirflexibilityand tactile perception.
Such adhesions, when opened over a
varicosed vein, collapse the unsightly protrusion
and restore vascular function and appearance.
• Abstention from the c o m m o n diet and ingestion of trudietary items causes a lite-long obstruction to sight and mentation to dissolve,
improving vision and mentation noticeably. Return to the c o m m o n diet causes these impairing
conditions to return.
T h e dietetic discovery herein indicates that
cronte enlarging wounds emitting a fetid discharge are pores converted into excretory organs ejecting noxious non-elimlnable ingestabies erosive of non-endothelial-llned perspiratory
pore passageways: that submission to trudiet
stops the fetid discharge and doses the onceeniargfng wound.
Such enlarging wound with a fetid discharge
appears a mild Inconsequential dietetic disorder
compared to an epidermal perspiratory system
mortally dogged by myridinal pathological adhesive structures that do not respond as favorably
or as rapidry to: trudiet as does the enlarging
wound with its fetid discharge.
T h e healed enlarging wound with it's fetid
oTscharge presents the usual charaderistics of
scar tissue (discoloration and shrivelling) however examination reveals the composition of the
healed wound to be the s a m e as that mentioned
hereinbefore and. that when these adhesrve
shrunken pitted structures are removed the
unsightly shriviling and cJscoloration is trans-

yrned into the soft supple skin of youth.


Benign tumors of the skin that commonly
cesent themselves as unsightly, hard enlarging
odules, as wen as corns and callouses, w h e n
xarnined in the Bght of the discovery herein
ppear Identically structured and similarly disenjgratable as the pathology hereinbefore merv
From earliest times until n o w researchers
jve continuously reported the inexplicable
filtration of an adhesiogenic agent which pereates the entire internal organism welding
sue to organ, organ to bone and bone to
sue such that aulophysical examination of the
;ed Invarfbfy shows heart, kings, kidneys.
adder, intestines, stomache welded together in
mass that m a d e the continuation of life
Among the marry chronic disorders benignly
ected by trudiet are those diseases of the
oat whose etiology heretofore did not consider
i effects of a tongue, unversed in correct
gual mechanics, coated with noxious, uneiinable, non-nutritive abrasive substances
tttualty lashing and abrading adjacent throat
J oral muscosa wtth trigeminal hunger exdtai excursionings until the protective tissue is
aded exposing the trigeminal nerve to injury.
Before us are indications that knowledge of
fat was available in pre-btbJical times and
i presumably lost when society abandoned
' special, natural mechanic for holding tho
jue at "rejuvenative rest" in preference for
W-geminal Ungual delights of ingesting neurexciting non-nutritive substances. Accord1 a point In time is fixed—predating the
"donment of trudietary laws—where loss of
*tedge of the physical mechanics for holding
tongue in its natural rejuvenative rest posioccurred.
Historically interesting to those w h o search
>ast for error is the possibility that humanity
astray under pre-biblical influences that

deprived them of their natural aversion for the
revulsive, degenerative, lingual practices they
delight in nowadays.
No mention appears in our healing arts
literature concerning the correct position for the
tongue at rest
If we examine oral trigeminal pathways we
find one set present on each lateral edge of the
tongue and another corresponding set directly
beneath each lateral edge of the tongue running
on the floor of the mouth into the throat.
Management of these nerves, which react to
hunger by exciting the tongue to rub against the
trigeminal nerves in the floor of the mouth and
throat and, which transmit to us immense sensual Impressions, appears to be the most urgent
need of humanity. For in fulfilling and satisfying
their d e m a n d s have w e been brought to suffer
worldwide dietary disorder. Since administration
of the law requires considerable use of the
tongue and since the judiciary are scheduled to
be the first recipients of a n e w and improved
healing system called rejuvenoiogy, which healing system is the exdusive proponent and
parctitioner of a novel and benign therapeutic
GENITALS, and EYES, it is here recorded to the
end that each administrator s function be improved:
The tongue achieves its natural rest position
when its lateral edges are held a hair s breath •
apart and the underside of the tongue's tip is
cupped under the posterior nasal opening catching and absorbing occasional droplets falling
from a region in the root of the nasal cavity
corresponding to the location of the pinial giand.
During the course of this rejuvenative mechanic
the shoulders are hekj back, down and together,
the chin is held pressed against the throat ( ©
Reiuvenology 1977).
After a short period of abstention from the •

c o m m o n diet the abstainers' daily expenences
with hate, rage and like negative emotionalism
subside and realization occurs that contact with
non-abstaining sodety is n o w occasioned .only
by an intense awareness that they are dieteticaJry depraved and suffer grossly from chronic
dietary negative emotionalism; that the peril of
our time ensues from our o w n dietetically demented personalities; that all civilizing systems
fail from unending dissidence and discord w h e n
its m e m b e r s
are directed to ingest
psychopathogenic substances; that adequate
world production and processing of trudietary
Items, n o w almost non-existent, will take at least
forty years; that this nation would be imperiled
were anyone to disdose trudiet publically.
Trudiet's unauthorized release to the public
will predpitate (1) perilous public d e m a n d for
items n o w exceedingly scarce, (2) massive
expurgation of literary matter from our libraries
by authors of pre-rejuvenage material, (3) benign restructuring of society's psychology.
health, intelligence, aspirations and technology.
T h e substances sodety has been direded
to ingest depress the psychic such that death
b e c o m e s society's unremitting aspiration and
concealment of that aspiration its persistent
purpose. W h e n the judiaary realizes that sodety
is manically depraved from a heretofore unknown dietetic psychopathology, they will (a)
prepare sodety and commerce for fundamental
changes which benignly terminate an unbelievably long age of degrading dietetic error, (b)
prepare for an age where benevolence rather
than malevolence is the subjed of the law, (c)
sequester the literary body of law in libraries
designed to discourage expurgation, (d) consider a general amnesty for all prisoners dearing
and preparing land for the monstrous agrarian
needs of rejuvenage, (e) prepare for full world
employment in prepanng the earth for the
staggering agrarian needs of rejuvenage, (0
consider m e a n s by which to prepare sodety to
meet the proofs that the dietetic instructions of
their venerated prophets were in manifest and
mortal error, (g) prepare for massive influx of
higher knowledge from intellects liberated by
trudiet from the subnormalizing influences of the
c o m m o n diet



latory agency;
0.t Washington, D.C.
ior earthquake
mt design.
•ior flood
•ior use of
-al light.
nor wind
ant design.
don system
ior fire
rior Occrupa


Patent Office
NUMBER 096729 of January 5th 1981

Washington D.C. 20231





NUMBER 096737 of January 5th 1981
Repelling Magnetic Fields • Transportation System
whereby a c»-;c zar-'9< cons.sting of one eecromagnet [A] *e::ing on a p:graMy o' 'dent;ca; electromagnetic trestie sections [B] is —
1 Suspended n a fnc.ionless magnetic (ie'0 of opening magnetic forces +r*\er eiectnca1 cur-ent <s s-c-

U. S.

plied to the electromagnetic coi1' m the cargo earner and the trestle section beneath.
2 Propelled by augmenting the current in the trest'e
sections directly behind the cargo earner, and
3 Stopped by increasing the current in the trest'e
sections ahead of the oncoming cargo ca"ier

Repellrnc. Magnetic Field* - Transportation System





Right Thumb

Left Thumb

6 <*SP\ 7


Left Big Toe

Index Finger

Right Middle Finger

Right Ring Finger

Right Pinky

Right Ring Finger


Left Index Toe


Left Index Finger

Left Middle Finger


Left Ring Toe

Left Small Toe

Right Middle Toe

Left Ring Finger

Left Pinky

Right Ring Toe

Right Srall Too


22 *SWK 23
Left Ring Toe

Right Index Toe


Left Middle Toe


Right Big Toe

Left Ring Finger

Right Ring Toe

25 M, , * 26 *flP^ 27 „ , „„. 28
INHALE ' f l /
Right Middle Finger

Left Middle Toe

Left Middle Finger

Right Middle Toe

Left Index Finger

Right Index Toe

29 .nr*. 31 . . 32
Right Index Finger

Left Index Toe




An erroneous idea has been circulated
a m o n g us under the name of education and
civilization, the practice of which cripples us
physically, retards us mentally and dooms us
all to premature unnecessary deaths.




This paper is to alarm humanity of that
error and to correct it.


The abandoned concepts of bloodletting as
a cure for disease, of a square earth and of
h u m a n sacrifice, recall h o w other civilizations
impeded their evolutionary progress by embracing ideas which were false.


Those w h o have labored to determine the
origins of the idea ofright-handednessfix the
Bronze Age as the time humanity first began
that practice.
Before that, pre-bronze age people used their
hands in a manner not fully known. All that is
k n o w n to us is that they were neither right-nor
left-handed and that they used their left hands
as m u c h as their right.
Today 9 4 % of the world population is
right-handed, 4 % left-handed, the rest ambidextrous. The first two types, having
trained only one of their two hands to perform ski'led work, are called unidextrous. The
ambidexter can use either hand, but not both
simultaneously performing two unrelated manual tasks.
Right-handers are regarded as those w h o
conformed to the pressures of the righthanded myth. Left-handers as those w h o rebelled against it and ambidexters as those w h o
by choice preferred a more balanced use of their


BOX 658 NYC 10013

For the first time in human history it is
here stated and shown h o w these manual
types are wrong and predispose toward mental retardation and disease.


Also introduced to h u m a n thought for the
first time is a fresh concept of handedness;
truhandedness. It means that both hands are
used simultaneously to perform different
skilled tasks.

The infant is truhanded until the tenth
m o n t h of life.
After the tenth month of life there is a decline in infant truhandedness. This, incidentally, is the time the infant begins to imitate its parents and the time parents are able
to influence the child, consciously and unconsciously in the manner of their o w n hand

Examples of truhandedness m a y be had by
observing any primate or infant. A primate,
for example, m a y be observed using one hand
for eating a banana, the other to probe for a
flea. A n infant likewise m a y explore the bristles of a hair brush with one hand while the
other is shaking a rattle.

It is not publicly known that regression
of infant truhandedness is accompained by
disorder. It is true that 8 0 % of all children in
their nursery years go through a period of
brain dysfunction characterized by tics, stuttering, epileptic-like seizures and blocking of
neuro-muscular co-ordination.

All mankind is endowed with truhandedness at birth. Truhandedness remained unreported to us until this historical m o m e n t .

The Human Brain
Development Function and Disorder

Alarmed parents of these affected children
and specialists in neuromuscular disorder
stand in the shadow of ignorance w h e n one
convinces the other that the child's symptoms
of brain dysfunction will disappear when one
of the child's two brain halves becomes more
dominant than the other through continued
unidextrous training.
This view maintains that unidexterity does
disrupt equal hemispheric function; that such
disruption is necessary to m a k e the child
"civilized" and that while such disruption is
occurring symptoms of brain dysfunction will
manifest themselves.

The human brain is composed of a right
and a left half. The left half controls the right
side of the body and the right half controls
the left side of the body. In infancy both
brain halves (hemispheres) are balanced in size
and function. Each can w o r k independently
of the other as indicated by the child playing with the hair brush and rattle.
Ear?h brain half has centers which control
sight, hearing, m e m o r y , speech, etc., which
are operative in the infant brain. Once a person becomes one handed he or she also becomes one-brained. This means that these
centers are active in one brain half, inactive in
the other.

This view is wrong.
Both brains were intended to function in
This general acceptance of half brain dominance as a necessary natural condition is mistaken and serves only to perpetuate the greatest disorder a total humanity has ever submitted itself to; demobilization of one hand and
its related hemisphere.
The suffering caused by this calculated unbalancing of brain function by civilization's
unjustified insistence upon unidexterity does

It is k n o w n that brain development and
function are related to hand training.
It is k n o w n that speech loss from disease or
injury to the active speech center is regained
by stimulating the inactive speech center to
function, through training the unused hand.
N o one is born left-or right-handed.


not stop with the appearance of disorder
among 8 0 % of all children.

the body are larger and stronger than those on
the non-preferred side. In infancy there is no
asymmetry in any of its members.

That is only the beginning.

Speech, m e m o r y and intellectualization
have operating centers on each of the infant
brain halves. However, once hemispheric dominance occurs, these faculties along with m a n y
others operate only on the dominant or
"active" hemisphere.

Next the child is submitted to the educative process where its remaining e n d o w m e n t
for truhandedness is methodically suppressed
by insistence on unidextrous training.
Again s y m p t o m s of brain malfunction
occur; tics, stuttering, epileptic-like seizures
and blocking of neuromuscular co-ordination.
Again worried parents are assured that
these disorders will subside after the brain
half related to the hand being trained becomes the dominant of the two.

The Neural System

Children w h o never go to school do not
usually experience these disorders.

The Neural System, for example, on the preferred side of the body responds more quickly
to stimulus than those of the non-preferred

When the child leaves the educative process
it no longer has the equally functioning hemispheres of its infancy. Only the brain related
to the trained hand is active. The other

The abhorrent asymmetry is most noticeable in the face. A n honest examination of
facial structure will reveal that the preferred
side of the face is noticeably larger than the
The extent of our lopsidedness is staggering. In truth one side of us is overdeveloped and overactive, the other dwarfed,
and paralyzed.

Other Organs
Neither does the child, after leaving the
unidextrous training process, have the equally
functioning hemispheres, the eyes, ears, legs,
hands, arms, fingers, speaking and swallowing
mechanisms of its infancy. It n o w thinks
mainly with its left hemisphere, sees mainly
with its right eye, hears mainly with its right
ear, walks mainly on itsrightleg, uses its right
arm, hand, andfingers,for most manual tasks,
speaks and swallows on the right side of its

It is a basic law of life that growth occurs
with exercise.
Unidexterity exercises only half the brain.
Consequently those centers in the exercised
brain which control body size, sight, hearing,
swallowing, etc., experience growth, while the
non-preferred brain experiences growth equal
to the training of the non-preferred hand.
Unidexterity writing is the exclusive factor
responsible for our lopsided civilization.

The deeper unseen picture reveals a similar
set of facts; the entire half of the body on the
side of the preferred hand is larger than the
other in every single k n o w n anatomical

All w h o have considered the art of writing
seem to have overlooked one very elemental
fact, and that is the basic falseness of the art
Writing with one hand is just as unnatural
as hopping about on one foot.

This means that all the bones, muscles,
glands, organs, etc., on the preferred side of


In the beginning mankind was not e n d o w e d
rith knowledge of writing. It y e w out of his
teed to communicate by means other than
ound. He fulfilled that need with the perfecion of the art of writing. That art however is
iot invested with inscrutable sanctity, or
•omplete success, for by it and through it w e
xolong a habit which impairs all of us.
Watch a tennis player or baseball pitcher
;wing or throw and observe h o w the non>referred arm hand and fingers art held in the
ame awkward position that they are during
he act of writing; the fingers clenched, the
rm bent.
Smilarly w h e n anyone holds a match,
urns a door key, or does any one handed act,
le unused arm, hand, and fingers are frozen
1 the same posture used for writing; fingers
lenched, arm bent.
This freeze of the non-preferred arm, hand,
id fingers truly gives us a picture of what's
sing on in the non-dominant brain; nothing.
Yet what other co-ordination can be exacted of a civilization which insists its m e m »rs sit at a desk week after week, m o n t h
'ter month, year after year, training one
md while the other is kept frozen and
Had endowment for truhandedness not
tn suppressed these manual acts would be
companied by that grace and balance which
mes when the unused arm, hand, and
»gers move in counter motion to the used
m, hand, and fingers.

Niemi Institute
As already indicated, the Niemi Institute
» approached the enigma of disease along
to of inquiry never before explored.
Science is determined to prove by classical
itomical proofs the relations between hand
Terence, brain dominance and lopsided

growth and function. T w o hundred years o f
research have failed to provide us with that
Since the Niemi Institute conceived of
humanity perishing from disease caused by
unidexterity before those proofs were uncovered, it became imperative for them to
seek a different approach.
They started by establishing for the first
time in h u m a n history, the heretofore unk n o w n fact that death comes to almost all of
us from diseases that destroy the preferred side
of the body first.
Next the Niemi Institute endeavored to
ascertain whether any of these diseases
subsided with a change of preferential use.

For example as previously stated, the
majority of people w h o are right-handed are
also right eyed, in that they see mainly with
their right eye. Almost all suffer a disorder
called crooked eye (strabismus). This means
that only the preferred eye fixes on the object
of sight, while the non-preferred eye is held
weakly and crookedly in its socket. The researchers of the Niemi Institute were satisfied
with the merit of their approach w h e n they
discovered that the accepted theory underlying the correction of this disorder was based
on the idea of wearing an eye patch over the
preferred eye thus forcing the weak crooked
eye to focus.
Next they theorized that that portion of
the brain which controls the preferred hand
should be the first to undergo degenerative
change from over-work. Their research confirmed this. It is a mattter of fact that stroke,
the major degenerative disease of the brain,
almost always affects- the left hemisphere in
right-handed persons and vice versa for lefth a n d e d presons. Stroke is typified by

paralysis of the entire preferred side of the
body and loss of speech. Sight, hearing, swallowing and kidney function on the preferred
side are also affected. They were again satisfied with the merit of their approach w h e n
they learned that the accepted treatment for
restoration of lost function in stroke is based
on training the non-preferred hand which
admittedly activates undeveloped centers in
the non-dominant hemisphere.
Hearing was next examined and it is true
that the majority of people w h o are righthanded hear mainly with their right ear and
the weak non-hearing ear can be improved by
wearing an ear plug in the preferred ear.
Next examined was preference for swallowing and speaking on the preferred side of
the throat. It is a fact that most right-handed
people swallow and speak on the right side of
the throat. It is also a fact that vocal polyps
and contact ulcers, precursors of serious degenerative changes such as a cancer, are almost always found on the preferred side.
Further confirmation as to the worth of the
approach was obtained w h e n patients were relieved of such polyps and ulcers after learning
to swallow and speak on the non-preferred
side of the throat.
Our research also uncovered another n e w
body of facts which is u n k n o w n to the world:
Bronchogenic carcenoma, all the major degenerative d i s e a s e s o f t h e lung,
glomurulnephritis and toxic goiter are diseases
which almost always affect the preferred side
of the body.
Also the most c o m m o n disorder of the
spine is typified by a spinal curve which is
almost always related to the preferred hand.

It is hoped that the following submission of
facts will spur others into the conclusion that
restoration of truhandedness and its ac-'
companiment, equal hemispheric function,
might eliminate epilepsy.
The age of onset of epilepsy coincides with
the age of on set of unidextral training. In
other words, epilepsy starts after disruption
of truhandedness.
The most prominent brain symptom in epilepsy is an asymmetrical discharqe of electrical
brain waves. The dominant hemisphere producing the great electrical discharges. In infants
of unaltered handedness these waves are symmetrical. They become asymmetrical after the
onset of unidextral training.
The epileptic attack begins in the dominant
hemisphere and manifests itself with convulsions which appear on the preferred side of
the body first.
Epileptic-like behaviour occurs in cases
where a shift of handedness is required as a
result of injury or amputation of the preferred hand.
Stuttering and crooked eye, disorders long
associated with handedness and extreme cerebral dominance, are very c o m m o n a m o n g epileptics.
"Epileptic children m a y ride bicycles, play
games, run, hop, skip and jump, but, sit them
d o w n to write and they have one attack after
another."That writing should precipitate epileptic attacks indicates that unidexterity is involved with this disorder.


Cysticfibrosis,a fatal disease which mainly
affects children is typified by the nondominant lung's weak, lethargic removal of

The enigma of epilepsy has never been considered as being a disorder caused by disruption nf equal hemispheric function.

In right-handed children the attack is almost always initiated in the weak left lung
and vice versa for left-handed children.

The association between the weak lung's removal of phlegm and the weak eye, ear, leg,
hemisphere, and side of the throat compels
the Institute to suggest that a nose plug worn
in the preferred nostril might have the same
positive effect in strengthening the weak lung
as the eye patch has for strengthening the weak
The glands on the preferred side of the
body are larger than those on the weak side.
Size is an indication of productive capacity.
What part does such unbalanced glandular
production play in those diseases characterized by asymmetrical glandular function;
Diabetes, leukemia, etc.
Lit here for all humanity is a bright new
light into a dark unexplored corner of disease
ind human suffering. The restoration of truhandedness could possibly eliminate much
disease and suffering and produce a race similar to those who practiced a form of trutiandedness; L e o n a r d o D a Vinci,
Michelangelo, Holbein, Morse of the Morse
Code, Lenbach, etc?

Personality Disorders
The final consideration of this paper is perlaps more wothy than those previously subnitted namely the possibility that restoraion to truhandedness and equal hemisphere
unction might eliminate that large group of
ersonality disorders generally referred to as
he product of an unbalanced mind. A brain
^balanced by truhandedness may not funcion like the c o m m o n mind of today,
bsessed by one idea, but might function in
Jch a way that obsessions become opposed
y balancing counter thoughts.
There is a new world coming, a world retted to the lost truths of balance and
m,netry. What will flower from the spread
• truhandedness remains to be seen. One

thing is certain; the world we know is about
to change.
Those w h o fear that restoration to truhandedness might have some ill effect on human behavior should know that surgeons
and physicians compassionately train themselves in a similar art in order that they might
perform dextrous feats of life saving in the
operating and examination rooms that would
otherwise be impossible.
Some of humanities most cherished men
and w o m e n condemned unidexterity and
pleaded for equal training of both hands.
Some are known, most unknown. The unknowns are about 200 valiant surgeons and
physicians (1865-1974), who tirelessly strove
to grasp what we now hold. Truly toward
these, should our love, honor and gratitude
flow, for they were thefirstto question that
which no one else dared question: the myth
of right-handedness.
The knowns are:
"Let not one hand know what the other is
doing when giving." (A litde reflection will
show that every manual act involves giving
something to ourselves or others.)
"We are crippled when we are taught unidexterity."
"A Petition of the Left Hand"
I address myself to all the friends of youth,
and conjure them to direct their compassionate regards to m y unhappy fate, in ordei io
remove the prejudices of which I a m the
victim. There are twin siters of us; and the
two eyes of man do not more resemble, nor
are capable of being upon better terms with
each other, than m y sister and myself, were it
not for the partiality of our parents, who
make the most injurious distinctions between

us. From m y infancy, I have been led to consider my5 sister as a being of a more elevated
rink. I was suffered to y o w up without the
least instruction, while nothing was spared in
her education. She had masters to teach her
writing, drawing, music, and other accomplishments; but if by chance I touched a penal, a pen, or a needle, I was bitterly rebuked;
md more than once I have been beaten for
being awkward, and wanting a graceful manner. It is true, m y sister associated m e with
her upon some occasions; but she always
made a point of taking the lead, calling upon
me only from necessity, or to figure by her
But conceive not, Sirs, that m y complaints
ire instigated merely by vanity. N o ; m y unusiness is occasioned b y an object m u c h
more serious. It is the practice in our family,
that the whole business of providing for its
wbsistence falls upon m y sister and myself. If
my indisposition should attack m y sister, ind I mention it in confidence upon this occarion, that she is subject to the gout, the
'heumatism, and cramp, without making mention of other accidents, - what would be the
late of our poor family? Must not the regret
>f our parents be excessive, at having placed
to peat a difference between sisters w h o are
10 perfectly equal? Alas! w e must perish from
listress; for it would not be in m y power even
:o scrawl a suppliant petition for relief, having
*en obliged to employ the hand of another
n transcribing the request which I have n o w
he honour to prefer to you.
Condescend, Sirs, to m a k e m y parents
ensible of the injustice of an exclusive tenItrness, and of the necessity of distributing
heir care and affection a m o n g all their
hildren equally. I a m , with a profound
wpect.Sirs, your obedient servant,


by Dr. Mollis
The question w h y w e use ourright-handin
preference to our left will occasionally force itself upon the minds of thinking men, and the
answer is and always must be unsatisfactory.
The larger number of our organs are in duplicate, and even such as are single in m a n have
frequently traces of such duplicate formation
(e.g. the nose, hear, brain and liver). In a paper
of this popular kind it will be unnecessary to
examine this subject in all its bearings, and it
will be sufficient for us to k n o w that our
right lung, kidney, liverlobe, and limbs exceed
in size those on the left side. This increased
size of the right organs implies both a greater
amount of tissue-structures in their composition, and also a larger supply of nerves
and blood-vessels for their nutrition. It is a
well-ascertained fact, that a m a n overtaken by
a dense fog whilst waiting on a c o m m o n or
other open plot of ground invariably figures
with his footsteps the segment of a circle. The
direction he takes is to the left, if he be righthanded, and is fixed by the circumstance that
the right leg naturally takes a somewhat
longer stride than the left. In the ordinary
course of life our eyes unconsciously guide
and regulate the length of our footsteps and
enable us to walk in a straight line. This increased length of the right stride is probable
due to a or eater amount of muscular development in the lower limb on that side, and to
an increased activity in its contraction. It frequently happens a m o n g blacksmiths and
others accustomed to wield heavy hammers
with their right-hands, that the greater
muscularity of the limb causes the shoulder
on this side to be considerably higher than
upon the other side, and gives such a m a n the
appearance (when stripped of his clothes) of
having a lateral curvature of the spine. The
increased size of therightarm is in such a case
palpably due to the greater amount of work it
undertakes, and w e might be disposed to


fancy without deeper investigations that
dexterity, acting in accordance with the laws
of natural selection, has gradually brought
about the enlargement of viscera on the right
side of the body, as is shown by anatomy the reverse process is probably nearer the
truth, as I shall presently show.

can only be developed to any great extent in
civilised m a n . W e can grasp an object as
readily with the left-hand as with the right,
Most of us have experienced the awkwardness of attempting to use a pen or hurl a
ball with the left-hand. The cause of this peculiarity in m a n must be sought in that part
of his system, wherein he manifestly excels
the lower animals, and that is the brain. N o
other animal can so arrange and modify the
various muscles in a part of its body, as to
thread a needle, or to articulate a rapidly following intelligible series of words, for such
sounds are produced by the careful mutual
adjustment of numerous muscular actions.

Dexterity appears, as far as m y observations go, to be confined to the h u m a n race.
The monkey tribes, the present representatives of our Simian ancestry (if such they m a y
be), use their right a n d left limbs
indiscriminately to grasp any object offered
to them. I have tried experiments with specimens of the Rhesus m o n k e y , the bonnet m o n key (macacus radiatus), the macacus silenus
and the m. eynomologus; and I have been unable to detect, as the result of several experiments in each case, any preference for the
use of the right limb. The thoracic viscera of
some specimens of m o n k e y s preserved at the
Museum of the Royal College of Surgeons
clearly prove that the right lungs of these animals bear about the same relations to their
left,as regards their volumes, as do our o w n .
The marmot again 1 have observed to use its
left limbs as readily as itsright,and yet there
is a yeater difference between the proportions of its right and left lungs than there is
even in man, whilst in the little musk-deer the
right lung is twice the capacity of the left. O n
the other hand, a species of seal (Phoca
vitulina), the zebra-wolf (Thylacinus cynocephalus) and Manatus australis appear to
have lunos of about equal capacity on either
side. The conclusion is, that the greater size of
the right viscera, although possibly determining in some w a y the primaeval selection of
the right-hand in m a n , does not necessarily
conduce to dexterity as s h o w n by the actions
of monkeys and other animals.

The left side of the brain in mankind is
larger than the right, and it is this side which
through a decussation of crossing of its fibres
at the upper part of the spinal marrow supplies the right side of the body with volitional
powers. The investigations of pathologists,
confirmed to a great extent by s o m e recent
physiological experiments, have shown that
the power of articulation in the right-handed
is confined to a certain convolution on the
left side of the brain. W e thus arrive at the
curious fact, that in speaking and thinking
(for w e mostly think in words) w e use the left
side of our brain to the exclusion of the right,
just as w e do w h e n w e write or throw a ball. I
believe that I can show h o w unfair to ourselves and to others is this result of dextral
Medical m e n of late years have had their
attention frequendy directed towards certain
peculiar brain-affections implicating the
powers of speech. A m a n whose intellectual
powers are otherwise apparently unaffected
m a y suddenly be attacked by a disease called
'amnesia', in which he loses his m e m o r y of
words, or by 'stroke', and finds that although
he remembers the words, he cannot utter
them. In such cases w e n o w k n o w that such a
m a n , if he be 'right-handed', suffers from a

Dexterity is palpably confined to the
higher and more elaborate muscular actions of
the limbs, and this is another reason w h y it


lesion affecting the articulatory convolution
of the left side of his brain before mentioned.
On the other hand, however, should the patient be left-handed, a corresponding spot
upon therightside of the brain is diseased.
Further, w e have the statements of two
eminent physiologists to the effect that stroke
can be recovered from by exercising the opposite side of the brain for articulatory purposes. The gradual return of the powers of
speech in such cases is frequently observed; if,
therefore, w e admit this explanation of their
recovery, and I think that it is the only probable one, the inference is, that had these patients used both brains equally, the disease
would not have occurred w h e n it did. Closely
allied to this disease is the hammerpalsy, observed, according to Mr. W . Frank Smith, to
affect knife-forgers and other h a m m e r m e n . It
consists of more or less loss of power over the
right limbs, combined occasionally with
symptoms of aphasia. A pen-knife-forger frequently delivers as m a n y as 28,800 accurate
strokes with his h a m m e r in the course of a
day. "The rapidity and accuracy with which
these blows rain upon the slender piece of
iron is wonderful to the onlooker. Supposing
he works three hundred days in a year, and to
continue this for ten years, he will in that
period have delivered eighty-eight million four
hundred thousand strokes; and just so m a n y
discharges of nerve-force will have occurred in
the motor ganglia which calculate the distance
and judge of the amount of force necessary to
be evolved." The palsy, which occaionally follows this excessive wear and tear of nervetissue in h a m m e r m e n , is still m o r e frequently
seen as a result of m u c h writing. The scrivener's palsy or writer's cramp, as the disease is
called, consists in a gradual loss of prehensile
power, and in subsequent wasting of the muscles of therightarm and hand. T h e clerk, w h o
& affected by this paralysis, finds an increasing difficulty in holding the pen, until he
eventually becomes qJte unable to do so. In

the earlier stages of the ailment to abstain
from writing for a few weeks will effect a
cure; not so, however, w h e n the wasting of
the paralysed muscles has commenced; the
disease is then incurable as far as the righthand is concerned. There are still hopes for
the patient, however, if he learns to write
with his left-hand he m a y continue his previous employment. W e cannot doubt that had
such a person from his childhood learnt to
write readily with either hand, the paralytic
seizure would have been postponed.
That many worthy lives have fallen a sacrifice to this Moloch of education is undoubtedly true. Such cases as these, to the
exclusion of m a n y others which might be adduced, s h o w h o w active energetic brains break
d o w n by overwork, or rather, by Si-balanced
work. It is perhaps too m u c h to say, that
none of these attacks would have taken place
had the patients allowed each side of their
brains to participate equally in their work,
but speaking with s o m e reservation, I believe
it is probable that the disease would have
been indefinitely postponed had their education been other than 'lopsided'. Physicians
have long since learnt to educate each eye and
each ear equally to aid them in the diagnosis
of disease, and as workers at the microscope
or stethoscope they can testify to the relief
which is given to a wearied organ by employing for a while its fellow. W h y should w e
not thus educate our hands?
In the days of our forefathers when work
was not performed at the present highpressure speed, and the struggle for existence
was proportionately less, the dextral flaw in
our education was of little or no importance;
n o w , however, the time has arrived when our
posterity must utilize to the utmost every
cubic line of brain-substance, and this can
only be done by a system of education which
will enforce an equal prominence to both
sides of the brain in all intellectual operations.

T w o handed Nations
Sythai (1220 B.C.)
The Scythians were a people w h o by law;
were enjoined to exercise both hands alike,
without partiality either for right or left.
"Very few of them dies in sickness. In general they lived to a good old age."
"Their w o m e n are affirmed to have been so
well trained to riding and shooting that they
did not fall short of the m e n in those exercises." (Lucian)
Theft among them was rare. (Josephus)
They "were a nation fierce in war and of
prodigious strength w h o could so control
their passions that they m a d e no use of their
victories." (Justin)
What is more wonderful, those virtues
which the Greeks in vain endeavored to attain
by learning and philosophy were natural to
them, and they reaped those advantages from
their ignorance of vice* which the other could
not derive from their knowledge of virtue.
"They were remarkable for their fidelity
and friendships, which they esteemed and
gloried in above all things...and w h e n such a
friendship was contracted, there was no
danger or death which they would not expose
themselves to for one another." (Justin)
"Upon the whole such was their strength
and courage wherever they entered into an offensive or defensive war, no nation either in
Europe or Asia could equal them for strength,
valor, or conduct." (Thucydides)
The non-preferred hand should be trained
to perform every and any task that the preferred hand can perform. The important thing
here is to occupy the unused hanc" arm, and

fingers in



O n c e truhandedness is restored the choice
of what hand to use will then be a matter of
which is most convenient and efficient.
Legs. Leg preference means that a person
steps up and d o w n with the same leg, starts to
walk, jump, run, and kick with the same leg,
that one leg takes a longer stride than the
other and that the body's weight is carried on
that leg more than the other.
Almost all suffer such imbalanced use of
their lec$. It is little wonder that the hip of the
prefered leg is thefirstto undergo degenerative change.
Correction of imbalanced leg use begins
with awareness of leg preference. Once such
preference is recognized, step up and d o w n
with the non-preferred leg, start off to walk,
run, jump, and kick with the non-preferred
leg, take a longer stride with the non-preferred leg and a shorter stride with the preferred leg. Most important is to carry the
body's weight on the non-preferred leg.
This calculated asymmetrical use of the legs
should be carried on for a period of time
equal to about half the time leg preference
was in effect, or until that time that the weak
legs's bone, muscles and nerves become
symmetrical in size and function. For most of
us this will take yearsEyes and ears. Almost allrighthanded people are right eyed and right eared. This means
that they mainl" use their right ear and eye
for sight and hearing.
Correction of this condition or rather
strengthening of the weak dormant centers
for sight and hearing in the non-dominant
brain half. However an eye patch worn over
the preferred eye and an ear plug in the preferred ear will force these weak organs of
sense into a state of strength. The length of
time these devices should be worn depends on

factors of age, which cannot be calculated at
this time. Six weeks should be the minimum
amount of time they are used.

Circles done at different speeds

Almost allrighthanded people swallow and
speak on the right side of the throat. This
condition is easy to correct.

Left hand Right hand

Swallow a few small sugar balls in succession and note that one side of the throat did
the swallowing. Once asymmetrical swallowing is recognized, proceed to swallow and
speak on the non-preferred side of the throat.
Here again the amount of time anyone should
do this depends on age and h o w much rest the
preferred side needs.
The final aim of all this asymmetry is the
balanced use of these organs and members.
Following are five exercises for restoration
of truhandedness through simultaneous use
of both hands on different manual activities.
The arrows indicate the directions that the
hands should move.
Great care should be taken to fix and hold
the sight on the " X " between the drawn figures for only then will the two objects being
drawn come into simultaneous focus.
Shifting sight from one hand to the other is
an error which makes truhanded writing impossible.
A transparent plastic writing board standing on an artist's tripod and colored marking
pens are the suggested materials to use.
Approximate time for lesson one is one
week, of lesson two, two weeks, lesson three,
four weeks, lesson four, eight weeks, lesson
five, sixteen weeks.
Please note that in exercise three the alphabet is drawn with one hand, while a circle
alternating with a square is drawn with the
The natural way to write left handed is



Left hand



Right hand


Each letter of the alphabet with a numeral.

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dynamic Systems created in advance of legislation, Section
23, of Macoscof Trust fled: April 30th, 1973, Index N o
517-D, provides: "that the United States Secretary of Agriculture m a y enter at w * and without notice, any Exempt C o m modity Futures contract market — under management and
control of said trust "* to inspect observe and m a k e such
rules and orders es is necessary, andtoinstitute actions in
the United States Court of Appeals upon the letter's failure to
compfy with its rules and orders.''

Deify Journal
of Exempt Commodity Futures Trading
World Benefits of New Exchange Mechanism
xempt Commodity Futures Trading is a newly established
:em whereby the principles of commercial transactions
e been further refinedtoremove from the Exempt C o m ity Futures contract market place, representatives of
culative capital interests and to replace them with entities
se inherent interest in this n e w and vital industry, though
rritten and difficult to exercise, far surpasses speculative
ts to appreciate capital.
hese entities are: Governmental Taxing Agencies, Govmental Agricultural Ministers, Judicial and Excutive
•cries of Government for recomendation to Lawmakers,
Jucers, Processors, Manufacturers, Ecotogists, Conserxiists and selected charitable foundations to provide
umentation workers.
itroducfon into worid commerce of a valid Exempt C o m ity Futures Contract • one executed by a certified broker,
stereo" on a duly established Exempt Ck>mmodity Futures
hange and guaranteed for performance by the Exempt
nmodity Futures Exchange Clearing House, should
>ilize present economy bouyed up on futures contracts
lufactured without a valid exchange mechanism.
anks loan up to 9 0 % of the face value of valid exempt
imodity future contracts.
he inception of a viable and sound Exempt Commodity
ires Exchange Mechanism, one which adequately met
wnmental, commercial and charitable needs, did not
inate from any governmental agency but by nature and
had to be fashioned by those w h o need it for the normal
iuct of a new and vital industry: Exempt Commodity Merits.
hree exchanges have been established in America to
sect exempt commodrry futures trading. They are: the
'York Exempt Commodity Futures Exchange, the United
es Exempt Commodrry Futures Exchange and the internal Exempt Commodrry Futures Exchange.
tae exchanges are organized like the stock markets.
exchanges are public in the sense that anyone can trade
makes the necessary arrangements with m e m b e r
• ^ firms. Thus, you don't have to be in the carrot
"•*tobuy and sei carrots, or in the metals business to
metals, etc
ternattonal businessmen w h o produce and process ex* commodities use the exchanges primarilytorhedging
"totes. In this area, Exempt Cc«mnodiry Futures ansi inportant and special economic needs which cannot be
?wtery met by banks, stock exchanges and other ftnan•nstttutions.

Copyright - Macotcof Trust -1976

Deify Journal
Exempt Commodity Futures Treding


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US » & - a *
Medicinal herbs
Acalypha indica:
U S $ 2-00 par kg
Adhatoda vesica:
U S I 2-10 par kg
Aegis marmeioa:
U S I 2-30 par kg
U S I 2-10 par kg c&f Friaco
Argemone mexicana:
U S $ » 7 0 par kg
Anstlochia brecheata:
U S » 4-90 per kg
Alpinis gaianga.
U S $ 2-00 par kg
*•*• a^grfowj:
U S $ 2-00 par kg
•oerhevis diffusa:
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• BorvJucafla casalpinea:
U S I 4-20 par kg
• C*lotropi» gigantee:
U S $ 2-40 par kg
• Cassia fistula:
U S • 3-80 par kg

• 9ast0f weds:

"Wnui communis
C*Phalandra indica:
• CitrulU-, colocymhia:
• D«tur> stramonium:

US I 2-30 par kg
U S t 2-00 par kg
U S $ 2-00 par kg

T7. Ecfipta afca:
18, Euphorbia amiquorum:
18. G v m n a m a syfveetre:
20. Hydrocotyle asiatica:
21. Hyoaavamas nigar.
22. Mafia azaoVachta:
23. Maringa ptarvgaaparma:
24. Lawsonta atba:
25. Nyetanthee erbortrietie:
26. n*x vomica:
27. O o m u m sanctum:
28. Phyftanthaa embiica:
29. Plumbago zeylonica:
30. Pongamia gtonica:

U S 13-80 par kg
U S » 2-00 par kg
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U S $ 2-00 par kg
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U S $ 3-30 par kg
FOB, Korean port
par 1,000 kgs

1. Hot RoAad Steel C O N S
Regular Mild Steel quality, SAE,
S A E 1010 to 1020
Width: 38" 48" onry
Gauge: #14 and/or heaviar.
U S • 180 00
2. Cold Rolled Steel Coils
Commercial quality, S A E 1008
Rockwall hardness 860 Max.
Width: 36" and 48"
Gauge: 12 or heavier
Coil Weight: 13,000 Lbs. to 18,000 Lbs.
U S I 197.00
3. Galvanized Barbed Wire,
JIS G3S33 (IOWA Type)
G #12.1/2. 4 points 4"-6" spacing.
U S * 352.50
4. Galvanized Iron Wire,
JIS G3532-SWMGI,G2 S W G #6-22.
5. B L A C K Annealed Wire, JIS G3532 S W M - A
S W G #6-22, 25/50 kgs per coil.
U S I 340.00
6. Mild Steel Place, A S T M A36,
A283 G R A D E C,
Thickneas: 3-6", Length: 6-20"
U S • 200.00
7. Deformed concrete Reinforcing Ban,
A S T M A-615 Grade 40,
3/r*-1.5/8" die. 10-40" in length.
U S • 180.00
8. Round concrete Reinforcing Bars,
JIS G3112 6 m m - 7 m m dia.
8 m m - 4 1 m m x 12 meter length.
U S t 180.00
9. Steel Square Bar, A S T M A36,
1/4"-1" square, 20" length max.
10. Steal Rat Bar. A S T M A36,
1/8"-5/8* in thickneas.
Width. 1/2"-1", Langth: 20" max.
U S $ 200.00
11. Sta* Angle Bar (Equaled), A S T M A-36
1.3/4"x1/8"-3"x5/16, 1/4",20",30" length.US • 200.00
12. Wire Roda for wire drawing, JIS G3606
6 m m d* 100 kgs per coi.
U S I 205.00
13. Electrodes for Electric Arc welding
A S T M 8011, many others, imenrte type. U S I 39500
14. Garvenoed Electric Resistance Welded steel
pipe, in accordance with 8 S S 1387/67,
length: 20ft. both ends screwed, one end
socketed, other protected.
Gieae Bght: 11T. 3/4", 1"
U S • 300.00
1"-1/2", 2 "
U S • 286.00
Ditto, but Medium daaa
1/2", 3/4", 1"
U S % 30500
1-1/2", 2"
U S 1296.00

Ub* &a?Trader
Deify Journal
of Exempt Commodity Futures Trading

Monday-10 to 2.00 EDT
Silver Bullion-1,000 Oz. MinSilver Spot4.40
Silver Future-(190 days)4J0
Re-bar. No. S's, Min. 10 Tons,Re-bar, Spot 34.00
Re-bar, Future. (190 days) 3420
Tuesday • 10 to 2.00 EDT.
Domestic US. Cement, Min. 25 Tons.
Cement, Spot 50.50
Cement Future - (190 days) •








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!i£ A daily publication; THE DAY TRADER
• I2J0
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N.Y.C. 10013 THE DAY




John Luomala, being duly sworn says that the accompanying enclosure was mailed,
to the following through the UNITED STATES POSTAL SERVICE:





60 Centre Street NYC NY

111 Centre Street NYC NY
le copy; pro se clerk Coffey

signed; x
John Luomala;Bx 658 nyc 10C13



V"> n w o t i c

urn <r\i~<m

November 12, 1981

32 IHaple Drive
Nortk Caldwell, New Jersey 07006


















~^~- ,

We've been, duped!








Gary North

Summary of the Paper
A. What Economists Know
1. Economists cannot, as scientists, recommend any policy because of its
scientifically demonstrated benefits to the public.

(The problem of

interpersonal comparisons of subjective utility.)

2. Economists, by training, avoid questions of economics and morality.

B. What Is Honest Money?.
1. Most marketable commodity

Possesses historic value


Expected to possess reliable, somewhat stable future value

2. Governments possess a monopoly over the creation of money

Monopolies tend to be abused


Central banks tend to accommodate past price inflation


Monetary inflation becomes a permanent phenomenon

d...The implicit contract -

the promise of reliable money ~

is broken

C. Civil liberties and the Gojd Standard
1. Redeemable money restricts government's ability to debase currency unit

Public can protest debasement by demanding gold for depreciating paper


Arbitrary money manipulation ("flexible monetary policy") is hampered


Implicit contract by government to produce honest money is enforced

2. Iredeemable currency reduces public's ability to pressure arbitrary state
D. Guarding the Guardians
1: Specialists can speculate against the Treasury's promises


The gold standard forces the Treasury to defend its promises daily

Summary of Appendix

/\. Three-step Program

Abolish legal tender for U. S. government money


Allow private minting of "gold dollar" and "silver dollar"




Fixed weight and fineness established by law


100% reserves for all specie-money substitutes (warehouse receipts)


No attempt to set exchange ratios by law among various currencies

Full gold-coin redeemability by Treasury at market prices

Freedom does not threaten the free society

Gary North
Because of the nature of the economics profession -- "guild" might be a better
word -- it is necessary to put quotation marks around the words, "honest money."
Economists will go to almost any lengths to avoid the use of moral terms when they
discuss economic issues. This has been true since the seventeenth century, when
early mercantilistic pamphlet writers tried to avoid religious controversy by
creating the illusion of moral and religious neutrality in their writings. This,
they falsely imagined, would lead to universal agreement, or at least more readily
debatable disagreements, since "scientific" arguments are open to rational investigation. The history of both modern science and modern economics since the seventeenth
century has demonstrated how thoroughly unreconcilable the scientists are, morality
or no morality.
Nevertheless, traditions die hard. Economists are not supposed to inject
questions of morality into their analyses. Economics is still supposedly a "positive"
science, one concerned strictly with questions of "if . . . then." _If the government
does A, then B is likely to result. _If the government wants to achieve D, then it
should adopt policy E. The economist is completely neutral, of course. He is just
an observer who deals with means of achieving ends. The economist can therefore deal
with "complete neutrality," with this sort of. problem: "If the Nazis wish to exterminate 50,000 people, which are the most cost-effecive means?" No morality, you
understand, just simple economic analysis.
The problem with the theory of neutral economics is that people are not neutral,
effects of government policies are not neutral, social systems are not neutral,
legal systems are not neutral, and when pressed, even economists are not neutral.
Because societies are not neutral, the costs of violating a society's first princiGary North, Ph.D, is President of the Institute for Christian Economics, located
in Tyler, Texas. The ICE is a non-profit, 501(c)(3) organization.


ples have to be taken into account.

But no economist can do any more than guess

about such costs. There is no known way to assess the true costs to society of
having its political leaders defy fundamental moral principles and adopt any given
policy. And if the economists guess wrong -- not an unlikely prospect, given the
hypothetical moral vacuum in which economists officially operate -- then the whole
society will pay. (This assumes, of course, that policy-makers listen to economists.)
The inability of economists to make accurate cost-benefit analyses of any and
all policy matters is a kind of skeleton in the profession's closet. The "problem
was debated back in the late 1930's, and a few economists still admit that it is a
real theoretical problem, but very few think about it. The fact of the matter is
simple: there is no measuring device for balancing total individual utility vs.
total disutility for society as a whole. You cannot, as a scientist, make interpersonal comparisons of subjective utility. The better economists know this, but they
prefer not to think about it. They want to give advice, but as scientists they
cannot say what policy is better for society as a whole.
This is why politicians and policy-makers have to rely on intuition, just as
the economists do. There is no scientific standard to tell them whether or not a
particular policy should be imposed. Without a concept of morality -- that some
policy is morally superior to another — the economists' "if . . . then" game will .
not answer the questions that need to be answered. Without moral guidelines, there
is little hope of guessing correctly concerning the true costs and benefits to
society as a whole of any policy. The economist, as a scientist, is in no better
position to make such estimations than anyone else. If anything, he is in a worse
position, since his academic training has conditioned him to avoid mixing moral
issues and economic analysis. He is not used to dealing with such questions.


What Is Honest Money?
Honest money is a social institution that arises from honest dealings among
acting individuals.

Money is probably best defined as the most marketable commodity.

I accept a dollar in exchange for goods or services that I supply only because I have
reason to suspect that someone else will do the same for me later on.

If I begin to

suspect that others will refuse to take my dollar in exchange for their goods and
services in the future, I will be less-willing to take that dollar today.

I may

ask the buyer to pay me a dollar and a quarter, just to compensate me for my risk in
holding that dollar over time.
A currency unit functions as money -- a medium of voluntary exchange -- only
because people expect it to do so in the future.

One reason why they expect a

particular currency unit to be acceptable in the future is that it has been acceptable in the past.

A monetary unit has to have historic value in most instances,

if it is to function as money.

Occasionally, meaning very rarely, a government can

impose a new currency unit on its citizens, and sometimes this works.

One good

example is the introduction of the new German mark in November of 1923, which was
exchanged for the old mark at a.trillion to one.

But normally the costs are so high

in having people rethink and relearn a new currency unit that governments avoid such
an imposition.
The question policy-makers must ask themselves is this: To avoid the necessity
of imposing a totally new currency unit on a population, what can be done to convince
people that the future usefulness of the currency in voluntary exchange will remain

What can be done to improve the historic value of money in the future?


other words, when people in a year or a decade look back at the performance of their
nation's currency unit, will they say to themselves: "This dollar that I'm holding
today buys pretty much what it bought back then.

I think it's safe for me to

continue to accept dollars in exchange for my goods and services, since people trust
its buying Dower.

I have no reason to believe that its purchasing power will fall


in the future, so I can take the risk of accepting payment in dollars today."


people do not say this to themselves, then the dollar's purchasing power is undermined.

People will demand more dollars in payment, meaning prices will go up, if

they suspect that prices will go up. This, in turn, convinces more people that the
historic value of their money has been unreliable, which then leads to higher prices.
The economist will tell you that prices cannot continue to go up. unless the
government, working with the central bank, accommodates price inflation by expanding
the currency base.

The economist is correct in the long run, whatever the long run

is these days, or will be in a few years.
to accommodate price inflation.

But governments have a pernicious tendency

Dr. Arthur Burns was forthright about this back in

These days the Federal Reserve is now and then described as pursuing
a restrictive monetary policy.

The Federal Reserve is described as being

engaged in a struggle against inflation.

The Federal Reserve is even

charged with being more concerned about inflation than about unemployment,
which is entirely false.

It is by generating inflation, or permitting

inflation, that we get unemployment on a massive scale eventually.


let us in the Federal Reserve ask this question: Are we accommodating
inflation at the present time or not?
professional answer —

The answer —

the only honest,

is that, to a large degree, we are accommodating

the inflation; in other words, are making it possible for inflation to

So we get a kind of self-fulfilling prophecy. The government expands the money
supply in order to finance its deficits, or create a temporary economic boom, or
whatever, and the prices for goods and services rise.

Everyone in the "great American

auction" has more dollars to use in the bidding process, so prices rise.

Then the

public gets suspicious about the future value of money, because they have seen the loss
3f purchasing power in the past.

They demand higher prices.

Then the Federal Reserve

System is encouraged by politicians to accommodate the price inflation, in order to keep
-he boom going (to keep the "auction" lively).

The dollar loses its present value,


because it has lost its historic value, which encourages people to discount sharply
its future value.
The secret of retaining the public's confidence in any currency unit is simple
enough: convince users of the money that the issuers are responsible, reliable, and

Government and its licensed agents have a monopoly of money creation.

Private competitors are called counterfeiters.

Sadly, in our day, it is very diffi-

cult to understand just what it is that counterfeiters do, economically speaking,
that governments are not already doing.

Fiat money is fiat money.

(Perhaps the real

legal issue ought to be the illegal use of the government's copyrighted material.
Copyright infringement makes a much more logical case for Federal prosecution than
There is an ancient question that every society must answer: !"Who guards the

Or in more contemporary usage, "Who referees the referees?"

needs an impersonal guardian

The public

to restrain the actions of those who hold a legal

monopoly of money creation: the government, the central bank, and the commercial

The public can guard the guardians if citizens have the right to go down to the

local bank and receive payment in gold, silver, or some other money metal.

The issuers

of money need only stamp on the paper money (or check, or deposit book entry) that the
holder of the currency unit has a legal right to redeem his warehouse receipt for a
stated weight and fineness of a specific metal. 3 Whenever the issuing agencies begin
to issue more receipts than they have reserves of metal, the public has the option of
"calling the bluff" of the issuers, and demanding payment, as promised by law.

It is

this restraint -- implicit economically, but explicit legally — which serves as the
impersonal guardian of the public trust.
The government can always change the law.

Governments do this all the time.

Whenever there is a major war, for example, governments suspend specie payments.


also suspend civil liberties, and for the same reason: to increase the power of the
state at the expense of the citizens.

Governments in peacetime are frequently


unwilling to re-establish pre-war taxes, pre-war civil'liberties, and pre-war convertibility of currencies, even after the war is over.

Civil libertarians have not

generally understood the case for a gold standard as a case for civil liberties,
despite the obvious historical correlation between wartime suspension of civil
liberties and wartime suspension of specie payments.
When the authorities declare the convertibility of paper into specie metals
"null and void," it sends the public a message,


This is your government

We are no longer willing to subject ourselves to your continual interfer-

ence in our governmental affairs.

We no longer can tolerate illegitimate restrictions

on our efforts to guard the public welfare, especially from the public.


we are suspending the following civil right: the public's legal right to call our
bluff when we guarantee free convertibility of our currency.

This should not be

interpreted as an immoral act on the part of the government,

Contracts are not

moral issues.

They are strictly pragmatic.

However, we assure you, from the bottom

of our collective heart, that we shall never expand the money supply, or allow the
historic value of the currency to depreciate.
standard restraint on our printing presses.

It will be just as if we had a gold
However, such restraints are unnecessary,

and besides, they are altogether too restraining."
Critics of the gold standard (and this includes virtually all Ph.D-holding,
card-carrying economists) tell us that the value of any currency is dependent on
public confidence, not gold.

But what the critics refuse to admit is that the

existence of the civil liberty of redeemable money is an important psychological
support of the public's confidence in money.

Even when the public does not under-

stand the gold standard's theoretical justification -- an impersonal guard of the
monopolistic guardians -- citizens can exercise their judgment on a daily basis by
either demanding payment in gold (or silver, or whatever) or not demanding payment.
Like the free market itself, it works whether or not the bulk of the participants
understand the theory.

What they do understand is self-interest: if there is a


profit to'be made from buying gold at the official rate, and selling it into the
free market (including foreign markets) at a higher price, then some people will
enter the markets as middlemen, "buying low and selling high," until the government
realizes that its bluff has been called, and it therefore is forced to reduce the
expansion of the money supply.
What is the morality of a gold standard? Simple: it is the morality of a legal
contract. A government's word is its bond. A government promises to restrain
itself in the creation of money, in order to assure citizens that the monopoly of
money-creation will not be abused by those holding the monopoly grant of power.
The gold standard is very much like a constitution: an impersonal, reliable institution which has as its premier function the counterbalancing of potentially damaging monopolistic power.

"Flexible" Money
Flexible money is a euphemism for the government's ability to increase (but,
historically speaking, rarely to decrease) the money supply. The degree of flexibility is determined by the political process, not by the direct response of those
affected,.namely, individual citizens who would otherwise have the right to demand
payment in gold. Flexible money means monetary inflation. Very flexible money means
a whole lot of nonetary inflation. Monetary inflation means, within 24 months, price
Civil libertarians instantly recognize the danger of "flexible administrative
law," or "flexible censorship," or "flexible enforcement of speed traps," Yet they
have great difficulty in recognizing precisely the same kind of evil in "flexible
monetary policy." The threat comes from the same institution, the civil government.
It comes for the same reasons: the desire of the government to increase its arbitrary
exercise of monopolistic power over the citizenry, and to limit public resistance.
The inflationary implications of "flexible monetary policy" can be seen in a
revealing exchange, between Arthur Burns and Henry Reuss:



Let me say this, if I may: the genius of monetary policy

its great virtue —

is that it is flexible.


With respect to the growth

ranges that we project for the coming year, as I have tried to advise
this committee from time to time —

and as I keep reminding others, in-

cluding members of my own Federal Reserve family —

our goal at the Federal

Reserve is not to make a particular projection come true; our goal is to
adjust what we do with a view to achieving a good performance of the economy-

If at some future time I should come to this committee and report a

wide discrepancy between our projection and what actually happened in the
sphere of money and credit, I would not be embarrassed in the slightest.
On the contrary, I would feel that the Federal Reserve had done well and I
would even anticipate a possible word of praise from this generous committee.

CHAIRMAN REUSS: You would get it, and the word of praise would be even
louder and more deeply felt if you came up and said that due to the change
in circumstances you were proving once again that you were not locked on
automatic pilot and were willing to become more expansive if the circum4
stances warranted. Either way you would get praise beyond belief.

Praise beyond belief! Who wants anything less? Just take the monetary system
off "automatic pilot," and turn it over to those whose short-run political goaTs favor a retiirri*of the inflation-generated economic boom, once the boom has worn off
because the printing presses are not accelerating the output of fiat money -fiat money being defined as former warehouse receipts for metal, in which even the
pretense of a warehouse has been abandoned.

Gold is a tough-minded automatic pilot.

Politically, there is a great deal of flexibility in monetary affairs.


people even pretend to understand monetary affairs, and most of those who do really
do not understand the logic of the gold standard.

The logic is very simple, very

clear, and universally despised:

It is cheaper to print money than it is to dig gold-

Fiat money is indeed pore flexible than gold, especially in an upward direction.
Fiat money allows the government to spend newly manufactured money into circulation.


It allows those who gain early access to the newly created fiat money to go out and
buy up scarce economic resources at yesterday's prices -- prices based on supply and
demand conditions that were being bid in terms of yesterday's money supply. But this
leads to some important problems:
1. Yesterday's prices will climb upward to adjust for today's money supply.
2. People will begin to have doubts about the stability of tomorrow's prices,
3. Producers and sellers of resources may begin to discount the future purchasing
power of today's dollar (that is, hike today's prices in anticipation).
4. The government or central bank will be severely tempted to "accommodate"
rising prices by expanding the money supply.
5. And the beat goes on.
Paying for the Guards
It is quite true, as Milton Friedman has stated so graphically, that the gold.
standard is expensive.5 We dig gold out of the ground in one location, only to bury
it in the ground in another location. We cannot do this for free. Wouldn't it be
more efficient, meaning less wasteful of scarce economic resources, Or. Friedman
asks., .just to forget about digging up gold? Why not keep the government or the
central bank from expanding the money supply? Then the. same ends could be accomplished so much less wastefully. Save resources: trust politicians.
This is a very strange argument, coming as it does from a man who understands
the efficiency of market processes, as compared to political and bureaucratic processes. The gold standard is the way that individual citizens acting to increase
their own personal advantage, can profit from any monetary inflation on the part of
the monetary authorities. They can "buy low and sell high" simply by going down and
exchanging paper money at the undervalued, official exchange rate, and hoarding it
in expectation of a higher price, or selling it into the free market at a higher
price. Why is the price higher? Because individuals expect the government to


gO back on its promise, raise the official price of gofd (that is, devalue the
currency unit), or close the gold window altogether. Citizens can become futurepredicting, risk-bearing, uncertainty-bearing speculators in a very restricted
market, namely, the market for government promises. It allows those who are skeptical
about the trustworthiness of government promises to take a profit-seeking position
in the market. It allows those who trust the government to deposit money at 6% •
or 10% or whatever. Each side can speculate concerning the trustworthiness of
government promises concerning redeemability of the currency, or more to the point,
government promises concerning the future stability of the currency unit's purchasing
Defenders of the commodity futures markets -- and this includes Dr. Friedman
-- argue that the existence of a market for future delivery and future payment of
commodities smooths out market prices, since it opens the market to those who are
willing to bear the uncertainties of predicting the future. Those who are successful
predictors increase their profits, and therefore increase their strength in establishing market prices according to the true future conditions of supply and demand.
Those who are less successful soon are forced out of the futures markets, thereby
passing along capital to those who are more successful predictors. The public is
served well by such markets, for obvious reasons. Prices adjust to future consumer
demand more rapidly, since accurate future-predictors are being rewarded in these
Then why not a market for future government promises? Why not a market which can
test the government's willingness to deliver a stated quantity and fineness of gold
or silver (but preferably gold, given international exchange)? The monopolists who
control the money supply then are faced with a market which offers rewards to those
who are willing and able to "call the monopolists' bluff" and demand gold for the
government's warehouse receipts.
Why not just rely on the standard commodity contracts for gold in the commodity
futures markets? Won't skeptics be able to take their profits this way? Why bring in


the "spurious" issue of a convertible currency?

The answer is simple enough: once

society has given a monopoly to the government to create money, then the full redeemability of the currency unit is a direct, immediately felt restriction on government
power. Of course the free market in commodities allows speculators to take advantage
of monetary inflation, if their timing is correct. But this does not mean that the
public at large will exercise effective action to force a political change in present
monetary policy. There is no immediate self-interest involved in expending resources
in what could prove to be a fruitless, expensive campaign to stop the inflation. After
all, very few citizens are so wrapped up in a cause that they will do what I am doing
now, namely, sit down and take time to submit a position paper to a gold standard
committee that is staffed with members who generally are opposed to a gold standard.
Average citizens have better things to do with their time. But with full redeemability,
the average citizen can help to restrain the inflationary tendencies of government
by being allowed to "take a contract" on the other side of the bureaucrats and the
politicians. The average citizen can speculate against the big spenders who want
more goodies from government, but lower taxes (at least on themselves). The average
citizen "shor.ts" the government's promise (implicit or explicit) not to debase the
currency unit, while the Treasury Department is forced, by law, to "go long" against
any and all citizens who decide to go short. •
In the commodities market, one investor wins, and one investor loses (unless
the price stays the same, in which case only the broker wins), By establishing the
gold standard -- full redeemability of gold on public demand -- the government forces
the Treasury, to risk becoming an immediate, measurable loser. It forces the Treasury's
officials to come back to the politicians and announce, "Folks, we have lost the bet.
The public has called our bluff. They have drained us of our gold. We can't go on
much longer. We have to stop the inflation. We have to convince the public to start
trusting the currency, meaning that they should start trusting our competence in
securing them a currency with a future. We have to balance the budget.'Stop inflating!"


An open commodities market in gold is desirable, of course.

But it is no

substitute for a gold standard, if the state has a monopoly of money creation (along
with its licensed subcontractors, the banks). Unless there is full redeemability,
the Treasury is not forced by law to "go long" on its promises whenever anyone else
wants to "go short." The Treasury, meaning the government, can keep on shorting
its own promises, despite the response of organized commodities markets, until an
expensive and successful political campaign can be launched to stabilize the money
supply. As free market analysis tells us, these campaigns are expensive to launch
because of such factors as information costs, costs of organizing pressure groups,
and the lack of an immediate, short-run pay-off to "investors" who contribute money
to such a program. Full redeemability allows market forces to work. Self-interested
forecastors can speculate in the government promises market. The public never has
to be told to vote, or send letters of protest, or do anything. The self-interested
speculators -- a small but well-capitalized elite -- will do the "policing" job for
the citizens free of charge. (Well, almost: there are transaction costs.)
So when we are told that it is inefficient to dig gold out of the ground, only
to deposit it in a vault, we are not being told the whole story. By tying the currency unit to that gold -- which is. wonderful ]y expensive to mine, as any monetary
brake should be and must be -- the body politic enlists a cadre of professional,
self-interested speculators to serve as an unpaid police force. This police force
polices the trustworthiness of government monetary promises. The public can relax,
knowing that a hard core of greedy capitalists is at work for the public interest,
monitoring Federal budgets, Federal Reserve policies, and similarly arcane topics.
By forcing the Treasury to "go long" in its own promises market, the guardians are
guarded by the best guards of all: future-predicting, self-interested speculators
whose job it is to embarrass those who do not honor contracts -- their own contracts.


I suppose I could invest more time in presenting graphs, or faking some impressivelooking equations, or citing—innumerable forgotten defenders of the gold standard.
3ut I think I have reached the point of diminishing returns.

The logic of the gold

standard is really fairly simple: Treasury monopolists, like all other monopolists,
cannot be trusted to honor their promises. Better put, they cannot be'trusted at zero

The gold standard is one relatively inexpensive way to impose high costs on

government monetary officials who do not honor their implicit contracts with the
body politic to monitor and deliver a reliable currency unit that will have future
value.-- a trustworthy: money system. There are moral issues involved: honoring contracts, preserving social stability, providing a trustworthy government.

There are

civil liberties issues involved: protecting citizens from unwarranted taxation through
monetary Inflation, protecting citizens from arbitrary (read: "flexible") monetary
policies, and restricting the expansion of government power.

There are economic

issues involved: designing an institutional mechanism that will bring self-interest
to bear on political-economic policies, stabilizing purchasing power, increasing the
spread of information in the community, increasing the political risks of money

No doubt, I could go on, but these arguments seem sufficient.

The real question is more fundamental: Do we trust'governments or the high costs
of mining precious metals?

William McChesney Martin, Dr. Burns' predicessor as

Chairman of the Federal Reserve Board, gave us the options back in 1968, in the midst
of an international monetary crisis:
It's governments that you have to rely on. Basically, you can't rely on
a metal for solvency.

Those of us who cannot bring ourselves to trust the government with the monopoly
over the control of money prefer to trust a metal.

It may not be the best thing to

trust, but it is certainly more reliable that governments.


The case for a gold standard is the case against arbitrary civil government.
While politicians may well resent "automatic pilots" in the sphere of monetary policy,
if we had a more automatic pilot, we would have less intensive "boom-bust" cycles.
When the "automatic pilot" is subject to tinkering by politicians or Federal Reserve
officials, then it is not automatic any longer.
The appeal of specie metals is not the lure of magical talismans, as some critics
of gold seem to imply.

Gold is not a barbarous relic.

Gold is a metal which, over

millennia, has become acceptable as a means of payment in a highly complex institutional arrangement: the monetary system.

Gold is part of civilization's most impor-

tant economic institution, the division-of-labor-based monetary system.

Without this

division of labor, which monetary calculation has made possible, most of the world's
population would be dead within a year, and probably within a few weeks.

The alter-

native to -the free market social order is government tyranny, some military-based
centralized allocation system.

Any attempt by the state to alter men's voluntary

decisions in the area of exchange, including their choice of exchange units, represents
the true relic of barbarism, namely, the use of force to determine the outcome of
men's decisions,
The gold standard offers men an alternative to the fiat money systems that have
transferred massive monopolistic power to the civil government.

The gold standard is

not to be understood as a restraint on men's freedom, but just the opposite: a means
of restraining that great enemy of freedom, the arbitrary state.

A gold standard

restores an element of impersonal predictability to voluntary exchange —


in the limited sense of not being subject to the whims of any individual or group.
This predictability helps to reduce the uncertainties of life, and therefore helps
to reduce the costs of human action.

It is not a zero-cost institution, but it has

proven itself as an important means of reducing arbitrary government.

It is an

"automatic pilot" which the high-flying, loud-crashing political daredevils resent.
That, it seems to me, is a vote in its favor.



When I began to prepare this paper, I had two possible audiences: economists, or
people with some authority.

I decided to write for the latter group.

For the benefit

of non-economists who may wish to discuss some of these points with the economists,
you need to know the following.

An economist, in the final analysis, is a person who

knows six words, divided into two three-word phrases.

Virtually everything in econo-

mics is the outworking of these two phrases.

The first phrase is a question. The

second phrase is the answer to the question.

The phrases are:

Question: "At what price?"


Answer: "Supply and demand."
This is the alpha and the omega, the law and the profits, in economics. Any economist,
if he is a serious economist, looks at a supposed economic problem, and asks, "At what

Is there a "glut"?

At what price?

Is there a "shortage"?

And when asked how to set the appropriate price, he responds:

At what price?


Supply and demand."

I.would contend that most of the success of the so-called Chicago School of
economics, which includes Dr. Friedman, is based on the ingenuity of the Chicago
School economists in discovering creative, or at least clever, ways of asking the
question about pricing (meaning costs), and answering their question by an appeal to
supply and demand.

Furthermore, most of the failures of modern political economy can

be traced to an unwillingness on the part of politicians to ask themselves, "At what
price (cost)?" and finding the solution by an investigation of supply and demand.
Therefore, it is imperative that those of us who advocate a return to a gold
standard specify just what kind of gold standard we are talking about.

We have to

ask ourselves the critical question: "At what price should we re-establish full convertibility?"

Second, we should look for our answer in terms of supply and demand.


The Price of Gold
Can you have a true gold standard without a fixed price of gold, which the Treasury
would guarantee to honor in buying or selling gold?

Can we achieve some degree of

monetary stability -- pressure on the Treasury to reduce monetary inflation -- apart
from a fixed price set by law?

Apart from re-establishing a 100% gold reserve stan-

dard, where a paper dollar (warehouse receipt) is completely backed by a stated quantity of gold, and where no fractional reserve banking is permitted, can we achieve a
purely definitional price for gold, meaning so many paper dollars are by law defined
as an ounce of gold?

Can we reasonably expect to be able to reimpose a 100% gold-

backed currency system overnight?

Can anyone even say what such a system would resemble,

or what the social costs would be to achieve such an unknown state?

Yet apart from a

100% gold-backed dollar, without fractional reserve banking, have we adopted a truly
reliable, predictable, enforceable gold standard?

These are real problems.

There are problems of allocating the "windfall profits" to the Federal Reserve

With gold's official price hiked to, say, $422 per ounce (close to what it is

on the free market as I write this paper), from $42.22, there would be a ten-fold
increase in the value of the Federal Reserve's holdings of gold.
part of the monetary base?

Would this become

With 264 million ounces, we are talking about a net increase

in value of about a hundred billion dollars ($422 times 264 million, minus $42.22 times
264 million).

One plausible suggestion: place the additional $100 billion into a

"sterile" account unconnected to the monetary base.

Then, as the public buys gold

for currency, use the income to retire the Federal debt.
If monetary conditions change as a result of the re-establishment of a fixed
price for gold, will the fixed price prove supportable over decades?

Will deflation

and bank runs make the price too high, encouraging the public to sell gold for cash?
Will the Treasury have to increase the supply of dollars in order to buy the gold,
and will it again become the owner of the bulk of the world's gold reserves?
"ise to concentrate this kind of monetary asset in the Treasury?

Is it


* Economists feel safer when they Teave pricing to the market.

"At what price?11

\nswer: supply and demand will tell us. I am proposing a three-stage revision of
the law, which .would not deliberately disrupt present monetary aggregates, or
threaten the banking system with monetary deflation. Yet it would remove the most
important threat to civil liberties, namely, the government's monopoly over the
money supply. My program would allow market responses to the demandfor money,
but without counterfeiting. The program:
1. Repeal the legal tender laws for all future contracts,
... 2. Allow the private minting of "gold dollars" and "silver dollars.!'
3. Establish full gold coin redeemability at market prices.

Legal Tender
Forcing the public to take paper money, either from public debtors or private
debtors, is an infringement on the right of contract. Also, it passes enormous power
to:the government, which then has the legal right to* inflate the money supply and
require all creditors to accept the debased currency from debtors. The government
can define ther monetary unit which it requires for the payment of taxes, or which it



4ises, in jnaking-purchases, but to-allow the state-to impose*its currency on all
sellers and creditors is an invitation to monetary debasement and the misuse of power.
The great increase in Federal power that took place during the American Civil War was
reinforced by the suspension of specie (gold) payments in late 1861, and the establishment of legal tender laws in February of 1862,8
By permitting citizens to make voluntary agreements regarding the means of
payment, the abolition of legal tender would increase human freedom. Men could still
contract in fiat dollars (and probably will, unless mass inflation or price controls
lie ahead). Nevertheless, they are given the legal option of escaping fiat dollars,
should they choose not to truth the promises and assurances of politicians concerning
the future purchasing power of the dollar.


The abolition of legal tender removes a bludgeon carried by the government.
Hen are free to escape the depreciating currency unit. This threat serves as a warning
to government officials not to inflate the currency.
the expansion of government.

Freedom is a means of limiting

It does not force anyone to accept payment in a currency

not to his liking.
Past contracts can be honored. Contracts established while legal tender laws
were in force can be tied to the dollar. But contracts written after a specific date
need not be written in terms of dollars, nor may debtors require creditors or sellers
to accept fiat dollars. They can only try to convince them.
The word "dollar" is the government's trademarked property. The government should
now proceed -to,all aw. private mints to* iss-ue^ "gold dollars" or "silver dollars," if
they meet "the law's specifications of weight and fineness.

Perhaps it is time to

redefine a "gold dollar" as one troy ounce of gold, .999 fine. A "silver dollar"
might be redefined as one troy ounce of silver, .999 fine. Any company wishing to
issue "gold dollars" or "silver dollars" should be allowed to do so. Companies that
issue them'sHould be required to register with the Treasury Department, in order to
make it-easy for citizensr or other interested parties to trace the source* of a particular coin (the counterfeiting problem), but no license should be required, only
No legal exchange ratio should be established, either between "gold dollars"
and "silver dollars" (the ancient problem of bimetallism and Gresham's Law), or
between the government's fiat dollar and the metal dollars. Parallel standards,
with the exchange rates (prices) set by the free market, should prevail. This keeps
"bad money" -- money artificially overvalued by law — from driving "good money"
— money artificially undervalued by law -- out of circulation.
Another feature of the private minting of coins is the requirement that all


'warehouse receipts for the "gold dollars11 and "silver dollars" be 100% backed by the
specified quantity of coins.

There must be no fractional reserving of specie-coin

If counterfeiting is illegal, then the issuing of unbacked specie money

substitutes should also be illegal. This makes it illegal to expand the coin-based
money supply, except by mining and minting processes, which are expensive. The goal
here is to stabilize the private money supply, that is, the monetary systems that may
grow up parallel to the prevailing, fiat-dollar-based monetary system.
Private individuals can use or ignore the specie-dollar standards, as they see
fit. But the existence of legal alternatives to the government's fiat money system •
can serve as another limitation on the unwarranted, inflation-financed expansion of
Federal sovereignty over the citizens.

If the benefits, in the minds of the partici-

pants, outweigh the costs of creating an alternative money system, then men are free
to choose different standards.

The government will no-longer use compulsion to make

men use its fiat money system.
The U. S. Treasury Department will stand ready, by law, to buy gold U. 5, gold
coins at, say) two percent below the prevailing cash ("spot") price of gold, and to


sell'U. S. gold coins at two percent above the spot price. The coins will be in
ounces or fractions thereof: one ounce, half-ounce, quarter-ounce, and tenth-ounce,
.999 fine, plus an alley for resistance to scratching.

A full gold-coin standard

is established, so that the average citizen can participate in the market.


can be made available upon demand, but those desiring coins must be accommodated,
A somewhat higher price for small transactions can be imposed, but not exceeding
prevailing market commission rates. The Treasury will make these coins available to
commercial banks, Federal Reserve banks, and private mints or coin dealers.
This avoids the problem of the fixed price of gold, and the inevitable temptation
by government officials to change the price from time to time.

This allows the public


to buy back the gold that was confiscated from an earlier generation of Americans.
The public can transfer the gold back into private hands. If the government begins to
run out of gold, and the expansion of money is not halted, then at least the public
has the option of shifting to an alternative exchange system, one based on gold coins.
The legal sanction is made clear by the existence of U, S. gold coins. There will be
no question of the right of citizens to "vote with their pocketbooks" against the
prevailing monetary policies of the state. Of course, other citizens also have the
right of voting for the state, by selling their gold coins back to the state (or to
a coin broker) and depositing the money in interest-bearing accounts. The option is
the public's, not the state's.
Market-priced redeemability still puts pressure on the Treasury to advise the
government and the Federal Reserve Board to adopt policies of monetary restraint.
In a serious inflation, the public will withdraw the gold, and the Treasury will be
hard-pressed to buy it back. The government will find it difficult to convince sellers
to sell their coins, if sellers know that the government is simply printing up the
money to make the purchases. Full redeemability may not become a serious threat to the
government's.monetary policies except in a crisis, but the possibility of the public's
responding to a monetary crisis by demanding the TreasuryKs gold is an incentive for
the government to adopt different monetary policies before the crisis hits. And this,
after all, is what the gold standard is all about.
These three steps would not necessarily disrupt the prevailing monetary system.
It is not clear just how the public would respond. The point is, the individual
citizen should be given the right to decide what currency he wishes to use, so long
as he is protected from fraud (in the case of 100% reserve requirements for speciemetal substitutes). Let the average citizen decide which monetary system to trust.
Freedom of choice should not be regarded as a threat to the free market economy.



1. For those who are curious about this great debate over the impossibility
of making interpersonal comparisons of subjective utility, see the exchange that
took place between Sir Roy Harrod and Lionel Robbins: Roy F. Harrod, "Scope and
Methods of Economics," The Economic Journal (Sept., 1938) and Lionel Robbins,
"Interpersonal Comparisons of Utility: A Comment," The Economic Journal (Dec, 1938).
For some "new left" conclusions concerning the results of this debate, see Mark A.
Lutz and Kenneth Lux, The Challenge of Humanistic Economics (Menlo Park. Calif.:
Benjamin/Cummings, 1979), pp. 83-89.

For my own observations on its implications,

see Gary North, The Dominion Covenant: Genesis (Tyler, Texas: Institute for Christian
Economics, 1982), ch. 4.
2. Federal. Reserve Consultations on the Conduct of Monetary Policy, Hearings
Before the Committee on Banking, Cu.rrencyand Housina,House of Representatives,
94th Congress, 2nd Session (July 27 and 28, 1976), pp. 26-27.

Printed by the

U.S. Government Printing Office, Washington, D. C.
3. On money as a warehouse receipt, see Murray N. Rothbard, Man, Economy and
State (New York: New York University Press, /T962/ 1975), pp. 700-3.

Federal Reserve Consultations, p. 13. j

5. Writes Prof. Friedman: "My conclusion is that an automatic commodity standard
is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society.

It is not desirable because it would involve

a large cost in the form of resources used to produce the monetary commodity."
Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 42.

6. "By creating monitors with a vested interest in the maximization of a
given set of values, property rights reduce the social cost of monitoring efficiency."
Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980), p. 125.

7. William McChesney Martin, quoted in the Los Angeles Times (March 19, 1968),
Pt. I, p. 12.

8. Gary North, ."Greenback Dollars and Federal Sovereignty, 1861-1865,n in

ns Sennholz (ed.), Gold Is Money (Westoort. Conn.: Greenwood Press, 1975).


November 6, 1981

Mr. Donald Regan, Chairman
U. S. Gold Commission
Dept. of Treasury

Subject: Flexible Gold Convertibility

Dear Mr. Regan
By the year 1967, it had appeared inevitable to me that we would
soon be forced to refuse^to honor our "fixed price" pledge to redeem
dollars for gold.

It also seemed important that some advance consideration

be given to a monetary system other than the free floating paper money system
which has always had a bad reputation for encouraging inflation and disrupting
foreign trade.

For these reasons, I spent considerable

time and effort

designing a hybrid system which would have some of the major benefits
associated with both the fixed price goldand the free float system, but
which would avoid the worst defects of each.

The result was the paper


entitled P Post Devaluation Monetary Police" a copy of which I am
enclosing for your consideration.
Although I was unable to obtain any wide spread acceptance of this
proposal at the time, (every official stoutly maintained that there would
never be any devaluation of the dollar) my predictions have proved accurate.
We did devalue the dollar, and we are now suffering the consequences of
a free floating paper money system.
I think that you and the other members of the Commission will find
this paper quite interesting.

Although I personally consider this hybrid

system as the practical optimum, it may also appeal to those who would
consider it as a step toward a fixed price system.

In any case, it would

confer some important benefits, and it would be much easier to establish,
as compared to jumping all the way to a fixed price gold standard.

Please note that the original curve in Fig. 1, which is retained
in the text for historical reasons, should be updated by the revised
Fig. 1 (attached) which shows how the system would operate if started
in 1982.

It may be noted also that a condensed version of fthis paper

was included in Chapter II of my book "Compassion and Common Sense"
which was published last year by MCP Books in German town Md zip 208?40273
If I can be of any further assistance, please let me know.
office phone is \ 353 ^263.

My new

No charge or obligation, of course.

Sincerely yours


r-'\ ; - r ;- !



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— : ..-..I.—'

Gold Price Relationship



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ft ft
to M
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[ 1 Gold Inventory (i) V
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Post Devaluation Monetary Policy
by Carl E. Ockert, 3-9-68



This paper assumes that there is a strong possibility that the U.S.
government will soon decide to increase the official price of gold,
despite present (and necessary) assurances to the contrary.
It follows
that we will then be in desperate need for a rational policy that will
restore confidence and, if possible, guarantee against any future recurrance
of balance of payments problems.
The necessity for devaluation is generally believed to be due to the
inability of the government to "balance the payments", that is, to persuade
foreign holders of dollars to spend their dollars for our goods and services,
rather than hoarding them, and cashing them in for gold.
However this
inability is the direct result of permitting the official "fixed" price
of gold to become unrealisticly low with respect to the free market price.
Thus the basic cause of the balance of payments problem is that the price
of gold has been fixed, while every thing else has been rising at about
3.5% per year.
Failure and bankruptcy result when promises exceed ability. History
shows that no person, family, corporation, bank, nation, or bloc can
permanently fix the price of anything, including the price of gold. Thus
solemn promises to fix the price of gold "forever", are regularly broken,
not because of lack of purpose, but simply because of lack of power.
In order to fix the price of anything, the price fixer must have
complete control of either the supply or the demand.
Theoretically it
would seem that a national government would have this required degree
of control over the quantity of paper currency which it issues.
Actually this control is an illusion, since in practice the adverse
effects of contracting the money supply will endanger the existence of
the government itself.
In plain language, the people will not tolerate
widespread unemployment Just to bring the "actual" value of their paper
money back to its "promised" value. This is the basic reason why most
governments have abandoned the fixed price gold standard money system.
II Requirements for an Internationally Useful Currency
If the fixed price approach offers no permanent solution to the
recurrent balance of payments problem, what would?
What kind of a
monetary system would avoid these recurrent crises, and sti/tl meet
the basic requirements for orderly domestic and international trade?
Let us first list these requirements and objectives in order of
their importance....
1. Short Term Predictability
The value of the currency should not vary significantly over a
short period of time, and it should be possible to rather accurately
predict its value over a somewhat longer period of time. This is


required so that both the buyer and the seller can accurately predict
any changes in the value of the currency during the time between the
placing of the order and final payment.
If this is nofct possible,
trade will diminish, since both the buyer and the seller must take
additional risk, or incur the additional cost of purchasing a "future"
in gold.
2. Non-Manipulatability
It must be patently obvious that no one man, or any organized group
of men, can possibly manipulate the value of the currency. This
follows from the previous requirement.
3. Acceptability
The currency should be acceptable any place in the free world, without
red tape, and without significant discount.
4. Convertability
The currency should tfe universally convertable into other currencies,
and also into gold, and these exchange rates must be predictable.
This right must be available to everyone, including citizens of the
Universal convertability assures universal acceptability.
5. Automatic Self Regulation
The system should be such that the price of gold autor atically
follows the long term trend of the free market, avoiding short term
fluctuations, and the system should maintain a relatively constant
inventory of gold in the Treasury.
6. Automatic Balance of Payments
The system should operate such that essentially all of the dollars
obtained by foreigners are eventually spent for purchase of goods
and services in the U.S.A.
7. Long Term Storage of Value
This objective is expendable, and the system recommended does not
provide a currency that is guaranteed to perform this service.
Those who have this purpose as their prime objective could accomplish
their purpose by hoarding gold bullion, which would be legal (but
uneconomic) under the system described below.

The Automated Gold Standard

The system will appear to be relatively simple. All that is needed
is to incorporate the following provisions as an admendment to House Bill
HR 14743.

The price at which the United States sells gold will be fixed by
the following formula:



where "P" is the selling price
owned by the U.S. Treasury.
6tart of the program, and should
approximate inventory of polrf *t

of gold, and "I" is the inventory of gold
is the initial price of gold at the
be set at $70 per oz. I Q is the
the start of the program, and could be


assumed to be 300 million ounces. (It will be noted that this formula
forces a 2% increase in the price of gold whenever the inventory decreases
by 1%. If the inventory increases by 1%, the price will automatically
decrease by 27..)
2. The price at which the U.S. will buy gold will be exactly 1% less than
the selling price calculated above.
3. The Secretary of the Treasury is required to maintain tabulations
showing the official buy and sell prices according to this formula, and
to report daily purchases, sales, and inventory levels.
All orders
received during any one day will be executed at the price determined
by the inventory existing after all orders for that day have been filled.
This formula is shown in graphical form in Figure 1.

Operational Characteristics

The system will operate similarly to the natural procedures followed
by any shop keeper.
For example, consider a dealer in antique furniture.
He desires to maintain a certain level of inventory. If his inventory is
too small, he loses sales. If his inventory is to large, he pays a large
interest charge. How does he keep a constant inventory when the market
demand for antique furniture varies from month to month and from year to
Whenever he sees the inventory getting too large, he lowers both
his bid prices and his sales prices. This encourages more people to
buy from him and reduces the number of items offered to him. Both
effects lower his inventory. Conversely, if demand increases and his
inventory drops, he corrects the situation by raising both his buy and
his sell prices. Thus he stays in business and keeps a fairly constant
inventory. He makes his profit by his markup, regardless of rising
or falling price levels for antique furniture.
The automated gold standard does the same thing. When demand for
gold increases, a small movement of gold out of the Treasury raises
the price. If demand falters, a small amount of gold moves back into
the Treasury, and the system automatically balances itself at a slightly
lower price level.
Every time the price reverses, the government makes a 1% profit. This
is necessary to inhibit attempts to manipulate the price. It also reduces
the activity required by the Secretary of the Treasury to a bare minimum.
Most of the actual buying and selling of gold would take place on the free
The only time that the government would be asked t° buy or sell
gold would be as a result of some accumulation of inflation (or deflation)
activity which would cause a long term drift in the price level of gold.
Short term predictability is obtained, since the total inflation that
is likely to occur over a period of a few months is generally less than
The "automatic" feature takes all decision power out of the hands of
government officials, and this eliminates the unpredictability associated
with the human factor.


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Carl E . Ockert, 3-9-68



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Since the daily inventory and price data is published, the trends
of these variables could be charted and studied analytically. Accurate
probabilities could be established for the price trend, variances, etc.
Thus traders would be able to accurately estimate the risk of using
dollars over any given period of time, and could discount ttu£Lr agreed
price such that the risk was equalized.
Alternatively, they1 could
hedge by purchasing futures at a minimum premium, since the speculator
would be able to minimize his risk by proper use of the published data.
The inventory and price data would also provide an excellant "inflation
index", one that could not be falsified by juggling the commodities selected
for analysis.
The record of the governments inflation, or deflation, or
stability, would be universally available in its true light.
Universal acceptability and free convertability would exist, since
anyone could immediately cash in his dollars for gold at the free market
price, anywhere in the world. The exchange rate would be known in advance
within close limits. This convertability would maximize the usefulness
of the dollar throughout th*e world, and our prestige and power would
be favorably affected, similarly to the situation enjoyed by the British
pound in the 19th century.
Self regulation is automatic, since anytime the free market price
changes by more than 1%, the official price will also follow along,
as the result of a small movement of gold.
Thus the official price
and the free market price can never diverge significantly, and there
will never be any "pressure", or-, speculative activity against the
In effect, the dollar is continuously revalued, instead of once
every 20 or 30 years.
Payments likewise are automatically balanced, since the bulk of the
dollars obtained by foreigners cannot be spent for gold. Foreign efforts
to buy large quantities of gold would quickly become uneconomic by the
automatic rise in the price of gold produced by such activity. In the
end, the vast majority of the dollars received by foreigners would be
spent for our products and our service, not our gold.



Devaluation crises are caused by unsolvable balance of payments
deficits, which result from the inability of governments to keep the
free market price of their currencies at the fixed "official" values.
A useful solution to this problem is to abandon all fixed price formulas,
and obtain the benefits of predictability, convertability, and universal
acceptability, by tying the price of gold to the inventory of gold
bullion in the Treasury.
The formula recommended sets the,price close
to the free market valuation, and then keeps it there. Depletion of the
inventory automatically raises the price by 2% for every 1% loss of
gold, and this automatically stops continued losses when the price rises
significantly above the normal free market value of gold.
In a similar
manner, excessive accumulation of gold is prevented by an automatic lowering
of the price of gold.


With the official price of gold always at or near the free market
price, normal consumption demand for gold would be met by current
gold production.
Consequently, no balance of payments problem would
appear, and dollars earned by, or given to, foreigners, wouldcall be
spent to purchase our products and our services.
Thus by promising a type of gold convertability which can be delivered,
our nation can eliminate the chaos that results from promising a convertability
that cannot be maintained.
The sole sacrifice is in the elimination of
currency as a vehicle for the long term storage of value, and this function
can be conveniently accomplished by hoarding gold itself, where such action
appears desirable.

Dated March 9, 1968 Carl E. Ockert


204 Laurel Lane
Broomall, Pa.

VIENNA, VA, 22180

*3S3-tz t 3



To: Members of the Gold Commission.

Edward E. Popp.


October 24, 1981.


The coinage and use of full bodied gold and silver

To outline a practical method whereby full bodied gold
and silver U.S. coins can be made and used as payments.

The American people will be given the opportunity to
make and receive payments in standard U.S. full bodied
gold and silver coins.

At the present time the U.S. government coins and sells
full bodied gold coins called, medallions, in one ounce and in
one-half ounce coins.
These coins are sold to the public directly at the market
price of their metal content on the day the sale is made.
To make these coins serve in our economic system as payments,
the Congress should declare these medallions to be standard gold
coins. (A standard gold coin is a coin with the specifications to
which all other U.S. made gold coins must conform.)
Congress is to declare that these gold coins will be
received as payments for all taxes and other charges due the U.S.
government in amounts of $500 or more.
Just as the government now sets the exchange value of the
medallions to the market value of their metal content on the day
of sale, the government is to set the exchange value of the medallions to the market value of their metal content on the day it
receives them as payments.
When the American people learn that the U.S. government
will receive these full bodied gold coins as payments at the then
currently quoted market value of their metal content, they will
also use them as payments in private transactions.


Anyone can obtain from the U.S. government the current
market value of the gold madallions by dialing the toll-free
number 1-800-368-5510.
The next step the Congress should take is to authorize the
mint to make silver coins in one ounce and in one-half ounce pieces.
These coins are also to be declared to be standard silver coins.
They are to be sold directly to the public in the same manner the
gold medallions are now sold.

That is, they are to be sold at the

market value of their metal content on the date of sale.
Congress is to declare that these full bodied silver coins
will be received as payments for all taxes and other charges due
the U.S. government in amounts of $100 or more.

The government

is to receive them at the market value of their metal content on
the day it receives them.
There is one more step for Congress to take.

It should

authorize the mint to accept from the public gold and silver in
any acceptable form (coins, bullion, nuggets, etc.), make it into
the current gold and silver coins and charge the owner of the
metal a fee sufficient to cover the total cost of the minting

Then give the newly minted coins back to the person who

brought the metal to the mint.
If Congress follows the above steps and does not put a
fixed price on the coins, the coins will serve both the public
and the government very well as one means of making payments.

Edward E. Popp
543 North Harrison Street
Port Washington, Wisconsin 55074







To: Members of the Gold Commission

Edward E. Popp


October 29, 1981


To stop increasing the U.S. government's
interest-bearing debts.

By using the gold and silver medallion coins as payments.

There will be no need for the U.S. government
to borrow.


When there is no need for the U.S. government to
borrow, the interest rates will be lowered for
other borrowers.

The news media has just reported that the Treasury Department intends to borrow betv/een eight and nine billion dollar's
worth of bank credit.

Such action is not necessary.

To avoid borrowing, the government can continue to make and
sell the gold medallion coins it is now making.

But in addition to

selling the coins to the public, it can use these coins as payments
to its employees and as payments for some of the goods it purchases.
As outlined in my memorandum No. 2, dated October 24, 1981,
the government can also mint silver coins and use them as payments
in the same manner as the gold medallion coins are used.
When the government declares that it will receive the gold
and silver coins at the market value of their metal content as payments for taxes and other charges due it, the employees and the
public will be happy to accept the coins for the payments due them.
They in turn will use the gold and silver coins as payments to each
other at the market value of their metal content.
When the credit lenders see that it is not necessary for
the U.S. government to borrow, they are very apt to lower their
interest rates to other borrowers.

Thus, the result will be that

the U.S. government interest-bearing debt will stop being increased
and the interest rates will be lowered for other borrowers.

Edward E. Popp
543 North Harrison Street
Port Washington, Wisconsin 53074

Chapter XV



There is much for which we must than.c the Greeks. i!ot the
Least of which is for their monetary system, f'hev used metal
so Lis i out they aid not thin'!: of money as wealth. '.Co them wealth
,vas houses, cattle, olive proves," land and other ~oods which
could satisfy their needs. 'Their metal coins were used as a
medium of e::cnan~e, and the Greeks were sometimes cuite proud
of their quality. One of the city state rulers found that his
coins laated a few trains of having as much value as those of
Athens. Te ordered that his co-ins be brought up to standard.
The coins of the different city states were near enough
of tne sane value so the monev of each city circulated in all
the other city states the same as their own coins.
Then a cit;•• state would tr?/ to cheat oy offering coins of
less value, tne people of tne other states would refuse the
inferior coins. Tne damate this did to the trade of the dishonest
state was a disciplinary force that helped maintain a most convenient monetary system. There was no such thin'; as a balance of
payments problem. A buyer paid a seller in any coins he had.
Political boundaries could .be ignored as Ion"* as tne coins were
of eo ual valu e.
fhe same system o^ usin;- interchangeable money with coins of
the same value was used for several centuries ov tne nrao ana 'yza:
.f:roires. tie asnarias was a coin of '-old that the Arabs copied
from the tenant used ov the .y/zantanes. ...'he two coins simplified
trade n-etwoon tne enoire:. A^ain tiers were no ba.lance of payment


Chanter XV

problems. Anyone from either empire could pay anyone in the otner
empire with either hind of coins.
It was with the bezant that Constantinople became a center
of trade for the mnown world. Traders carried it from England
to Persia to Abyssinia (now hnown as .'ithioni a) •
Constantinople continued with sound money until near the
end of the eleventh century when a ruler beT'an to cheat by reducing the amount of metal in the money by which he paid his
bills. Te still tried to collect taxes in yood money. ::h.en
character crumbles, money soon follows.
Another place that interchangeable money helped the users
to become prosperous was in Tortnern Italy. The people of Florence
coined tne told florin in 1252 A.'O. 'Tne ^-enoans coined the ducat
24 years later. It contained the same amount of n:old as the
florin. This made them interchangeable- Ty the end of the century
all the cities of Northern Italy had made their coins of tne same
value and all circulated freely and interchangeably. Without doubt,
interchangeable money, made possible by standard values, helped
Northern Italy become famous as a financial and bannint center in
the fifteenth Century. Italian bankers financed the transportation
of toods from the far fast to Aurope so successfully tnat Italian
traders en.ioyed a monopoly. It was to breaic this monopoly so as to
^et :oods more reasonaoly tnat trainee Henry the :avi~aton encourated
his students to find tne wav around Africa to the fast. It was

p. Ic4

Chapter XV

also because of this monopoly that Columbus sailed west to find
the "Tast and stumbled onto America.
Lore than four centuries later in 13.551 an association for
promotint unity in weights, measures and coins was founded and
worked to promote its principles.

The Congress of I863 was

held in Berlin and adopted a series of important resolutions.
Its report advocated the superior convenience of a gold system
with subsidiary coinage of silver.

The millesimal (thousandth)

scale of 9^0 as the fineness of the higher coins was also approved
of, as well as the definition of the weight of coins in the metric
Advantages of universal coinage are:

'Jreater ease in international trade.

of developing countries.


j.iakes travel easier.


Improved currencies

'..ore easily understood price lists.

5* more easily understood international statistics.


wider development of smaller trade transactions.

Tends to



apply pressure on those countries who depreciate their currencies.

Eliminates problems of balance of payments.
Aach country when mahin^ its own money, should plainly mart

tne country that made it so worn bills or coins may be returned to
the country of origin to be replaced by new ones.
The one disadvantage 'would oe the inconvenience of chanting
iron tne present systems to .a universal one-

./hen tne United. .States

cian-ed to smaller tills, ola bills were tanen in at, and only

?• 135

Chapter XV

small bills were given out. The change was made so ouickly
that no one had any use for the purses that had been
manufactured to accommodate both sised bills. Taking in our
present dollars and giving out new bills representing grams at
tne rate of perhaps 20 to 1 should be no proolen. Other countries
would exchange their moneys according to its worths*

.~!he one problem that seems to have stood in the way of the

adoption of standard money was the choice of a coin, with the
wider use of tne metric system this problem is solved. The
association for promoting unity in weights, measures and coins
recommended use of the metric system more than a hundred years
aro. -^he unit of value would be one gram of gold.
The Tatin . onetary Union was formed as an outgrowth of the
wort, of this association. It was founded by Teitlum, France,
Italy and Switzerland in 1-65, and was joined by ureece in 18u?.
The separate countries adjusted their coins to have the same values.
Ty tne laws of each participating country it coined 3»100
units of money from each hilo^rarn of "-old and 200 units from each
•iilotram of silver. Tach country tent its own name for its coins.
•-'his applies the metric system, scientifically created, to the
ho;ie t ary units.
Another outgrowth o'l:' the effort to promote universal coina"e
'•"•'as the 'orthern or tcanainavian Union. -his union was forme x
°? ant T,Tidbt in U'g, ana ."joined bi' :cr"nv, two years
l^ter. Tie irone tr Arena ""as their unit of value. ~: IVA), for

P. Ido

Chapter XV

all practical purposes, it could be said tnat the three countries
of forway, Sweden and CenmarT had a single monetary system.
neither the Tat in laonetarv union nor tne northern Union survived
•,/orld vjar I, although the Latin monetary Union was not officially
dissolved until 1926.
We do not hnow of any effort to make the monies of other
countries freely used, but foreign coins circulated in United States
for many years.
'The first United States law by which our monetary system
was established did not come until 1392, the third year of George
Washington's administration. The bills printed by the Continental
Congress had become worthless, and the first citizens of tne United
States were bartering" and. using such commodities as oeans and
tobacco for money. .ney supplemented these with foreign coins.
\:he most famous was a silver Spanish coin after whicn our dollar
was copied. Tils Spanish coin circulated in tne United States for
another naif century - another case of using tne money ot anotner
•country when its value is trusted.
^resident Arthur, who led the world, conference at which
international time zones were adopted, advocated interchangeable
money for the /estern Uemisphere to -lafe trade easier.
It '//as never adopted.
Olde""" totttoogs list the oualities needed for a substance
t.iac is to •;•; used at money.
'o ae useful tor mone^ a commodity snould nave: 1* ~enerai

Snaptor X7

desirability so at will be accepted in, exchange :


treat value

in small bulk so it may be easily carried: 3. .durability so it
will not be easily damaged or lose value by deterioration as it
is transported or stored 1 4. uniform Quality so anyone can
judie the value oy the quantity without having to have it examined
by a specialist: 5» divisibility so it will not be damaged
'oy dividing' it into suitable amount; 6. Oosnizability so anyone
can easily identify it: ?. Stability of value so it will not
gain or lose value while in anyone's possession.
If is easily seen that told meets these requirements better
than any other commodity. '^he instability of the trice of gold in
the 1970's is not because of an irregular supply. The fluctuation
of prices reflect a fluctuation in the public's trust of money.
In other words, it is the value of money that is fluctuating
rather than the value of gold.
>Ve are frequently told that there is not enough gold - that
trade has increased so much that tne gold stock is inadequate.
this is tne tint of myth that has no oasis in fact. ^.he same
technolo'-vv tnat has increased production ana business has speeded
UP tne velocity with whicn money changes hands. . ost ouronases
are made by booia-ieeping transactions. In the decade before 1977,
velocity of money in the United States increased at the annual rate
of 2.7 •>• Uith an absolutely constant amount of currency, prices would
still rise sli'htly. ..'he same money could do more because it traveled
faster. This has tne same effect as increasing the amount of mone*".



Chapter XV

It raises prices.
There are those who say fiat or unbacked paper money has
value because it can be exchanged for toods of value. It has
this power because of government order. A government that has
this power invariabiey uses it to increase the amount of money.
Increasing tne amount of money causes destructive inflation.
Every possible device has to be used to make the abuse of power
to produce money as difficult as possible.
Adhering to the principle that it is dishonest to give title
to property that does not exist is an essential safeguard. The
possibility of establishing a universal currency without its
being based on a commodity is hopeless. Unbacned paper currency
was tried by our American colonists and our Continental Congress.
Their failure shows how hopeless it is to establish a value
with fiat or unbacked money. Some of them weren't even accepted at
face value at the time of issue. Their acceptance varied tremendously.
To make commodity, interchangeable money serve successfully over a long period of time, cheating must be prevented so a
paper that says tne Dearer owns a certain amount of gold must mean
wnat it says. There needs to be ?. watch do'-- system for cnecning on
the honesty of those who manage money.
If the amount is increased, prices will rise even theu~h
it represents a commodity of real value. Sue to increased mining"
of told, tne ""roater amount of money coined by the Initei States



Chapter XV

before World War I caused inflation. Again, there should be
continua.1 international discussion of the wisdom of increasing
the amount coined, or printed following adoption of a universal
•There is no governmental body with authority to control
a world wide currency, and there should never be one. '~I}he Roman
Empire had a custom of government coinage, and when the government
became dishonest, there was no built-in control, \7hen each country
acts separately, the honest people can bring pressure to bear on
the dishonest. Sood money is built on the integrity of the people
who manage it.
"What would n3.^~oen to tne billions of dollars held by
foreigners as deposits in the United States bants if people all
over the world traded their money for interchangeable bills based
on trams of. gold? '.!he billions of dollars held by foreigners would
immediately become useable in any part of tne world where commodity,
interchangeable money had oeen adopted.
./hat happens when people of a poor countr-" deal witn people
from a rich country? It would be tne same as wnen poor people
within a country trade with rien people witning tne same country^
'Sne people from unproductive part? of a state of the United States
have found tnat those from prosperous cities li.~e Jefroit and flint,
-ichi "an, in tne ear.U"r nays-of tie antomo :?i.Ue industry, '0^ most ot
tne tone* • .Tie";; "bt if because tne".' produced ana solo tore. .nose
— — w ... ._ ._' ^ ^j • , j_ , „._ . . • _, ., _•_ , J : . . .. . . J ; I.. i .i ; - e O - - -J . <J\*\* ~ >-- - - «. - - -J — - — - - -.- ^ •-' — • - —


Chanter XV

not afford to pay mucn. " flowed into more productive areas
without any balance of oa.ymen.ts problems.
.-resident Arthur was right in aavocatin" interchangeable
money for the Americans as a means of helping trade, he should
have -rone further and promoted it for the world when he promoted
the establishment of standard time zones.
Avery count.ry which is inflating its currency faces the
problem of now to stop. Inflation is like navin-t a tiger by the
tail. fortunately, business and industry can adjust to two or
three percent of cnan ~e without a great deal of trouble. .-..Iso it
is fortunate tnat there are advantages as well as disadvantages
to changes in either direction--to a decrease in inflation tne
same as to an increase- Tne President and chairman of the board
of the Central ..-.ank of reru told us that when they stopped increasing tne amount of currency, i. eoole out :"-~:z; money in banks because
it aid. no~c lose value through inflation while tnere. :?he additional
deposits helped business and industry 'oy providing more loans.
.hat ever the cost, s ton pin-: inflation is better than tne
destruction 01 business, industry and agriculture ant sometimes
having revolution that comes to those who let inflation run its
tie first step in sto^oin~ inflation it to mate a surplus
oud~ef. )o this gr a systematic oroce-iure. otart ""ita a reoora
of tne la'-J ear' : •;." oen- .tt .\:-?c as a ai, j to v'naf is neeaea.

P. I'-:

Chapter 17

maintained as a surplus to be paid on tne debt. "Tien list tne most
necessary item fount on last year's expenditures. It will probably
oe interest on the debt. .. ove on to the next most necessary item.
Reduce it if possible, froceed with the most necessary of remaining budget items, tryin~ to reduce each. After going all the way
through tne list, go oac: ana reduce the least necessary items until
the total budget is no more than the amount of taxes that are
expected for the :-ear. All this requi; es statesmanship, sterling
character and determination, but it has to be -done to remove the
necessity for inflating the currency. '.!he history of inflation
snows very clearly that printing, or otherwise increasing the amount
of currency, is useu to remove debt. Removing debt yy taxes, as
John .aynard advised for sound financing and as the



Abates die. under the goad in ~ of Alexander .anil ton, is a much better
hen the necessity for i if latin"* the currency nas been removed,
the Central fan., can start slotting the amount of inflation oy reducing
tne steed of printir_r money* 'he speed of increasing tne amount can
oe slowed by one percent four to six months.


a country is

increasin - tne amount of its currency by ten percent, reduce thai
to nine percent. ^.Aber four to six months, reduce it to ei tit percent
.'his gradual reduction can continue until increase rescues zero
10 ayjfi an:" unfa*.7o-nasie reaction, ma :e tne transition g.ien
tne econo g" it strong. .men trices are rising", this traoua.i reduction


Cnanter X v

in the speed of printing v/ill tend to retard the rapil rise in
prices wnicn many economists are inclined to favor during an
economic boom.
In maxing a change in tne speed of printing money, we must
remember tnat it takes from about nine months to two years or longer
for prices to change after a change in the rate of printing. Also
it is even more important to provide plenty of publicity so people
can plan for a stable economy. The American public is so anxious
to see an end to inflation that they would be happy to mate all
necessary adjustments.
When stability arrives, the next step is to exchange our
fiat money for one hundred percent gold oacked bills based on
one gram of gold as the unit of value. One economist is recommending a. of twenty dollars for one of gold bached money.
This procedure is standard throughout the world so making the
change is not a problem. The only problem is to determine now
many dollars must be exchanged for one tram. There are about
1 billion 3C0 million ounces of gold in the possession of
Central bangs. With twenty-el nit and one-fourth r"rams to the
ounce we have about S7 oillion grams. THie United States conducts
perhaps one-fnira of tne world's business. This figure is only
sooroximate. „gb this rate the United Jtates needs about 12 billion
trans. ,e ,ii tnt need to buy. :?0"m gold. If there are ISO oillion

. 1 -' 2

t. 19.;

Chapter X7

dollars of United States currency, ten dollars would need to
be exchanged for a one gram bill fully bached, by gold.


figure is illustrative and is changing with the amount that the
currency is being inflated before'stable money will be established. '
In German-' after World War I, one trillion old marks were exchanged
for one new one.

We hone people in the United States make tne

change before reaching that stage-





3M133T V3-Et A. WftfiffltlS
iaroadway^lew^ork,^I.Y|l0006l212) 964-9000
Member New York, American and Other
No 85
Principal Stock Exchanges

a fortnightly newsletter
February 21, 1980



The recently announced $100 million Sunshine silver-indexed
loan offering, which is described in the following paragraphs, represents a historical turning point in our monetary system.
"Andrew G. Racz, an authority on silver and President of
Racz International, New York, called the move 'the historical turning
point in legitimatizing gold and silver as backing for currency.'"
- The New York TIMES
Tuesday, February 5, 1980


$100,000,000 of % Silver Certificates Due
March 15, 1995 (the "Silver Certificates").

Payment of Interest

March 15 and September 15.

Indexed Principal

For each $1,000 face amount Silver Certificate, the
greater of $1,000 or the price of
troy ounces
of Silver (determined as provided in the Indenture).


Callable at the Indexed Principal Amount on or after
March 15, 1985, if such amount is $2,000 or more for
a period of 30 consecutive days.


The Swiss franc and the Deutschmark are no longer safe havens for
excessive dollar holders — the flight from paper currencies is on.

Editor: Andrew G. Racz
Steven Bayern

Circulation Mgr.: Jo Tortorici


The recently announced $100 million Sunshine silver-indexed
loan offering, which is described in the following paragraphs, represents a historical turning point in our monetary system.
Floating currencies became the rule of the day on or about
October, 1973 -- shortly after the fourfold increase in oil prices.
World acceptance of floating currencies was a historical turning
point -- world trade and international monetary transactions were no
longer conducted at fixed exchange rates. Accordingly, the Breton
Woods Agreement collapsed. Under fixed exchange rates international
interest rates were closely co-ordinated. Interest* rates in different currency denominations began to show a wide divergence -- rate
differentials being drastically influenced by currency fluctuations.



Sunshine Planning Sale
Of Silver-Backed Notes
ITie Sansnine Mining *?bmpany, tne
nation's largest siiv?r producer, said
yesterday that it pianned to raise $50
million to expand operations by selling
SI.000 certificates redeemable into either cash or silver.
The interest-bearing certificates, to
be traded on the N e w York and Pacific
Stock Exchanges in m u c h the s a m e
way as bonds, will be the first silverbacked obligations of any kind since
the United States withdrew silver backing on paper currency in 1963.
They will be offered publicly in about
a Andrew
month through
a an
Street investG . Racz,
on sllmentandsyndicate
be managed
president to
of Racz
Inc. "the hisal. N e wBurnham
York, called
the move
torical turning point in legitimizing
gold and silver as backing for currenAs proposed by Sunshine, Investors
would be unable to collect silver for
their certificates for at least the first
five years. After that, at Sunshine's option, investors would receive either silver, its value In cash at that time or the
$1,000 face value, whichever is greater.
The company, announcing it had
filed papers for m e offering w ith (he Securities and Exchange CommiSbion,
said the certificates would become due
March 1,1995
"The principal amount of each certificate whenever due shall be the
greater of $1,000 c the price of a certain number of troy ounces of sliver
hniiinn " the compan'-' <-»id in a statement. Ihey woula oe freely negotiable
in the meantime, however. The amount
of silver to be offered and the Interest
rate to be paid — both of which depend
on market forces — will not be m a d e
public until shortly before the offering.
One well-placed Wall Street source
asserted that the importance given silver as an inflation hedge would help set
the interest rate Sunshine win pay. H e
maintained that the rare might be substantially less than Sunshine would normally pay to raise funds.

As for the amount of silver backing,
this source explained that, if silver sold
for, say, $40 an ounce at the time of the
offering, $1,000 worth would m e a n Sunshine might back the certificate by 25
ounces. But, he said, Sunshine might
decide to back it by only 20 ounces,
which, in turn, would m e a n that the
company expected to pay a higher interest rate.
Silver bullion stood at $6 an ounce at
the start of 1979 nnd soared as high as
$50 an ounce in the middle of last
month. As measured by the February
futures contract, silver closed yesterday at $33 an ounce.
Sunshine's novel offering — the first
of m a n y expected to be m a d e by other
companies with large silver holdings if
this one is successful — emerged in
London last month after company officers told investment analysts there
that they envisioned issuing as m u c h as
$300 million In silver certificates to finance expansion. Industry sources
seriously doubted whether Sunshine
would later offer more than the present
$50 million.
Explaining how the new certificate
appeared to him, Paul Sarnoff, N e w
York commodities research director
for Conti Commodity Services, said:
"You've got yourself a w a y of investing
in silver. You're getting a return on
your money, and you ha\e a chance for
growth with the rise in the price of silver."
In its prepared statement, Sunshine
said that proceeds from the $50 million
sale would be used in part to finance silver exploration and development on
the company's propei ties, situated in
the Coeur d'Alene mining area of northe m Idaho. They also would be used, it
added, to complete a second mine shaft
and to develop a pilot refining plant.


The background of this financing may best be illustrated
by the following reproduction of an article in FORBES Magazine
in which Sunshine's management's thoughts and future actions are


Sunshine Mining's president is putting all of Irj Mirrfcatl Eifhrv\t?wlT.f
is best
his eggs in one basket. A silver basket.
k n o w n for the giant silver mine of the

Klichael Boswell
and his Arab

sunshine Mining President G. Michael BosweU
_*ttng out ofdlmtractionm Wee manufacturing to bet everything on miiver.

Reprinted by permission of FORBES magazine from
January 21, 1980 issue.

same n a m e it operates in the Coeur d'Alene district of northern Idaho. In recent
years, however, the Dallas-based company has gained half of its income and as
m u c h as 7 5 % of its revenues from other
operations like fencemaking, electronics
and oil and gas.
All that changed last year w h e n the
price of silver soared to $27 an ounce,
more than four times its price in 1978.
Sunshine's estimated earnings quadrupled with the higher price of silver, rising
td $13 million, or $2 per share, on revenues of $75 million.
A one-shot performance? If silver remains at these lofty levels or soars above
them, it will be breaking all precedent,
but G. Michael BosweU, Sunshine's 39year-old president, insists that 1979 was
riot a fluke. H e is liquidating all of Sunshine's nonsilver-related manufacturing
operations and is planning to expand further into silver, using Arab petrodollars
phis m o n e y raised through the sale of
unique silver-backed securities. T h e result, says Boswell, "will be a vertically
integrated metals firm devoted solely to
Since 1918, w h e n the company w a s
founded, Sunshine and its partners, the
Hecla Mining Co. and Silver Dollar Mining Co., have extracted over 300 million
ounces of silver from the Sunshine
mine—of which Sunshine owns 5 7 % ,
Hecla 3 3 % and Silver Dollar 1 0 % . Boswell, w h o took over the $130,000-a-year
(plus bonus) Sunshine presidency in
1977, says that "management in the past
just plain ignored the basic asset of the
company. They didn't put the kind of
manpOwer or investment into the mine
that was needed."
Since taking office, Boswell has done
just that, plowing $12 million into capital improvements since 1978, with another $20 million scheduled for investment in the early 1980s. This, he says, is
only the beginning. The Sunshine mine
produced about 5 million ounces of silver
last year. Boswell predicts, "It will be
producing 7 million ounces by 1983 and
in excess of 9 million ounces by 1985."
However, Boswell says he can see silver
rising substantially higher in the decade
that has just started. Putting his m o n e y
where his mouth is, Boswell plans to
purchase additional silver-producing
properties while anticipating production
at a Nevada mine in which Sunshine has
a two-thirds interest. "If our plans work
out, we'll be getting as m u c h silver from
the other properties as we'll be getting
from Sunshine," he says. If that happens,
that would give Boswell 18 million
ounces a year, worth $486 million at
To getprices.
that production he talks of in-

-5vtsting a staggering $300 million in n e w
silver properties. Where is all that m o n e y
coming from? Boswell is selling Sunshine's manufacturing subsidiaries—
fencemaker Anchor Post Products Inc.
and electronics firms Piezo Crystal and
Premier Metal Products—to a newly
formed company run by the former managers of these operations. H e will raise
$28 million from the sale. Beyond this,
Boswell has some novel ideas. If his financial advisers can successfully negotiate their w a y through a morass of S E C
and IRS regulations, he intends to sell
either silver-backed securities or silverbacked debt issues to both U.S. and international investors.
He got his idea in part from the Mexican government, which has issued 1,000peso bonds pegged to the price of oil, and

will continue to increase in price.
There are risks in all this, both for the
investor and for Sunshine. If silver drops
in price, the investor would be left holding a piece of paper with a low interest
rate and of relatively low quality. Could
silver drop in price if inflation continues?
Of course, it could. W h a t goes up also
comes down, and silver went up last
year. R e m e m b e r what happened to gold
back in 1976. It dropped from nearly
$200 an ounce to $100 an ounce while
inflation raged.
Yet another problem: Should runaway
inflation develop, Sunshine's cost of production could increase to the point
where it would be extremely burdensome to deliver the promised silver. O n
the other hand, should the price of silver
rise as handsomely as Boswell thinks it

Sunshine Mining is precisely the kind
of investment that appeals to Arab oil
money. It bothers the Arabs to exchange
oil for depreciating paper dollars. By contrast, it makes sense to m a n y of them, in
effect, to swap their oil for other resources in the ground. Capitalizing on
this, Boswell plans to place control of the
company with an Arab group that will
give h i m a free rein in running the company. Here's the story:
Boswell is a tall, native Texan, born
near Dallas, schooled in finance and law
at Southern. Methodist University and
fond of flamboyant speech, Swedish Tiger-brand three-piece suits and $300 Lucchese boots. H e was originally put in
charge of Sunshine by Nelson Bunker
and William Herbert Hunt, the Dallas
petromagnates w h o took the company
over in a bloody 1977 tender offer, which
left them with 2 8 % of the 6 million
shares of c o m m o n stock. Last June, however, Boswell bought out the H u n t interests with m o n e y borrowed from the
company w h e n the tender offer stalled
short of a full takeover. N o w Boswell has
sold the Hunt stock to the Luxembourgbased Arab Investor Group, which consists of Saudi and Kuwaiti private investors. W h y Arabs? "Because," he replies,
"we were looking for a very stable longterm equity investor w h o would not seek
to control Sunshine but merely be satisfied to see his investment appreciate in a
fashion that we've outlined to h i m in
advance." Looking pleased with himself,
Boswell calls the Arabs "silent partners."
'Boswell has gotten some flak tor the
Arab deal from Andrew G. Racz, president of Racz International division of the
N e w York securities firm Philips, Appel
& Walden, Inc. A minority investor in
Sunshine, a metals analyst and a bull on
silver, Racz gives Boswell high marks for
putting Sunshine Mining on the road to
in Kellogg, Idaho
Shift change at Sunshine, the U.S.' largest
becoming the only totally integrated silyear keep soaring?
Will silver's quadrupled price in the last
ver company in the U.S. But he flunks
the French government, which has in- will, the promise to deliver silver at a Boswell for concluding his deal with the
dexed certain bonds to gold. (There are a fixed price would penalize future profits. Arabs in only two days with little or no
Nevertheless, Sunshine's lawyers are dickering while both the price of silver
number of U.S. railroad bonds issued in
the 1880s whose redemption was prom- currently deciding which of the two in- and the price of Sunshine stock were
ised in gold, but the promise was voided struments is the more desirable and are climbing dramatically. H e is particularly
when the U.S. made gold holding illegal devising an array of downside protec- miffed that Boswell turned d o w n his ofin the 1930s.) O n e of Boswell's securities tions for both the company and the in- fer on behalf of U.S. investors that was
could be a preferred stock that would pay vestor. Boswell hopes to launch the first $1 per share higher than the Arabs' deal.
a cash dividend of 5 % or 6%. Sunshine $50 million of these instruments in "For $33 million Boswell is handing over
would agree to redeem the stock at par 1980, possibly offering them first to his the American silver market to the
value in terms of a fixed ratio of silver o w n shareholders and later to a wider Arabs," he gripes. Racz is appealing to
domestic and international audience.
weight to value.
influential congressmen to stop the deal.
Boswell's mind clearly runs to the un- But Boswell considers the matter closed:
The alternative would be a bond. It
would be redeemable—after five years, orthodox deal. Last s u m m e r he horse- "It's a little unfortunate that the gentlesay—for a fixed amount of silver. With traded 160,000 shares or 3 % of Sun- m aMike
has giant
ambin hadBoswell
to takeclearly
an adverse
silver backing, Boswell thinks such a shine's stock to Arab financier Roger tions.
C a n he fulfill
this transaction,"
he them?
says inThat
an unusual
bond could carry an interest rate less Tamraz of the First Arabian Corp. for mcan
answered with another queso m only
e n t be
of understatementthan half the current prime lending rate. First Arabian's London-based c o m m o d - tion: What's going to happen to the price
What the buyers would lose in interest ities firm, J.H. Rayner (Holdings) Ltd. H e of silver? We're not brash enough to anthey would gain in inflation protection— is n o w restructuring Rayner so it can swer that one. •
on the assumption, of course, that silver serve as his international bullion dealer.


Much effort by the world's leading Central Bankers — and later
as the currency crisis became more acute, even by the President of the
United States and the leaders of Germany, France and England — has been
devoted to restraining currency fluctuations and co-ordinating monetary
policies and international interest rates as well.
Speculations in the Swiss franc, Deutschmark and Gold had a
devastating effect on the dollar.
The steps outlined in President Carter's historical and tragically
ill-informed speech in November, 1978 were an attempt to stabilize the
dollar. The effort failed. The "age of the floating currency system" was
The floating exchange rates, which govern our financial and
trade transactions, represent changing values in currencies and debt securities in various currency denominations. A set of tables from the
international monetary markets serves as a guideline in terms of deposit
rates and interest rates that investors and borrowers can expect when
transferring monetary deposits from one country to another.
F«b. 14


Pound Starling
U.S. Dollar



Japanese Yen 1,000




French'Franc 1 0
Swiss Franc



Dutch Guilder
Italian Lira, 1,000


Canadian Dollar
Belgian Franc 100



U.S. Dollar . Deutschem'k Japan seYen FrenchFranc Swiss Franc DutchGuitd'r Italian Lira Canada Dollar Belgian Franc

4.018 .

















3 745































The following nomnal ratps *rere quoted for London dollar certificates of deposit: one-month
months 14.50-14.60 per cent; one year 14.20-14 3Q per cent.
Feb. 14


U.S. Dollar



Dutch Guilder Swiss Franc

14.05-14.15 per cent; three-months



Italian Lira

14.35-14 45 per cent; six-

Asian S



tlhort term.:.,... 17i2-1734
1212 1412
12 l2i 4
1078-lUg !
71 2 7i 8
1 3 •';. 1 4 . fc 1
' clays' notice.' 171 4 -17 iz
1354 14
12i2 13l9
12 12U
13 15
7 * 8>
111114 i
35 B -33 4 .
12 1 2 ' 4 , .
8 '-8..
141?. 1612 • 14.^-14'; !
11J8 1158 !
1338 13?4
1418 1438
• I8i 2 .185 4
8-;; 938
14 be 14 i4
43e 4 i 2
141* 1434 ' 13.* 13 *
! 12i>> 12*4
' 16 17
8i« 8I2
Three months
; 177 8 18>«
13 1 3 U
14-=, 14 ,;
8,,' 9,;-,
14^2 1434
1134-H78 '
Six months...
j 1714 175 8
4i-;-4 «
• 1314 13i2 '
...-' 16& 8 I7i 8
Long-term Eurodollar two years 1 3 V 1 4 per cent; three years 13V13»i per cent: four years 13l«-133« per cent; five years5 13-13 .! per cent; nominal closing rates.
aiort-term rates are call for sterlng, U.S. dollars, Canadian dollars and Japanese yen; others two-days' notice. Asian raates are closing rates in Singapore.


London FINANCIAL TIMES, 2/15/80


The international Eurobond market (which is an integral part
of the Eurocurrency market, that has grown from $73 billion in 1973
to $1,000 billion by the end of 1979) partially developed in the 1970s
as a result of the growing offshore dollars and the offshore currency
trade that had resulted due to vast increases in the OPEC billions.
Drastic changes in historical trade relations and the re-orientation
of East-West trade -- a scramble for the world's diminishing resources
-- has followed.
To a certain extent, the Eurocurrency bond market is an unfamiliar issue to most American investors. Eurocurrency bonds are
traded mainly in the international money centers; in London, Zurich,
Frankfurt, Singapore, Hong Kong and Tokyo. The bonds are issued by
governmental agencies and corporations which trade in convertible
debentures. (Selected examples and descriptions appear on the following chart.)


The list shows the 200 latest international bond issues for which an adequate secondary market
existss. For further details of these or other bonds see the complete list of Eurobond
E u r o b o nprices
f S J published
on the second Monday of each month
Closing prices on February 4
Chang* on
Issued Bid Offer day weak Yield
Alcoa of Australia 10 89 60
85*. 8S 3, -03, -is, 12.73
Alex Howden X W 9>2 91 30
74 7 6 - 1 -17.14.00
Aquitaine Can. 1 1 V 8 5 30
93i4 93»4 - O H - O H 13.11
Australian Res. 9», 84... 30
88>4 89H -0>, -0', 12.96
Avco O/S Cap. 10H 87 40
79*. 80H +V, +01,14.93

Change on
Issued Bid Offer day week Yield
African Dev. Bk. 8 87 ... TOO
97'4 98H + O H + 0 H 8.33
Asian Dev. Bk. 714 89... 100
92 92H 0 -0*2 8.44
Barclays O'seas 6*4 89 100
9034. 81H + 0 H + 0 H 8.17
BFCE 7>4 87 \
— 7.89
99 99H —
BFCE 8l, 95
— 8.41
97', 97', —

Change on
Issued Bid Offer day week Yield
Argentina 5H 89
92 92H 0 -0» 4 6.62
Aumar 5 89
91i4 91». +©i 4 +2i 4 6.21
Australia 3 , 89
87i2 87»4 - O H -1», 5.37
9112 92
Bergenv City of 4'4 91... 40
0 -2i, 5.75
82H 83
BNDE 5 89
0 + 2 7.61

Change on
Issued Bid Offer da|< week Yield
Avco Fin. 10H 86 C$
84H 85 - O H -OH14.03
Bell Canada 10'4 86 C$
90 90*2 -0>, +0', 12.99
Cr. Foncier 10H 84 C$
89 89»2 - 0 s . ^-0', 13.62
Ex. Dev. Cpn. 10 84 C$
90V 90', - O H - O H 12.95
Jat. Can. Inv. 16 84 C$
88'. 89', - O H 0 13.46

Allied Irish Bk. 5»4 87... OH
Banco di Roma Int. 6 87 OH
Banco Urquijo 6 86......' 0J4
Bank of Ireland 5»4 89... $0H
Bank of Tokyo 5H 89 . *0H


Bid Offer C.dte C.cpn'C.yld
97', 98', 2/7 151, 15i41
991,100 26/4 15>4 15.79
97*, 981,21/3 13', ,13.67
97i4 97'421/2 15.69 16.09
97'4 981,25/4 14.56 14.86

Cnv. Cnv.

f PA ft,t'K . -,, « .AS
A G A Akt bolag 7»4 89..10/79
Aj.nornto 7»4 95
'"*• *"• 91* 94 ... 1/80
As a hi Optical 7 94 ......11/79
Canon 6»4 94

prica Bid 0ffer d

«y *•"»

145, 105i, 106i, + 0 H - 7 62
618 97', 98', —
40 96 9 7 H + 0 H 13 82
605 90H 9 1 H - 1 H 8.91
570 103H 104H + 1

* No information available—previous day's price.
t Only one market maker'supplied a price.
Straight Bonds: The yield is the yield to redemption of the
mid-price: the amount issued is in millions of currency
units except for Yen bonds where it is in billions.
. Change, on week = Change over price <a week earlier.
Floating Rate Notes: Denominated in dollars unless otherwise indicated. Coupon shown is minimum. C.dte = Date
next coupon becomes effective. Spread •Margin above
six-month offered rate (• three-month; § above mean
rate) for U.S. dollars. C.cpn=The current coupon.
C.yld=The current yield.
; Convertible Bonds: Denominated in dollars unless otherwise indicated. Chg. day = Chenge on day. Cnv. date»
First date for conversion into shares. Cnv. price =
Nominal amount of bond per share expressed In
currency of share at conversion rate fixed at issue.
Prem = Percentage premium of the current effective price
of acquiring shares via the bond over the most recent
price of the shares.


These Eurocurrency bonds are issued with descriptive material which is somewhat similar to a prospectus in the United States;
however, because of the brevity and the lack of restriction on their
contents, they are usually not qualified under SEC regulations and are
not eligible for private American purchase.
Let us now look at certain characteristics of the Eurocurrency
bond market:
1. They are usually issued in a tax-free haven such as
2. They are in bearer form, which means that the name of
the owner is not registered;
3. The dividends and interest are sent without withholding tax to the owner; and
4. They are deposited with one of the major international
clearing houses, which are usually large, international
Efforts to list some of the Eurocurrency bonds on a recognized
United States exchange are underway. The writer of this report has been
in contact with one of the leading listed exchanges in order to work out
the technicalities whereby Eurocurrency bonds could be traded in the
United States. It is interesting that American investors cannot be
solicited to buy these Eurocurrency bonds even though a large number of
these bonds are issued by well-known American-based international corporation and many multi-national corporations. These bonds are, in fact,
available for purchase by American investors in an unsolicited form ninety
days after the issue period.
Avco 0/S Cap 10-1/4 87
Beneficial Fin 9-3/4 87
Dome Petroleum 10 94
ITT Antilles 9-1/2 89
Kennecott Int 9-1/2 86
Warner-Lambert 9 84






Change on


0-1/8 + 3-1/2
0-5/8 + 0-1/4
0-1/4 - 0-1/2
0-1/2 - 2-3/8
0-1/4 - 0-1/2
0-3/8 + 0-5/8



This explanation may have been necessary to bring this issue
closer to home. The trillion-dollar Eurocurrency market, which now forms
the basis for recycling the petrodollar surplus and the basis for keeping
the underdeveloped nations (the non-oil-producing countries) afloat, leans
very heavily on the Eurocurrency market both in the banking and the bond
sector. These are the vehicles through which money is being raised and
refinanced to pay for exports, particularly for oil and food. The inherent
danger that the Eurocurrency market is getting overextended is well illustrated by the views of the Chairman of the Bank of England, Mr. Gordon
Richardson. Mr. Richardson has given a firm warning that the $100+ billion Eurocurrency OPEC surplus, expected this calendar year, may not be
easily recycled in 1980, not to mention the potential $150 billion surplus,
with interest, that will be available from the OPEC nations in 1981.

1980 oil surplus
' will top $100 B'
By our Business Staff ing—and will go on rising—
,, „ , „• , ,
uncomfortably fast."
M r Gordon Richardson, Gov- *> 7 The
ernor of the Bank of England Commission has c. -.firmed that
last night forecast a collective the European Community is
current account surplus of 100 proposing to help finance probillion dollars (£43.9 billion) j e c t s in deprived areas of Brifor the oil exporting nations in tain, to ease the country's
burden of payments into the
Speaking to the Overseas E E C budget.
Bankers' Club, he emphasised
The executive body's propothe renewed burden on the sals to the nine member govworld banking system, in ernments,
attempting to re-cycle those yesterday, said the scheme
funds prudently and profitably, would be in addition to a sysH e pointed particularly to the tern to reduce the sum Britain
need to re-cycle petrodollars to pays into the Community's
oil-importing countries that were treasury.
suffering deficits on the curBritain's net contribution
rent account of the balance of this year of 2.2 billion dollars
payments because of higher is higher than that of any
priced oil.
other country, despite its weak
Although deficit countries economic performance, and
needed to take remedial action, Britain wants it reduced.
M r Richard-on said that howThe Commission said the
ever vigorous the adjustment extra aid to Britain would proeffort, imbalances in payments mote the community aim of
could not be quickly reduced ironing out differences between
and many countries would still member-states' economic perneed finance on a considerable formances. British sources in
Brussels said the idea was an
H e added : " Well before the important step forward, but
of the 1970s,
the debts
ser- that the
Nine still had2/5/80
to agree
vice commitments of the non- on figures and hard bargaining
oil developing countries were was expected.
growing more rapidly than
Ministers were expected to
their exports. Now, with matur- begin discussing the proposals
ities closely bunched, world soon, in the hope that a decitrade slowing down and inter- sion irri°rM be taken at the
est rates high, the debt-service next E E C summit, likely to
ratios for m a n y must be ris- open in Brussels on March 31.


Furthermore, leading international banks could be the casualties of the currency overextension, including the American banking system.
Thus, as an issue closer to home, the weakening of the Eurocurrency market
simply cannot be disregarded by what we call the domestic provinciality
which prevails more in the United States than in Western Europe.
From the point of view of the dollar holder, let us now examine
the potential of an investment in a Deutschmark-deposited bond.

1. Current exchange rate


1-Year interest on DM deposit

3. Exchange rate 1 year later


1.737 DM

$1.00 =

4. U.S. Inflation

1.900 DM


$1,000 investment DM 1,737
Interest after 1 year (8H>% return)



Total value

DM 1,786

Reconversion (1.9 DM rate)

$ 940

Discounted by 12% U.S. inflation

$ 839


Actual Loss
$ terms
% of original holdings

$ 161


The idea, of course, is not to make the picture frightening
to American investors who are interested in diversifying into foreign
assets. It should be pointed out that the OPEC nations at the time of
this writing will receive an estimated $300 billion oil income in dollar
denominations in 1980. If, therefore, the trend to diversify away from
the dollar -- which has been the most important issue in international
finance by Arab investors in 1977, 1978, and 1979 -- continues, then the
original dollar owners,(namely the OPEC nations) would lose their incentive to diversify into DMs and Swiss francs due to the depreciation of
those currencies against the dollar. In addition, there would also be
a loss of purchasing power (U.S. inflation) for the OPEC nations which
would be added to the currency risk. Although this combination (currency
risk + inflation) worked in their favor in the late 1970s, it could work
against them in the 1980s.
and this is the Crux of the Matter!!!
By the end of 1979, currency diversifications away from the
dollar became pure speculation; and if anything, downright risky.
The Swiss franc and the Deutschmark are no longer safe havens
for excessive dollar holders -- the flight from paper currencies is on.

Accordingly, the $50 million silver-indexed loan by Sunshine
Mining has set a precedent for:
1. The ending of the "paper-based" floating currency
system; and
2. The beginning of the remonetization of Gold and
The concept of bringing Gold and Silver into the picture is
startling. Consider the single issue of a $100 million silver-indexed
loan and an acceptable interest rate as low as 10% for this loan. This
well-publicized 10% interest rate is contrasted with the pure dollardenominated Eurodollar loans where yield today commands 13%. Suppose
that the silver-index is pegged to a $30 or $35 silver price. If over
a period of two years silver goes to say $60, then the price of the
silver bond will increase 100% to 150%. The proposed "Sunshine bond"
has a convertible feature against all paper currencies provided that
silver appreciates against the dollar and simultaneously appreciates
against the weighted average index of other leading paper currencies.
This unique convertibility feature would make the 10% dollar-denominated
interest rate cheap and would, consequently, create a drastic contrast
to ordinary dollar-denominated bond holders.


Let us now examine a theoretical evaluation of investors
holding for a one-year period a silver-indexed bond with a 10% coupon,
a dollar-indexed bond with a 13.5% coupon, and a DM-indexed bond with
an 8% coupon. The assumptions are listed within the exercise.



DM Bond*


8% 10%


Rate of Return 1.5%

Silver Bond* (backed
by 25 ounces/$l,000;
interest payable in




- 2%

Silver increases from
$40 to $60 in one year


Capital Gain

48% Total Return
*(A11 denominations $1,000; assume no change in $U.S./DM exchange rate.)
Following the previously enunciated concepts, it is, of course,
obvious that if such a scenario presents itself, then an entire series
of financing in silver- and gold-indexed bonds could be marketed at lowcoupon, low-interest costs and could be redeemed in gold and silver.
The popularity of such "metal-backed" bonds would render the redemption
features highly favorable to the issuer. At the sama time, in terms of
comparison, the regular Eurocurrency bond interest rates to be paid in
paper currencies (particularly d liars) could increase considerably.
The concept now reach's mammoth proportions if we assume that
gold- and silver-indexed bond' will grow from the original $100 million
Sunshine silver-indexed offer<ng into the hundred- and eventually billiondollar range should other nr ling houses and corporations follow. Needless
to say, with two billion oi <ces of gold in total above-ground circulation
(of which at least 700 mi 1 ion ounces are in investment hands) and substantial above-ground ho1 .ings in silver (either coins and other ingot
format) the owners of these precious metals are in a lucrative position
to deposit the required amount of hard currency assets in an appropriate
corporate vehicle and float low-coupon bonds in any currency denomination against their metal holdings.





4- U.S.S.R.











U.S. Bureau of Mines, International Monetary Fund, Charter Consolidated,
and J. Aron Precious Metals Research Department

Chart prepared by J. Aron Precious Metals Research Department


In point of fact, I had suggested a similar plan in 1976
to the South African government.

"As gold slips below $120 an ounce -- its lowest level
in two years -- it is perhaps worth considering how South
Africa's interests might be better served in the marketing of our gold.
"At present total gold output is sold by the mining houses
to the Reserve Bank which pays them the 'official' price
of $42 an ounce. Once the gold is disposed of on the free
market (largely through Swiss banks) by the Reserve Bank an
agterskot, known in the market as the premium, is then apportioned out among the mining houses.
"In terms of understandings with the International Monetary
Fund, South Africa does not 'play' the gold market and, in
any event, this would be extremely difficult given our chronic
balance of payments problems.
"Coupled with this is the fact that Russia, due to climatic and
managerial disasters, is also a heavy seller.
"Certainly South Africa wants to maintain its untarnished image
of respectability in the corridors of the IMF while any toenadering with Russia -- not a member of the IMF -- is on the
face of it out of the question.
"However, there are ways and means whereby South Africa can
mobilize its gold production and at the same time protect the
free market from the constant and heavy flow of our bullion
to it.
"One of these measures was the recent R147.5-million gold swap
which was essentially a short-term measure: in due course the
Swiss will give us back our gold at the previously agreed
price and take their money.
"How much better it would be to structure truly long-term finance
at reasonable rates using our gold to link such loans to an
attractive speculation.
"A New York investment expert, Andrew Racz, suggested in Johannesburg this week the following proposition: a Eurobond issue by
South Africa carrying a coupon of 10 per cent and a term of 20
years with the bonds, denominated in Rl,000 units, each carrying
an option to buy five ounces of gold at a price of $145 at maturity in 20 years.


"Racz suggests that such bonds be denominated in Special
Drawing Rights thus eliminating currency risks and that the
gold required to service the options be deposited in a Swiss
bank thus reducing any political risk investors might fear.
"His view is that this technique would provide long-term
finance for the development of South Africa and at the same
time be a catalyst for recovery in bullion.
"The gold market, he states, is run by professional traders of
the financial capitals of the world. With the two major suppliers in financial trouble, the traders are operating against
them, particularly in the futures market.
"Amateurs, he says, can't compete with professionals and he insists that South Africa should now involve itself in the rapidly
developing futures market for bullion by giving birth, through
gold-linked bonds, to a new and virile options market in bullion.
"One would suggest that Pretoria would be well-advised to seriously
consider innovative approaches to the marketing of our bullion -or perhaps they should leave it to the private sector to get rid
of its own gold."
SOURCE: The South African SUNDAY TIMES, 7/18/76

The purpose of this article is not to talk about the potential
"Silver Cartel". However, it is obvious that at the current turbulent
market price of $35 to $50 for an ounce of silver, large amounts of
silver could disappear into unregulated hands. This silver could eventually reappear in corporate or private hands in almost any part of the
world, and Eurocurrency loans at favorable interest rates could be
floated against such silver or gold holdings. With a development of
this kind, the gold and silver segments of the Eurocurrency table would
increase in population and create further distortions of the Eurocurrency
market which at its current rate of growth should reach the two-trill iondollar mark by the year 1985 or 1986. With such success, it is an almost
obvious conclusion that speculators would find it more than convenient to
take delivery in gold and silver. They can leverage their holdings by
issuing cheap paper money against the gold and silver that they acquire
on the open market and eventually create an entirely new monetary system
through the following steps:



Acquisition of gold and silver;

B. Taking delivery; and
C. Leveraging on their existing holdings by establishing
sound international depository agencies and utilizing
the issuing houses of international repute in the
Eurocurrency market.
Needless to say, three dynamic conclusions can be drawn at this
1. The process we have described is almost inevitable
because of the lack of respect for paper currencies;
2. It's the automatic follow-through to the floating
currency market; and
3. Gold and silver would attain greater significance;
and because of its favorable utilization through
leveraging on the Eurocurrency market, the price
would increase substantially -- maybe even 100%
from the current price -- which is currently considered by most monetary experts as excessive.
In my own lifetime, from Hungary to England, and then to South
Africa and eventually to New York, I saw:
(a) Hyperinflation in Hungary in 1945/46;
(b) A decline in the British Pound from $2.§0 to $1.55;
(c) Gold go from $35 to $875 per ounce; and
(d) The dollar decline from 4 S.Fr. to $1.5 S.Fr.
It may be too early to talk about the first corporate silverindexed loan as a harbinger of a total rentalization and change in our
monetary system. However, it can be argued that a new process has been
set in motion which legitimizes the gold and silver assets in the international monetary circles; but more than legitimizing it, it brings about
a new monetary system where individuals and corporations set their own
currencies based on internationally uncontrolled assets (namely precious
metals) and create their own pitfalls (safe havens) or simply create an
exchange of values in what we call the precious-metal-based monetary






80 Broad Street, New York, N.Y. 10004 (212) 785-5300
a fortnightly newsletter

Member New York and Associated Member
American Stock Exchanges

September 17, 1981

No. 118

Recommendation to the Presidential Commission
for the Possible Establishment of the
Gold Standard
by Andrew G. E. Racz, President and
Chief Executive Officer of A. Racz & Co., Inc.,
Member of The New York Stock Exchange, Inc.




Current analysis of the possible return to the gold standard
originates in my opinion from a false conception of America's
strengths and weaknesses. Gold can play a vital role in re-establishing America's realistic role in the world of power and monetary
politics and can offset the re-emergence of the 20-year decline in
America which began with the monetary mismanagement under the Kennedy
and Johnson Administrations, the Vietnam War, the "guns and butter"
policy and the tremendous increase of approximately $1 trillion in
overseas liabilities against American reserves.
My analysis starts with different assumptions. It is my
original thesis that the United States today is strong. Out of the
monetary turmoil unleashed on the world by the oil price increase,
with the creation of the $1.2 trillion Eurocurrency market (which was
basically $50 billion at the time of August 15, 1971 when President
Nixon stopped the outflow of U. S. dollars, or when he closed the gold
window) and with the $30+ per barrel price of oil (which necessitates
that non-oil producing countries, including the IDCs, hand over
between $300 billion and $350 billion to the OPEC nations every year)
is a deficit for the IDCs, the Soviet Union and Eastern Europe. Even
with record-high interest rates in the United States and all over the
world and with the so-called military superiority of the Soviet Union,
America today is still stronger than ever, not by design but by default.
We are stronger and more powerful and have more room to maneuver than
any other nation in the world. Today America could dictate to the
world instead of politicking and practically begging. The road -- the
solution to international problems -- is in Washington. The keystone
of this theory is our monetary strength, namely:
(1) The strength of the dollar;
(2) The determination of the Federal Reserve and the
President of the United States backing the original
policy of Chairman Volcker;
(3) Our ability to finance, if necessary, and deliver,
if necessary, a $1.5 trillion defense budget over
the next five years;
(4) The integrity of our monetary and banking system as
opposed to the monetary system of any other country
(even though the strength of our monetary system
today is not as strong, and in effect is much
weaker than it was 20 years ago); and
(5) Our ability to utilize gold as a monetary weapon
in international negotiations.


My analysis, as I stated, starts from strength. These strengths
have been overlooked. They have been overlooked, because since 1973
the American public and its political leaders have undergone a series
of self-analyses, useless, childish and impractical. It began with the
now defamed and deplorable Ervin Committee hearings...coupled with
corporate witchhunting (which toppled foreign governments and drove
people to suicide)...with the election campaign in 1976 and the moralistic attitude of Jimmy Carter which left the dollar in 1978 in the
hands of foreign speculators...with our inability to stop a weak nation
like Cuba (living totally on borrowed foreign resources) from making an
attempt to change the whole surface of Central America and Africa...with
our guilt feelings toward other nations..-with our inability to look at
a realistic picture -- that it is the goal of the United States to drive
the price of oil down and break up OPEC -- that it is our long-range
policy as stated by President Truman in the famous Truman Doctrine
(which concerned mainly the Balkans, Greece and Turkey) to break up if
possible the Soviet Empire, weaken Eastern Europe and use every conceivable power necessary.
Let's go back to the last time American power was used effectively.
A few weeks after President Eisenhower had been inaugurated, he let it be
known through the Indian ambassador to the United States, Krishna Menon,
that if the Korean peace treaty was not signed within a matter of weeks,
all American military alternatives would be reviewed. The words "atomic
bomb" were not mentioned, but the peace treaty was signed six weeks
This is where my narrative begins. American power today means
military power, MX missiles, B-l bombers, troops in Germany and a $1.5
trillion potential defense budget. We are now experiencing the
re-emergence of the American spirit and our monetary power, including
gold. As part of our strategy, we have monetary power which must be
used ruthlessly, intelligently and imaginatively. It should be aimed
directly at the two forces which put the American public in jeopardy and
the free world into insecurity: 1) the price of oil; and 2) the miscalculation of the Soviet Union that this is helpful to their
imperialistic aims.
I am hereby recommending that we use monetary power as part of
our national reserves in line with the strengths of the Pentagon. I call
upon the Treasury of the United States of America to consider that our
monetary power be used just like the Pentagon's reserves in a war
condition, against the two most hideous but visible political foes we
have: the price of oil and the determination of the Soviet imperialistic
leaders to upset the tranquility of the free world and threaten Western
interests and American interests all over the globe. Gold and monetary
power are no different than nuclear weapons, Sputniks, atomic bombs or
man-made bombs, except that is subtle. Its force, however, is
irresistable in the world. People today respond to monetary pressure
more than at any other time in our history.


The civilized world has had peace for 40 years. Wars have been
marginal and out of the reach of civilization, except terrorism. The
standard of living since 1945 rose steadily until probably the mid-70s.
The demand of ordinary citizens from Siberia to Cairo, from Warsaw to
Lagos, from Paris to San Francisco, has been rising steadily. The power
of politicians to break the expectation is virtually nil. The Polish
revolution is not an anti-Soviet revolution, it's a revolution from the
middle class and the lower-middle class for a decent standard of living.
This political force is translated into a demand for money and the goods
that money can buy. The common word which politicians fight is inflation. The power, therefore, rests in the hands of those who control
money. The world's money today is controlled by the President of the
United States of America.




August 15, 1971 was a date whose significance and circumstance
has not been properly analyzed by either monetary theorists or politicians. The political negligence, of course, is understandable because
we have learned to live in a world, much to my regret, which has been
critical of any decision which President Nixon and his cabinet made
on domestic matters, regardless of historical merit. Consequently, it
is vital that we make some reflections on that date and how that decision — the closing of the gold window, which ended the fixed currency
system ~ happened.
In 1971 the Eurocurrency market virtually did not exist; therefore, dollars were held in the United States and the overseas dollar
holdings (the so-called Eurodollar market and the Eurocurrency market),
are relatively minor but still threatening to the U.S. gold reserves.
That window was closed by President Nixon. I think that decision was
vital, presidential and important. Had the gold window not been closed
-- with the resulting monetary explosion followed by OPEC's decision in
October, 1973, to increase the price of oil tenfold -- our gold reserves
today would be practically nil.
Today we still have more than 264 million ounces of gold. This
figure, when it is compared to the world's gold reserves of other nations
and with world gold production, is a magnitude of international significance. Today, the floating currencies, the homeless currencies -- the
so-called Eurocurrency market — is about $1.2 trillion, and fixed exchange rates are a thing of the past. At any time a run on the dollar
could lead to a run on gold, provided our gold reserves are not protected.
Accordingly, any classical gold standard, which could not withstand the
vissicitudes of the times of the 1960s and early 1970s, is insignificant
compared to the tide which can be unleashed on American reserves in the
The very conceit of a conventional gold standard almost at any
price - $500 an ounce, $1,000 an ounce - is totally ridiculous. World
events can change so rapidly that the resulting damage to American
monetary, and therefore political strength, could disappear overnight.
If Saudi Arabian oil production is cut by two to three million barrels
per day, and the price of oil goes to $50 or $60 per barrel, the run on
gold in an open monetary system with fixed parities could not survive
a matter of weeks.
Before returning again to the famous Nixon decision, let us look
at some other figures. The OPEC nations in the last ten years have taken
in close to $1.0 trillion from the Western and under-developed nations.
Today their revenues are in the vicinity of $350 billion per annum. We
must now compare with American monetary reserves, the so-called Ml and
M2 bank reserves, and realize the tremendous liquid resources held in
hard but convertible currencies which we either fear or utilize for our
monetary and political objectives.


It is customary in all democratic countries that when new
leaders are elected and adminstrations change hands, they bring in
their own experts and their own theories. Everything which has
happened in the past is considered a mistake and new theories are
expected to solve mankind's basic problems; namely, the improvement
of the standard of living, strengthening of their currencies, and a
better economic system to live in. I think it was 1958 or 1959 when
I listened to a speech in London from former Prime Minister MendesFrance: "In physics you can experiment, in politics you cannot; you
have to make decisions. I made a decision that De Gaulle is now the
leader of France and a good leader of France; therefore, I support
In the United States, more than in any other civilized country,
we have a habit of discarding politicians every four or eight years.
We throw out the parties and their experience, and we start from
scratch with new faces, at a tremendous cost to the continuity of our
institutions. On numerous occasions I see in Sir Winston Churchill's
speeches -- when he defended Western civilization and when he fought
during the Second World War for the English-speaking world and everything it stood for -- the phrase, "the continuity of institutions."
In our 200 years of American history, there was no other time
when the American people discarded their systems so rapidly as in
1974. The resignation of President Nixon made almost everything that
had happened in six years of a Republican Administration wrong, harmful, not to be mentioned, and not to be analyzed. We discarded not
only the President -- who is considered an intellectual leader in
the Western world today -- but we also discarded a group of intelligent people. Today they are leaders of industry, finance and politics.
These people were present in 1971 when a decision was made on gold and
the dollar which in my opinion saved the Western monetary system,
Western civilization and world civilization during the subsequent
monetary turmoil. Those people today are alive, and their experience
is absolutely essential to any constructive move which may lie ahead.
To name a few, the former Secretary of the Treasury, John Connally;
the Secretary of Commerce, Mr. Peter Peterson, currently Chairman of
Lehman Bros. Kuhn Loeb; the right honorable George Schultz, President
of Bechtel Corporation; Henry Fallow, currently partner of Goldman,
Sachs; His Excellency Arthur Burns, U.S. Ambassador to Germany, the
former Chairman of the Federal Reserve; and last but not least, or
rather first, President Richard M. Nixon, and a whole list of intelligent, accomplished people.
My first recommendation is to appoint a council of so-called
"Wise Men" (a council such as President Lyndon Johnson used in March
1968 during the Viet Nam War), to bring back the experience of the
people who formed the monetary policy of the United States in 1971,
and who on August 15 of that year came to a momentus decision. Let's
get all the data from the Treasury, the recommendations, the alternatives, and the inside facts on how the decision was arrived at and
implemented. That was the last major decision on gold. Not to draw
upon that experience and information, not to draw upon the process
and the thinking as to how that major monetary change came about, is


simply an insult to intelligence. No academician who researches a
major topic -- a topic which could change the life of every American
and foreign citizen whose life is tied to monetary stability -- would
begin his work without first exploring a topic of vital importance
which happened only ten years ago, especially when the major characters
of that decision are still alive. That council to the President of the
United States should be formed immediately and their report, if necessary in secrecy, should be submitted to the Oval Office. This recommendation is imperative.




The Reagan Administration is facing problems which have obviously
accumulated over 20 years of Democratic, or liberal, neglect. Problems
such as: a $1.0 trillion debt economy; 15% of the national budget covered
by interest expenditure; a 20% prime rate; an interest rate structure
all over the Western world which creates economic strangulation; an
antagonistic attitude from Western governments who blame high American
interest rates for their economic ills; an aggressive Soviet Union in
Afghanistan, Angola, Poland, shortly in Rumania, and in Central America,
which necessitates a $1.5 trillion U.S. defense budget. A tax cut,
coupled with a not-too-large and insufficient budget cut, has created
turmoil in monetary markets. Corporations are unable to raise money.
The equity market is experiencing the biggest massacre since 1974; and
because of high interest rates the stock market may not function for
several months and possibly for a year. Personal and corporate fortunes
are disappearing because of the declining commodity stock prices and the
possibility of collapsing real estate prices. The nation's savings and
loan industry simply doesn't function, in fact, it doesn't exist on its
own any more.
The recovery program at the moment, economic and monetary, is
left in the hands of a new theory, the so-called supply-side economics.
If it works, of course, it would solve some of our problems, if not,
it could end up as a disaster. It is, as Mendes-France defined some
20 years ago, "an experiment," hopefully one which will work. I would
agree with what President Reagan said on many occasions: "Money in
the hands of the people is more valuable than money in the hands of
the Government." However, our monetary markets seem to be in total
turmoil. High interest rates simply do not fit with the American and
Western economies; certainly not at our current rate.
Since October 6, 1979, when Chairman Paul Volcker left the IMF
meeting in Belgrade in a hurry, he embarked on a restrictive monetary
policy which slowed down the money supply in the United States and declared an unconditional war on inflation. Today, the money supply is
declining, inflation is declining; but our monetary woes are unlikely
to go away.
Theories have been put forward that the growth of the money
supply can no longer be left to political decision makers. It seems
that the old maxim has been called into being: Money supply is too
important an issue to be left in the hands of the politicians. A
classical gold standard, with a fixed rate of exchange between gold
and monetary aggregates outstanding would cut permanently the growth
of the money supply within a relatively narrow range, and create a
semblance of fixed exchange rates between leading currencies and the
dollar. The new monetary era would begin where inflation, under


classical theories, would be more manageable. The propagators of such
a gold standard brought in the example of the 1950s and other decades
(going back even a hundred years) when the gold standard and a limited
money supply created economic prosperity.
Unfortunately, today such parameters alone do not apply. The
currency reserves of foreign countries, the economic power of the OPEC
nations, the dangers of the Middle East, the aggressiveness of Soviet
imperialism, and the necessity of abnormally high defense budgets, makes
us think that in terms of monetary policy, monetarist or supply-side
alone, the problems of today are different than can be defined in
classical economic theories. To reiterate:
(1) The rapid increase in the money supply all over the
world, and the resulting hyperinflation in the growth
of money and currencies, is directly related to the
OPEC nations' drastic rise in the price of oil and resulting world inflation.
(2) Aggressive attitudes from the Soviet Union which have been
demonstrated in the last five years (ever since America
crippled itself because of the so-called Watergate Hearings), have created Somalia, Ethiopia, Afghanistan, Iran,
El Savador, Nicaragua, Poland, and shortly Rumania, Angola,
and other problems of its kind.

It is not overlooked that in the last eight years, while
American political power has been declining, our military power
has weakened correspondingly. Our defense forces must be rebuilt,
this is -- on a national level -- a first priority. However, we
don't have $1.5 trillion to spend during the next five years, unless we accept intolerably high interest rates and the declining
purchasing power of the dollar.*


In such a gloomy setting -- like in the dark days of 1978 and 1979
-- the price of GOLD can rise dramatically. I am not afraid of a
high GOLD price -- under certain circumstances it can be construed
as favorable to the United States, provided we recognize that GOLD
is a monetary weapon and, in fact, a political power base of the
United States.




Theoretically speaking, the establishment of a gold reserve could
be construed as opening the door to the actual depletiation of our reserve
assets. I want to interpret GOLD as one of our monetary assets. A more
practical thought, therefore, is to mobilize gold for our monetary needs!!
Later on in this chapter I will try to explain how monetary objectives actually
coincide with the political needs of the United States. The idea of gold- or
silver-backed bonds has been around; some experimentation has been carried out
and, of course, silver-backed bonds gained some widescale publicity with the
so-called Hunt-silver transactions in late 1979 and 1980.



The recently announced $100 million Sunshine silver-indexed
loan offering, which is described in the following paragraphs, represents a historical turning point in our monetary system.

"Andrew G. Racz, an authority on silver and President of
Racz International, New York, called the move 'the historical turning
point in legitimatizing gold and silver as backing for currency.'"
- The New York TIMES
Tuesday, February 5, 1980


$100,000,000 of
% Silver Certificates Due
March 15, 1995 (the "Silver Certificates").

Payment of Interest

March 15 and September 15.

Indexed Principal

For each $1,000 face amount Silver Certificate,
the greater of $1,000 or the price of
ounces of Silver (determined as provided in the


Callable at the Indexed Principal Amount on or
after March 15, 1985, if such amount is $2,000
or more for a period of 30 consecutive days.


By the end of 1979, currency diversifications away from the
dollar became pure speculation; and if anything, downright risky.
The Swiss franc and the Deutschmark are no longer safe havens
for excessive dollar holders -- the flight from paper currencies is



Accordingly, the $50 million silver-indexed loan by Sunshine
Mining has set a precedent for:
1. The ending of the "paper-based" floating currency system; and
2. The beginning of the remonetization of Gold
and Silver.
The concept of bringing Gold and Silver into the picture is
startling. Consider the single issue of a $100 million silver-indexed
loan and an acceptable interest rate as low as 10% for this loan. This
well-publicized 10% interest rate is contrasted with the pure dollardenominated Eurodollar loans where yield today commands 13%. Suppose
that the silver-index is pegged to a $30 or $35 silver price. If over
a period of two years silver goes to say $60, then the price of the
silver bond will increase 100% to 150%. The proposed "Sunshine bond"
has a convertible feature against all paper currencies provided that
silver appreciates against the dollar and simultaneously appreciates
against the weighted average index of other leading paper currencies.
This unique convertibility feature would make the 10% dollar-denominated
interest rate cheap and would, consequently, create a drastic contrast
to ordinary dollar-denominated bond holders.


The United States is the largest owner of gold among all
countries with some 264 million ounces.

Central Bank Reserves
United States



International Organizations
IMF 140.6


Communist Countries (Est.)
U.S.S.R. 100.0


Private Hoardings (Est.)
France 200.0
Rest of Europe
Middle East
Far East
United States



My proposal is for the Treasury to put aside less than 8% of
its assets, some 25 million ounces, and issue long-term five- or
ten-year gold-backed bonds with an 8% coupon in $1,000 denomination,
with a conversion value of 20% to 25% above the market price.

$25 billion issue
Conversion price:
Total ounces:
Annual interest:
5-year total interest:

41.7 million
$2.0 billion
$10.0 billion

5-Year 16-1/8% Treasury Bond - $25 billion issue
Friday, Sept. 11, 1981




Nov... ...92.14



Nov... ..101.00






Annual interest: $ 4 billion
5-yr. total interest:
$20 billion.
Savings on Cv. Gold Deb.
After 5 years:

$ 2 billion
$10 billion.



+ .8


+ .23


+ .30



$25 billion issue
Conversion price: $600/ounce
Total ounces:
41.7 million
Annual interest:
$2 billion
10-year total interest:
$20 billion

10-Year 14-7/8% Treasury Bond - $25 billion issue
Friday, Sept. 11, 1981













14-l/2s, 1991 May 97.9 97.13 +1.7 15.02



Annual interest: $ 3.72 billion
10-yr. total interest:

$37.2 billion

Savings on Cv. Gold Deb.
After 10 years:

$1.72 billion
$17.2 billion.


Let us now analyze this hypothetical transaction in detail.
(1) For the owners of gold who intend to hold gold if they
are investors for at least five years, the cost of carrying gold is
approximately 18% per annum. If they can buy 5% bonds with a conversion price of about $600 and allocate an interest of 8%, the actual
owner of the debenture who at some stage, five years later, would like
to convert it into gold, would fare better than buying the gold bullion today on the open market.
(2) By stretching the conversion of all or part of the issue
to ten years and dividing up the $25 billion into various parcels, a
different interest rate may be lower or a different conversion rate
may be higher could be obtained.
Price/Ounce Total Interest Paid On Net Savings
Matures in
at Maturity
Gold Deb.


$8bil. 5 yrs. $550 $10bil. $20bil. $10bil.
$8bil. 10 yrs. 650 20bil. 37.2 bil. 17.2 bil.
$8bil. 20 yrs. 800 40 bil. 70 bil. 30 bil.
Total Net Savings to U.S. Goverment
5 years $10.0 billion
10 years 17.2 billion
20 years 30.0 billion

(3) By quoting an interest rate of say 8% on a ten-year
issue as opposed to 16% which currently prevails on a five- or
ten-year Treasury bill rate, if we can actually sell $25 billion
debentures, would save approximately an interest rate of $2 billion if the $25 billion bond is on aggregate convertible at $600
per ounce.

to c3ov't


(4) The United States can give the option of having the bonds
redeemed in dollars almost any time -- after all the Treasury would be
doing nothing but borrowing money at 8% as opposed to 16%. Alternatively,
it could permit the bond to fluctuate with the gold price and honor its
obligation to redeem either in gold or in dollars at the expiration of
the bond.
(5) It should be mentioned that nations other than the United
States could, of course, come out with similar issues. Should Germany,
Switzerland, the Bank of International Settlement in Basle, follow the
American example, the net effect would simply be to absorb excess
liquidity which today commands an interest rate both in the United States
and overseas in various denominations higher than a gold-backed 8% bond,
and consequently would stimulate economic activity and result in important
interest savings. Gold-backed bonds in DM-denomination issued by the
Bundesbank are by no means a negative for the monetary system.
$5 billion issue
Conversion Price: $600/ounce
Total ounces:
8.3 million
Annual interest:
$300 million

1 Year 12-1/2% Deutsche Mark
$5 billion issue
Annual interest: $625 million
Interest on Cv. Gold Deb.
Interest on Deutsche Mark

$300 million
625 million

Savings on interest payments

$325 million


(6) Let us now look at the Russian example. Russians mine
gold and sell gold in order to finance their exports and their balance
of payments deficits. Can the Russians float let's say a $5 billion
dollar-equivalent value bond at 8%? The difficulties are quite insurmountable.
Major World Gold Producing Countries
(Gold output metric tons p.a.)

700t _,




500t __

















South Africa
United States
Papua New Guinea



It has to be denominated in dollars or some other hard currency,
as the Russians clearly have not obtained the creditability of permitting the conversion in rubles which the international banking community simply does not trust. Exchange rates of the ruble are artificial and can be manipulated. An 8% gold-backed bond that on the last
resort the owner might end up holding 50% depreciated rubles, is not
a good international exercise. Can they resort to a dollar-denominated
bond and reinvest the proceeds in high-yielding Treasury bills? Of
course they can, and a $5 billion 8% bond, if it's invested at a 16%
rate in U.S. Treasury bills, going from dollars into dollars, would
result in a $400 million annual savings for the Soviet Union. But can
they do it? Can they afford to? If the Russians need the gold from the
proceeds of the sale of gold to balance their balance of trade deficits, they cannot at the same time hold their gold and deposit it in
the Bank of International Settlement in Basle and play with the proceeds
in the U.S. money markets, as $400 million is substantially less than
the $5 billion that they would obtain through the actual sale of the
gold, even though selling bonds at the higher conversion price would
provide more money. We can assume that if the Russians have plenty of
gold and plenty of money, they would not risk the economic collapse
of Poland and they would not silently go along with the risk of slow
bankruptcy in Rumania.


Euromoney • August 1911

The Next Poland?

Bankers are laying odds on which will be the next East European state to be forced to seek a rescheduling of its commercial
debt to the West. In private, they reluctantly admit it looks like
Romania. A n d this isn't simply because of general pessimism
resulting from their experiences with Poland (see this month's
cover story).
Romania is finding it more and more difficult to raise m o n e y
from Western commercial banks. It has managed only two syndicated loans this year, one an $85 million oil-import facility from
Arab banks — this for a country that used to be Europe's leading
oil producer — and the other a $200 million co-financing by commercial banks and the World Bank for a canal project.
Romania is a member of the I M F . That is, it has an extra
cushion to fall back on, which Poland did not have. But this m a y
prove something of a mixed blessing.
When the fund granted Romania loans totalling nearly $1.5
billion in June, what evidence did it have that Nicolae Ceausescu's
regime, notoriously corrupt and incompetent, was changing its
No doubt the I M F was given statistics. All East European
statistics have somewhat slender connections with reality. In
Romania, it seems, they give one set of statistics to their C o m e c o n
allies and another to the I M F .
Whatever set offiguresyou take, the Romanian sums fail to
add up. The hard-currency current account deficit looks like being $3 billion this year, and another $3 billion next year, on top of
$2 billion last year. Hard-currency debt, which was over $9 billion
at the end of last year, will be $16 billion by the end of next year,
and $19 billion by the end of 1983. Even more worrying is the concentration of debt in the shorter maturities. Roughly half of what
Romania owes Western banks is at maturities of a year or less.
The regime has, so far, kept up its debt service payments. But
exporters to Romania are experiencing delays in payment.
This is one tell-tale sign. There are others. There has already
been industrial unrest and shortages of basic commodities in the
shops. The shortages are caused not only by shortcomings in prot o n , but by the switching of supplies destined for the domestic

market into exports as Romania desperately tries to increase its
foreign currency earnings.
The usual hounding out of scapegoats has taken place. This
year the planning boss and the finance minister have been sacked.
(There have been three planning bosses in three years.) Yet the
leadership continues on its way, not seeming yet to see the severity
of the crisis or the bankruptcy of its o w n policies. The failure to
meet the growth targets in the 1976-1980 plan, culminating, in
1980, with the worst economic performance of any year since the
Second World W a r , seems to suggest that more than individual
incompetence is to blame.
In obtaining a three-year credit from the I M F , the Romanian
Government agreed to raise domestic prices and slow down state
investment, in order to reduce the swelling current account
deficit. But some observers feel that the fund was far too lenient.
The danger, as they see it, is that the I M F action will be taken as an
endorsement of Romania's economic policy.
According to Wharton Econometric Forecasting Associates,
"the I M F loan decision will allow the Romanian leadership to
continue its present policies — until a new and more serious
economic crisis takes place." Wharton sees this crisis as probable
within the next year or two. S o m e bankers put the time as nearer
than that.
For the bankers, to have one sick client in Eastern Europe is
painful enough. T o have two will put a severe strain on their
balance sheets.
A n d there are even more dangers in the knock-on effects of
the Polish and Romanian economic crises. Poland's troubles have
resulted in missed deliveries of goods and components to its C o m econ allies, forcing their comrades to buy from the west instead
and deplete still further their precious stocks of hard currency.
Romania is less central to the interdependence of the socialist
economies than Poland, but any reduction in purchases from its
neighbours as it tightens its belt will add to Comecon's problems.
Economic ills m a y yet rot the guts out of the East European
economy in a way that no political subversion could.



Poland owes $30 billion to the West; it is a political issue
as far as the Soviet Union is concerned, and the resulting monetary
damages through partial bankruptcy can be incalculable. Rumania,
from its $9.5 billion deficit in 1980 is estimated to run to $19
billion in 1983. In 1981 Rumania managed to borrow with great difficulties somewhat less than $400 million on the international Euromarket, part of the money coming from the Eurobank, the Paris-based
Russian bank which has total assets of $8.5 billion only.
Poland, of course, is not only the case study of an international monetary basket case -- but the real first Chapter II of the
Cold War. Let us cheer!!! The West is winning.

-21Euromoney • August 1911

Sarah Martin

The Secrets of the
Polish Memorandum
The memorandum which western commercial bankers have agreed to
present to Poland is extraordinary in that it would give the
bankers an IMF role in directing the Polish economy
A banker sat in a Paris caffe, stirring the remains of an
espresso round and round in his cup. T h e topic for discussion over
lunch had been Poland, but he had lapsed into silence. Abruptly
he spoke. "You know, w e bankers are going to lose our m o n e y on
Few of his fellow bankers were willing to admit that. C o m mercial bankers from 12 countries had gathered in Paris in late
June to try and agree on an orderly restructuring of Poland's 1981
debt. The two-day meeting resulted in an extraordinary document
which, zsEuromoney went to press, still had to be approved by all
the national banking groups and Poland itself before it could
come into effect. It is unprecedented in the role it would assign to
commercial bankers in monitoring the rebuilding of the Polish
The Polishfinancialcrisis is the biggest shock yet to hit the
Euromarket. The country is not a m e m b e r of the I M F and its
debts are larger by far than those of any country that has had to

W h a t happens if Poland doesn't meet the conditions to the
satisfaction of the banks? This has been left unclear. M a n y
bankers doubt Poland's ability to fulfil the conditions of the leadin agreement completely, but most of those w h o spoke to
Euromoney felt that it was worthwhile to inject some conditionality into the rescheduling. A s one put it: "If you don't ask
you don't get; if you do ask you might not get but you will at least
have tried to get." O r be seen to have tried, he might more aptly
put it.
Scepticism runs deep about Poland's ability to provide
reliable information. A s one American banker admitted privately: "Poland is not in a position to come up with reliable data,
because the assumptions it would be founded on are simply
changing from day to day. They will disappear the day after the
plan is written."

* * *

T h e Soviet Union subsidizes the Poles through preferential
trade terms. It has also provided hard currency loans, over the
past year, of at least $1.5 billion. Insiders have suggested that
Poland has had an open credit line of as m u c h as $5 billion since
February 1980. There was evidence for this in mid-July, when
Poland's deputy foreign minister, Marian Dobrosielski, was
reported to have said that Poland had received $4.5 billion in aid
from the Soviet Union since last summer, though not all in hard
currency. T h e Paris m e m o r a n d u m demonstrates clearly h o w anxious are western bankers to k n o w the exact extent of Soviet aid to
Poland. O n e of the difficulties inherent in any rescheduling agreement it that it must be lenient enough not to strangle Poland's
economic recovery, and yet tough enough to give the Soviet bloc
the message that western banks were not going to bail out Poland
alone. T h e Soviet Union, for its part, is signalling to the west.
Analysts have suggested that the Soviet Union let Poland know in
the first quarter of 1981 that there would be no more hard currency available until the fourth quarter of 1981, a message apparently
intended to spur on western bankers. But insiders are certain that
there has been money available to Poland to draw on to cover its
interest payments and short-term debt. O n e bank economist said:
"There is no doubt about the Soviet Union's ability to provide
short-term assistance, but they are naturally reluctant to enter into
a long-term open-ended commitment."

The details of the secret m e m o
put before Poland
As a condition of the lead-in agreement, Poland will be
asked to retain a technical adviser, acceptable to the western
banks, to act as assistant to the Polish authorities. If accepted, this
step will mark a sharp departure in the relationship between
Poland and western commercial banks. This is the closest the
banks have yet come to assuming an IMF-type role.
Poland will be required to provide any economic and other
'^formation the banks request not later than November 1, and a
Polish representative w h o can confirm the accuracy of the
economic information.

How the overdue FRN was paid
with Russian money


(7) The numbers, the convenience, easily put the United States
in monetary confrontation in a different league, separated from the
Soviet Union. A clear monetary superiority is already established by
the marketplace. Only our interpretation, our resolve, is missing.
By changing our attitude, "The Power of Positive Thinking", we would
increase not only our prestige, but the buying power, monetary power,
and economic power accruing to the West.
Let us now diverge for a minute from the gold-backed bonds to
the so-called Eurobond market. In London, in Singapore, in the socalled Asia dollar market, in Hong Kong, in Frankfurt, in Zurich, huge
markets have evolved in Eurobonds and Euronotes. Interest rates vary,
banking transactions made easy, and today approximately $200 million
is held in Eurobonds, making international borrowing by corporations
and particularly by government agencies easier. The resulting interest
rate differentials today are the highest in Canada and then the United
States, the lowest in Swiss francs, has accommodated the free flow of
capital and enabled corporations, government agencies, governments and
the World Bank to soak up extra liquidity and mobilize capital to the
needs of modern civilization.


The following compilation is international bond issues for
which there is a secondary market - priced as of September 7, 1981












U.S. Dollar Straights
Amoco 13-1/4 '88
Hiram Walker 16 '86
World Bank 16 '88
Deutsche Mark Straights
Asian Dev. Bk. 10 '91
Finland, Rep. of
World Bank
8 '90


Swiss Franc Straights
Aeroport Paris 6-1/2 '91
Japan Dev. Bank













C$ 60
EUA 25
FF 150
Lux Fr 500





Yen Straights
Asian Dev. Bk.
Finland Rep. of


Other Straights
Bell Canada 10/3/4
Mort. Bk. Denmark
Utd. Mex. States 14
9-3/4 '87




Assuming that the Treasury and President Reagan in full cooperation with the Federal Reserve made a decision to launch gold as a monetary weapon (monetary because we have value which we don't need for
settling our international debts) we would place the United States into
a class of our own. This issue does not apply to 95% of the countries.
We have gold, which the Eastern bloc does not have. We have gold that
the OPEC nations do not yet possess. If the price of gold goes higher,
it is by no means a negative for the dollar and the actual reserves of
the United States increase and,therefore, our monetary superiority becomes clearer.


% of Na-


Total Valuation

ti onal Debt

$105.6 b i 11i on





$360.3 billion

National Debt:

$1.0 trillion

The above table illustrates what percentage of our total
national debt can be met should we monetarize our total gold
reserves. For example, at $600 an ounce, we could realize approximately $160 billion and meet instantly 16% of total debt
owed by the nation. At $750 that figure rises to near 20%.


There is no doubt in my mind that President Reagan and his
Administration came to office with the strong desire of establishing
the soundness of the dollar, to establish -- or rather, to re-establish
-- the economic and monetary supremacy of the United States. Candidate
Reagan promised that the United States would re-establish the military
might and superiority of the United States versus the Soviet Union.
The Soviet Union is our enemy. In the military field it is now forcing
us to a $1.5 trillion expenditure which affects every American citizen
through high interest rates via the overcrowding of bank borrowing.
The Soviet Union is our enemy because it has threatened the Middle East
through Afghanistan, Central America through Cuba, Africa through Cuban
and East German proxy forces, and Western Europe via Poland and potential bankruptcies of other Eastern European nations. If our defense
budget were to decline $100 million over the next three years, interest
rates would drop, economic activity would pick up, the Reagan supply
side economics could gain quicker and more visible effect. World-wide
interest rates would decline. What hurt us in the 1970s and is still
hurting were the high oil prices. Oil prices are crumbling today, but
the Soviet Union is still the most dangerous enemy the United States
has had since the end of World War II.
Monetary superiority via Gold! The policy of America unfortunately has been neglect, shortsightedness, and the mistaken theories
which were put into practice by previous Administrations. The so-called
forced gold sales of the 1970s, which originated from an otherwise
talented Secretary of the Treasury's theory that gold has no place in
the monetary system, has been a failure. Bill Simon, Secretary of the
Treasury under two Republican Administrations, has resulted in utter
failures by forcing the International Monetary Fund to sell 25 million
ounces of gold and distribute another 25 million ounces to the socalled "poor nations." The policy wasted international assets — 50
million ounces of GOLD for no good reason, selling American gold on the
open market at a price not much higher than $200. It resulted in a
waste of national assets, a decline in our prestige in providing leadership of international monetary affairs.



A cumulative summary of sale of gold in U.S. Dollars:
December 1976 $320.0 million
December 1977

964.0 million

December 1978 2.04 billion
December 1979

3.45 billion

May 1980 4.64 billion

Average total auction price... $186

If blame is to be thrown around, we could paraphrase the
famous words, "The best and the brightest" have participated in
the total disregard of the real value of Gold and the real monetary
and, indirectly, political interest of the United States of America
However, let us close this chapter and recall the famous words of
Sir Winston Churchill in his first speech to Parliament when he
became Prime Minister in May 1940:
"If the Present will sit in judgement upon the Past,
it will lose the FUTURE."



If we accept the principal that Gold and Silver, as well as
strategic metals, just as oil and gas, are national assets and monetary values and therefore monetary assets, we of course can easily
conclude that all those constitute in aggregate the political power
for every country. This paper deals with activating American interest
and American monetary power!! How to make American political power,
through activating American monetary credibility!! President Reagan
was elected on the mandate to restore national dignity, monetary and
military and political power of the United States, which were in decline since the sad days of the early part of 1973. Historians will
argue, but I am in the affirmative, that the mandate of 1980 is a continuation of the mandate the Republican Party overwhelmingly received
in 1972 when unfortunate political events took away the power from the
Executive branch for political leadership. If Watergate was an incidental Russian and direct OPEC victory — let the monetization of GOLD
be the source of planned overwhelming American political triumph!! In
a period of eight years of indecision, the country has been brought
near to monetary turmoil and has seen American political prestige at
its lowest level of perhaps its entire history.

London Gold Price
(US $ per ounce)





^.- -.



**»*•«./->*—— ^"v^^As^^—%.-»N-.JKAVV' London Gold Price
(Swiss francs)







This chart contrasts the movements in the bullion market and in the gold share prices. The bullion price based on the daily London fixing is given in both Americanrf"w«
and Swiss francs. Movements in the share markets are represented by the Mining Journal Gold Mines' Index, which is based on the international market whilst'W
Johannesburg market is shown by the South African Financial Mail Gold Mines' Index. The latter has been replaced bv the Financial Mail A ll-Gold Mines' Index as from
January 1980.
M I N I N G JOURNAL—Quarterly Review of South African Gold Shares










—I 102







A f-^ \


J v



\ /



» I l I l i I I I i i I i i i I i i i I i i i I i i ,

•l 40
0 '••I ••• I i
1974 J975


i i I i i i Ii

i i i



1 18
1 16
1 14
1 12
1 10

i i

i i i










i i i i i i



i i i

974 1975 1976 1977 1978 1979 1980 1981

976 1977 1978 979 1980 1981





1 10




SCALE ~* 88.0


-Ll l I i


I i i i I i i i I i i • I • i i I • '• I

?4 1975 1976 977 1978 979 1980 198
1974 1975
P R E P A R E D B Y F E D E R A L R E S E R V E B A N K OF S T . L O U I S


. 17
















SCALE -"• 80





974 1975 1976 1977 1978 1979 1980 198

974 1975 1976 1977 1978 1979 1980 1981
















974 1975 1976 1977 1978 1979 1980 1981

\ «
^EFFECTIVE 9 0.9 90
' ' ' '' I I I
_ L _ L I I I I I I 'SCALE"*
0 i l lI l II
974 1975 1976 1977 1978 1979 1980 1981




240 «-SCALE

1 \











\ v""~" /

-1 1 1 1 1 1 11 11 11 1 1 1i i 1i 1 i i i 1 i , i 1 . i i_

974 1975 1976 1977 1978 1979 1980 1981



SCALE"* 60




Gold, as we have illustrated earlier, is becoming an active
monetary asset if we raise money against our gold reserves. No
other country can do it on the scale we can. Let us now look at the
practicalities. The U.S. Treasury can set a trend and sell small
quantities of gold-backed bonds and see the effect. If the gold
price declines*we are as a country quite at liberty to increase our
gold holdings at lower prices. Subsequently, the Treasury can float,
if required,either dollar-denominated bonds without gold backing,
(where the net cost to the Treasury has actually been reduced by the
lower cost of gold-floated bonds) or float at a more propitious time
with different maturity, additional gold bonds with an even lower
coupon. In each case, provided with the lower price we could replenish
our own inventory, as obviously the previously floated bonds require
the required gold reserves to be put aside either in Fort Knox or, if
necessary, in Switzerland (in an internationally acceptable reserve
deposit). The net effect of a declining gold price after floating
one, two or as many gold-backed bonds, would simply be a lowering of
cost of borrowing for the United States. Borrowing at lower rates
certainly does not constitute an increased but rather creates a
decreased liability to the Treasury.
Let us now continue the above analysis. Even if gold prices
remain the same after floating let's say five or ten million ounces
equivalent of gold with appropriate premium, the Government can authorize the U.S. Treasury or the General Services Administration to Increase
gold and silver holdings by propitious purchases in the open market.
By recognizing the value of monetary assets, we are simply increasing
our inventory and floating the appropriate debentures at our convenience.
The gain for the United States from such an operation is obvious. Do
we hurt our Western allies? Hardly; we have simply lowered interest
on gold-backed U.S. Treasury bonds. Do we hurt the under-developed
nations? Undoubtedly not; we are indirectly probably helping them to
give greater value to their commodities which is the prime export
earner for most of the countries. Do we help the South Africans?
Undoubtedly, by mobilizing gold we are strengthening that nation undergoing a major political transformation. With the vast economic problems South Africa will face in the next two decades vis-a-vis their
non-white population, the stronger and closer South Africa is to the
United States, the speedier will be the economic development of Black
Africa. Again, the stronger the United States monetarily and militarily,
the greater the influence we can exert on South Africa.




Should the popularity of gold-backed bonds, the elimination
of some gold from sale on the day-to-day London and Swiss cash market
and the recognition of gold as a monetary asset lead to a higher gold
price, a scenario would present itself which we would have to analyze
with great care.
(1) From the point of view of the United States, the higher
gold price would simply permit the sale of additional bonds at an
even higher premium and higher price than let's say the original $600,
and lower interest rates. Also, some of our gold reserves can disappear by conversion; the resulting savings in Treasury bank borrowings could be considerable. Furthermore, by allocating 10% of our
gold reserve initially to gold-backed bonds, the limit to which we are
willing to part from our gold reserves can be set by Congressional
action, modified by Presidential decree, of course. The flexibility
in this approach is absolutely essential.
(2) The higher gold price would increase the monetary value
of our reserves and,consequently,by activating gold the value of our
reserves would gain greater monetary significance. No doubt it would
also strengthen other countries.
(3) Would an increased gold price lead to inflation? It seems
to me that the Federal Reserve Bank's policy of restricting the money
supply is by no means tied to the price of gold. Since Chairman Volcker's
restrictive money policy went into effect October 1979, the price of gold
has fluctuated somewhere between $200 an ounce and $850, back to $380,
and now stands at $440. It seems to me that the price of gold,
the price of silver and the growth of the money supply are tied together
only by the imagination of corporate journalism or by the gold bugs who
want something which is attainable — I'm talking about the gold bugs
and the hard currency advocates who talk incessantly of fixed exchange
rates -- but whose desires and views are totally unprofessional and
should not be considered by our monetary and political authorities.
(4) In fact the higher gold price would put the United States
in stark contrast with the OPEC nations. They do not possess gold, and
the higher it goes the more they have to pay for it. Furthermore, the
economic structure of the world oil market simply does not permit a
drastic increase of the net surplus spending power of the OPEC nations.
If anything, the trend is opposite. However, a higher gold price and
initial issue gold-backed bonds would create greater credibility to
international savers, the largest of which are the OPEC nations. Confidence in America'a ability to activate all its monetary reserves,
namely gold, and by strengthening the dollar via the strengthening of
the American monetary system, they would find greater interest to invest in the United States their surplus dollars and thereby even accept a lower oil price and even increase oil production. If they feel


that their savings could be exchanged with viable alternatives,
oil production could even increase. Lower or even stable oil prices
are highly favorable for inflation. Obviously,the depreciating
currencies of the last five years, the depreciating value of the
dollar, and loss on Treasury bills purchased prior to the end of
1980, did not give them too much encouragement for savings.
(5) Accordingly, I would even encourage the private placement of low-coupon,gold-backed bonds with various OPEC nations. This
would enable them to exchange assets in the ground, namely oil, for
gold-backed bonds which have the alternative to be converted again
either into dollars or into gold. We will open the avenue for Kuwait,
for Venezuela, for Indonesia, and particularly to Saudi Arabia, to value
not only the money they earn for oil, but they money which they save.
It would,therefore,result in a new monetary and eventually political
relationship between constructive members of OPEC and leave those who
wish to use the oil price for the destruction of economic trade out in
limbo. Let it be said loud and clear -- The U.S. should not make
such deals with Colonel Quadaffy or the Ayatollah Khomeni!!




One of the potentially most explosive issues facing the Western
world today is the so-called debt of the Eastern European countries,
namely Poland, Rumania, Eastern Europe, and of the Soviet Union. Can
a higher gold price help the Russians to be more liquid? The answer is
undoubtedly "yes". Does it hurt the Western world? The answer is not
as simple as some of the previous theories, but to a certain extent
the Soviet Union may also practice its old dogma put forward by Chairman
Kruschev after the Hungarian Revolution when he introduced the concept
of what is called "Gulash" Communism, saying,"People with full stomachs
do not make revolutions."
However, should the American Government or rather the Treasury
obtain $20, $30, $40 or $50 billion through gold- and silver-backed
bonds, it may not be a totally mistaken idea to combine monetary forces
with political objectives. I recommend that under certain circumstances
the U.S. Treasury should start exchanging the bad debt of Western banks
given to Poland with U.S. Treasury bonds which we obtain through the
floating of gold- and silver-backed bonds in the American market. The
President could put tremendous pressure on the Soviet Union. The theory
would no longer be valid that if we don't roll over the Polish debt,
if we don't roll over the Russian debt or the Rumanian or Eastern European debt, it would lead to bankruptcies for some of our leading banking institutions. The blackmail effect would disappear, and the trump
card would be passed through monetary and political levels to the hands
of the President of the United States! THAT IS WHERE POWER BELONGS!!
Do I advocate the use of monetary weapons to obtain political objectives?
Definitely. I would rather create inflation in Eastern Europe and inflation or economic stagnation in the Soviet Union than here at home in the
United States of America.
In plain English, I would advocate that if the American Government
can raise without jeopardizing budget deficits or budgetary trends an
additional $5 to $10 billion through gold- or silver-backed bonds or via
the purchase of lower priced gold and the refloating it at lower interest rates, should we substitute the bad debt of the Soviet Union in the
major Western banks in order to obtain political leverage? The answer is
definitely "yes." Do I believe in using monetary power to obtain political objectives? The answer is definitely "yes." Did I approve of President Nixon's utilizing the linkage theory to use economic weapons to
obtain political concession from the Soviet Union in Viet Nam? The
answer is definitely "yes."
It is, however, vitally important to remember that when former
President Nixon negotiated with the Soviet Union, he had no monetary
weapons at his fingertips. Gold was selling at $35 an ounce, and it did
not surface as a monetary weapon. The Eurocurrency market basically
did not exist. The Western countries did not make Eastern Europe and


the Soviet Union debtor countries. I have recently read a criticism
in EUROMONEY Magazine (a leader in its field) that the countries and
the banks of the Western world are responsible for the monetary weakness and large borrowing of the Eastern European countries. If so,
they were probably right; we have lulled Eastern Europe into easy
money, easy credit, made them debtors and,therefore,it is high time
that through monetary means we exert utmost pressure on Soviet imperialism and make them withdraw their proxy forces from the Western
Hemisphere, from Africa, and give up the idea of the military occupation of Eastern Europe and tend to their own business. Otherwise,
we can call in their bad debt, replace it with cheaply obtained U.S.
Treasury bonds, and create economic chaos within the Soviet Empire.
It is a good, plausible and commendable American objective.
History may even give us credit for such objectives; credit
in GOLD!!



I have analyzed the idea of silver- and gold-backed bonds many
times in the past. In the summer of 1976 I was a front-page story
in the Johannesburg SUNDAY TIMES by recommending that South Africa
should sell gold-backed bonds instead of flooding the market with
cheap gold because of their economic needs.

-37The South African SUNDAY TIMES, July 18, 1976

"As gold slips below $120 and ounce — its lowest level in two years —
it is perhaps worth considering how South Africa's interests might be
better served in the marketing of our gold.
"At present total gold output is sold by the mining houses to the Reserve Bank which pays them the 'official' price of $42 an ounce. Once
the gold is disposed of on the free market (largely through Swiss banks)
by the Reserve Bank an agterskot, known in the market as a premium, is
then apportioned out among the mining houses.
"In terms of understandings with the International Monetary Fund, South
Africa does not 'play' the gold market and, in any event, this would be
extremely difficult given our chronic balance of payments problems.
"Coupled with this is the fact that Russia, due to climatic and managerial disasters, is also a heavy seller.
"Certainly South Africa wants to maintain its untarnished image of
respectability in the corridors of the IMF while any toenadering with
Russia -- not a member of the IMF -- is on the face of it out of the
"However, there are ways and means whereby South Africa can mobilize
its gold production and at the same time protect the free market from
the constant and heavy flow of our bullion to it.
"One of these measure was the recent R147.5-mil1 ion gold swap which
was essentially a short-term measure: in due course the Swiss will
give us back our gold at the previously agreed price and take their
"How much better it would be to structure truly long-term finance at
reasonable rates using our gold to link such loans to an attractive
"A New York investment expert, Andrew Racz, suggested in Johannesburg
this week the following proposition: a Eurobond issue by South Africa
carrying a coupon of 10 per cent and a term of 20 years with the bonds,
denominated in Rl ,000 units, each carrying an option to buy five ounces
of gold at a price of $145 at maturity in 20 years.
"Racz suggests that such bonds be denominated in Special Drawing Rights
thus eliminating currency risks and that the gold required to service
the options be deposited in a Swiss bank thus reducing any political
risk investors might fear.
"His view is that this technique would provide long-term finance for
the development of South Africa and at the same time be a catalyst
for recovery in bullion.


"The gold market, he states, is run by professional traders of the
financial capitals of the world. With the two major suppliers in
financial trouble, the traders are operating against them, particularly in the futures market.
"Amateurs, he says, can't compete with professionals and he insists
that South Africa should now involve itself in the rapidly developing futures market for bullion by giving birth, through gold-linked
bonds, to a new and virile options market in bullion.
"One would suggest that Pretoria would be well-advised to seriously
consider innovative approaches to the marketing of our bullion -or perhaps they should leave it to the private sector to get rid of
its own gold."


I have also hailed the idea of silver-backed bonds as a
new monetary instrument and I evaluated Mr. Hunt's original plan
of printing their own money cheaply when the U.S. Treasury would
have to pay a much higher rate for its own borrowings.
The issue of this thesis is to help American monetary policies, but at the same time it would not be a bad idea to have the
thinking of the Hunt brothers regarding silver-backed bonds. Let us
consult Nelson Bunker Hunt! Here is a man who did something with this
idea and almost carried it to fruition. If gold- and silver-backed
bonds will ever be listed in the London Financial Times or in The Wall
Street Journal, if it ever becomes a reality, how can we neglect the
thinking of a man who was the pioneer of an idea?
Let us recall that the silver price collapsed because, as Mr.
Hunt said in Congressional testimoney, "the gentlemen of COMEX changed
the rules." Mr. Hunt is no friend of the Soviet Union; he is a patriotic American. He did think about the idea of backing currencies with
silver. In a recent three-hour conversation with me in Dallas (on
September 10, 1981), he favored gold-backed bonds and commended the
concept as favorable for the United States. Can we, therefore, neglect
the whole concept of gold- and silver-backed bonds and go into the
1980s with the idea that the prices of gold and silver and the currency
exchange rates of the dollar can indecisively fluctuate? Can we enter
a world where not the gentlemen of the COMEX (who are after all American citizens, accountable to American authorities), but some foreign
powers, some foreign interests, could change the rules of the game?
America should remain a monetarily independent nation; it should survey
all of its resources of which Gold is not the only but is is one of the
most important. Let us change our long-range thinking about Gold; let
us have no dreams of an imaginary gold standard. Let us activate gold
-- gold is an active reserve currency, an active monetary asset, an
active American asset. It is monetary power, and in the hands of
President Reagan and the Republican Party, hopefully,it is already an
instrument of political power.
ftespecp-<f\~\y/i submitted

Andrew G. E. Racz

Gold: T h e Solution to

Our Monetary Dilemma

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T O

anyone w h o has followed the vagaries of the government's
economic policy in recent years, it is clear that w e are confronted with a monetary dilemma.
T h e nature of our dilemma is that our government is faced with a
choice between a 1929-style depression and a 1923-German-style
currency collapse. The dilemma arises from the fact that it has been
pursuing a policy of inflation and credit expansion—that is, of
m o n e y creation—for several decades without any serious interruption. In this period, the economic system has become geared to the
continuation and acceleration of inflation.
Like a drug addict it's gotten "hooked" on inflation. It needs
bigger and bigger doses, and to stop or cut d o w n the dosage n o w must
produce terrible withdrawal s y m p t o m s — a depression.
I don't think there can be any doubt which way the givernment will
choose. It is not only hooked on inflation, it has the key to the drug
cabinet—it's got an unlimited ability to create money. Thus, it will go
on inflating at an accelerating rate. (For the same reason, I don't see
any possibility of a so-called soft-landing—of a gradual deceleration
of inflation—because even a modest decline must produce enough
pain to send the government running back for the money needle.)
T h e ultimate outcome must be a hyperinflationary currency collapse,
with paper m o n e y being d u m p e d in the streets as so m u c h litter.
I'd like to explain h o w I think this terrible dilemma might, in
principle, be eliminated—how, in other words, inflation might be
stopped cold without the necessity ofa depression.
Simply put, m y solution to our monetary dilemma would be the
adoption of a 7 0 0 % reserve gold coin standard at an appropriately
high price of gold. (Actually, silver coins, too, would have to play a
prominent role, alongside gold. But for the sake of simplicity, I will
ignore silver.)
Under such a gold standard, gold coins would form a substantial
portion of the circulating m o n e y supply that passes from hand to
hand. All paper and checkbook money would be 1 0 0 % backed by
gold coins payable on demand.
Such a system, I believe, not only is the ideal monetary system for
the long run, because it would permanently eliminate the threat both
of inflation and deflation, but is the only system potentially capable
of solving the terrible dilemma w e are faced with today.
In order to explain h o w the adoption of this system could solve our
dilemma, I must explain in some detail w h y stopping inflation under
our present paper money system would cause a depression. The
analogy to a drug addict w h o goes "cold turkey," while accurate, is
not sufficient. W e must understand the inner nature of the inflation
addiction, so to speak, and thus exactly what it is about stopping an
inflation that produces a depression. Only then can w e understand
h o w the adoption of the 1 0 0 % reserve gold coin standard could serve
as an appropriate remedy.
So let m e try to briefly explain the inflation-depression process
under paper money.
The most important thing to realize is that inflation undermines
the need and desire to o w n money balances. A s a result, it causes a
more rapid spending of m o n e y — a rise in what economists call "the
velocity of circulation of money.''
This occurs in a variety of ways. O n e way is that as inflation
proceeds, people get accustomed to rising prices and come to expect
them to go on rising. W h e n that happens, they start buying sooner,
before prices rise further. Another way that inflation leads to a rise in
the velocity of circulation of money is that it raises interest rates; this
makes it worthwhile for people to lend out short-term sums of m o n e y
that otherwise would have remained in cash holding. A third way is
that the prospect of easily obtaining loans manufactured by the
banking system through the creation of new, money leads businesses
to invest their cash reserves, since they expect that when they need
m o n e y they can obtain it from their banks.
at Pepperdine
these waysisinflation
of professor
the m o n e y of
brings about
an even
University in Los Angeles.

Copyright © 1980 The Intellectual Activist, Inc

greater inflation of the volume of spending in the economy.
Spending rises not only because there is more money, but also
because the increase in the quantity of m o n e y leads to a more rapid
spending of money.
N o w observe that the other side of spending is people's revenues
and incomes, since one man's spending is another man's receipts.
Obviously, in super-inflating the volume of spending in the
economy, inflation also super-inflates people's revenues and
Inflation also does something else. It encourages people to pile up
a mass of debt that they can pay only so long as their revenues and
incomes hold up; indeed, only so long as their revenues and incomes
go on increasing.
O n e way that inflation encourages debt is simply by leading people
to borrow in anticipation of rising prices and as a hedge against
further inflation. Housing purchases today are a prime example of
the influence of inflation. People go heavily into debt to buy houses
at already inflated prices, because they expect prices to go on rising.
The same thing happens with business spending for plant and
equipment and inventories.
But even before rising prices become taken for granted, inflation
encourages borrowing by holding d o w n the rate of interest in relation
to the rate of profit. I have said that inflation raises the rate of
interest, and it does. It does so because as new money enters the
economy and gets spent, it drives up sales revenues and profits. It
thus raises the rate of profit, and that pulls up the rate of interest. But
to the extent that inflation takes place in the form of credit expansion—the creation of new loanable funds—the rate of interest, even
though rising, lags behind the rise in the rate of profit. As a result,
inflation makes borrowing exceptionally profitable; and the more
so, the more leverage the borrowing provides.
IN sum, we've got inflation doing two critical things: It superinflates people's revenues and incomes, and it leads them to pile up
heavy debts against those revenues and incomes.
This is what sets the stage for a depression if inflation stops.
Because, then the causes of a low need and desire for money balances
are removed. People then start trying to rebuild their money balances. A s a result, spending and the velocity of circulation fall. So
people's m o n e y revenues and incomes fall. Then they can't pay their
debts. Mass bankruptcies occur. In the process, banks fail and the
m o n e y supply actually gets reduced.
This, I believe, is the essence of the inflation-depression process.
The critical factor is the contraction in spending and revenues,
following the end of inflation, which leaves people with no means of
paying their debts.
N o w this contraction in spending and the consequent bankruptcies
are what the transition to a 1 0 0 % reserve gold coin standard could
avoid, while representing a complete halt to all further inflation.
Let m e explain what I mean. T o do so, I have to go back again to
our present paper m o n e y system and look at things tne way they
stand in concrete dollars-and-cents terms. Right now, we have a
money supply of roughly $400 billion. W e also have a gross national
product of about $2,500 billion. Gross national product, or gnp for
short, can be taken as an indication of total spending in the economy.
(Actually, it's a lot smaller than total spending, but it can serve as an
indication nonetheless.)
Because gnp is $2,500 billion, while our m o n e y supply is $400 billion, the velocity of circulation of m o n e y — t h e kind economists call
income velocity—is a little more than 6. It's just gnp divided by the
m o n e y supply. A n d , of course, it represents the number of times in a
year that the average dollar or unit of the m o n e y supply is spent in a
way that counts in gnp.
If w e froze the m o n e y supply at $400 billion, and especially if the
m o n e y supply actually started dropping, as it did from 1929 to 1933,
velocity might easily fall to 3, or even less. In most of the '30's, it was
significantly less than 3.
Obviously, to whatever extent velocity fell, even with a money
supply of $400 billion, gnp would fall, people' s revenues and incomes
would fall, and there would be mass bankruptcies. The banks would
be under pressure, and if not bailed out by the government, they
would fail too, reducing the m o n e y supply as they went.

dollars unchanged.
In other words, it is possible to stop inflation cold, and yet avoid
the contraction in dollars spent that would otherwise result from a
greater need and desire to hold money, simply by making the gold
stock equal to enough dollars.
Thus, one major aspect of the depression problem could be
solved—the contraction in spending that results when inflation is
W h a t about the other aspect—the excessive debt burden? T h e
transition to a 1 0 0 % reserve gold coin system would be able to solve
that, too. If there were no other w a y to solve it, gold could simply be
priced high enough to give people an actual sudden increase in their
revenues and incomes calculated in dollars. In such circumstances,
the transition to the system would be accompanied by the equivalent
of a last burst of inflation.
But the transition to the system could avoid mass bankruptcies in
another way, which would not entail any further losses to creditors.
This concerns the effects of distributing most of the country's gold to
the banks, to place them on a 1 0 0 % reserve basis against their
checking deposits.
But now, to begin to understand h o w gold could save the situation,
A s I indicated, at present it would take about $300 billion in gold to
imagine that our $400 billion m o n e y supply consisted of gold coins.
do this. The transfer of this gold to the banking system would
Imagine that to bring this about, the government took its present
represent an enormous increase in its assets, since its present reserve
gold holding of 265 million ounces and priced it high enough to m a k e assets are less than $50 billion. T o give the banks $300 billion of
it equal $400 billion. A price of about $1,500 per ounce would
reserves in place of $50 billion of reserves would increase their assets
accomplish this.
by $250 billion, which would represent an enormous enrichment to
Imagine that the government physically distributed this gold to the which banks are clearly not entitled.
people: It called in all the paper currency, amounting to about $100
In the circumstances, the appropriate thing to d o would be to pass
billion, and gave out gold coins in exchange; and it turned the
along the benefit of most of the additional assets to the bank's
remaining $300 billion of its gold over to the banks, to place their
borrowers, by reducing their debts to the banks. For if the banks are
checking deposits on a 1 0 0 % gold reserve basis.
getting $250 billion in additional reserve assets, they would still gain
substantially even if their other assets, in the form of borrowers'
FOR the sake of maximum simplicity, we could think of the
IOU's and the like, were reduced by $200 billion or more. This
money supply as n o w consisting of 265 million one-ounce gold
coins. (Obviously, smaller denominations would be necessary, but reduction in the banking system's other assets, which are the debts of
let's think of it this way.) Imagine that on one side of each of these individuals and businesses, would certainly go a long w a y toward
coins it said "one ounce of gold," and on the other side "$1,500." solving the problem of excessive debt, without further harm to
The money supply could then be looked at as being either 265 million
NOW have to introduce an important complication into the disgold ounces or 400 billion dollars.
People would certainly want to hold this gold m o n e y supply very
cussion, which is the fact that the United States is only one
tightly. Because the possibility of inflation would n o w be over for country in the world economy.
sure, since the money supply would actually be gold and thus there
If the United States went to gold at $4,700 per ounce, or even
would physically be just no way for the government to increase it.
$1,500 per ounce, and were the only country to do so, it would
People would hold the money not as dollars, but as pieces of gold.
experience an enormous increase in its gold stock. It might attract
Let's imagine that people wanted to hold this m o n e y supply so half or even m u c h more than half of the world's monetary gold, for
tightly that its velocity of circulation would be only 2. T h e effect until sufficient gold came in, its value would be higher here than
would be that in terms of dollars, gnp would fall all the way to $800 anywhere else.
billion. In terms of gold, gnp would be just twice the 265 million
Estimates of the world's gold stock vary between two billion and
ouces of gold, or 530 million ounces.
three billion ounces; some m a y even go higher. Thus, even at a price
Now let's make a change in our example. While the gold m o n e y of $1,500 per ounce w e might end up with a gold stock of well over a
supply remains at 265 million ounces and its velocity remains at 2 — billion ounces and thus a substantial increase in gnp in terms of
because it is gold that people are holding—let's see what happens if dollars. Furthermore, the country could be exhausted in producing
we plug in a higher prices of gold. Imagine that on the dollar side of the exports needed to import all this gold. A n d even if w e could
each of the one-ounce gold coins that constituted the m o n e y supply, overcome this problem, there could be a further problem. Namely,
it said not "$1,500," but "$3,000."
what if the American economy became geared to the use of such a
Observe. The gold money supply remains 265 million ounces and substantial proportion of the world's gold, and then other countries
the gold gnp remains 530 million ounces. But the dollar m o n e y began going over to gold? At that time, we'd begin experiencing
supply now becomes $800 billion—twice as large. A n d the dollar gnp massive gold outflows—we could have a kind, of deflation in gold.
now becomes $1,600 billion—also twice as large.
This leads to the conclusion that any kind of reasonably smooth
Let's carry this a step further. At a gold price of $4,500, the 265- transition to a 1 0 0 % reserve gold coin system would have to be
million-ounce gold money supply becomes equal to a dollar m o n e y accomplished internationally. It would have to be undertaken simulsupply of $1,200 billion, and the 530-million-aunce gold gnp
taneously by as m a n y of the world's economically important counbecomes equal to a $2,400 billion gnp. Just one more small step, and tries as possible. It would need the cooperation of the C o m m o n
J gold price of a little more than $4,700 per ounce yields the original Market countries, Japan, the Middle Eastern countries, the larger
dollar gnp of $2,500 billion.
Latin American countries, and the former British dominions, as well
$4 TZ ia m n0t in fact a d v o c a t i n 8 a g ° l d P r i c e nearly as high as
as the United States.
*V00--for reasons that I will explain shortly. I used it just to illusIf this were done, then it would probably be possible for the United
ate an important point. A n d that is, in principle it would be possible States to adopt the system at a gold price of no m o r e than about
ostop inflation cold with a 100% gold money, and simultaneously $2,500 per ounce in terms of today's buying power. I arrive at this
W™ tf*e fall in the velocity of circulation of money, by making thefigure on the conservative assumption of a world gold stock of two
s 'a supply equal to enough dollars to leave spending in terms of billion ounces and the further assumption that the American

It is possible to stop inflation
cold, and yet avoid the
contraction in dollars spent
that would otherwise result
from a greater need and
desire to hold m o n e y , simply
by making the gold stock
equal to enough dollars.


economy represents about one-fourth of tb-

' "

—- \ s a

result, I estimate our potential gold m o n e y supply under a world- of gold assets to the banking system m a k e possible a large-scale
wide 1 0 0 % reserve system as 500 million ounces. Assuming a velocity cancellation of bank debt, thereby substantially reducing the overall
of two, our gold gnp would be one billion ounces.
debt burden in the economy and avoiding the mass bankruptcies
Given today's gnp of $2,500 billion, gold would have to be priced characteristic of a depression.
at $2,500 per ounce to m a k e it possible for the billion-ounce gold gnp
A s a final note, it cannot be stressed too strongly h o w vital is the
to represent an unchanged dollar gnp and thus avoid a contraction in
1 0 0 % reserve coin element if gold is to be used to solve our dilemma.
dollar revenues and incomes.
If the attempt were m a d e to go to gold without this element, that is,
Next year, of course, the appropriate gold price would be higher. with the government continuing to hold the gold and the people using
The principle is simply to price gold in such a way that the prospective paper, the effecLfif a sharply higher price of gold would merely be
gold-ounce gnp of the country is m a d e to equal the country's gnp in more inflation, and an actual increase in the velocity of circulation of
dollars at the time the transition is to be made.
money. For then, people would experience merely an increase in the
O f course, even if the system were adopted internationally, a
quantity of paper dollars, that could be endlessly repeated. O n the
great deal would depend on the accuracy of the estimates of the
1 0 0 % reserve gold coin system what they are holding is not dollars,
world's gold stock, the relative share of it that an individual country but gold. The velocity of m o n e y is then determined by the fact that
could expect to attract, and the prospective velocity of gold money in the pieces of m o n e y are gold. The pieces of gold are held tightly and
that country. These would obviously be crucial to determining the
the number of dollars the pieces are called is then unable to affect the
appropriate price of gold for that country. Major errors would
rate at which the m o n e y is spent.
certainly be possible.
I, for one, would favor erring on the side of too high a price of I'D like to indicate the connection of my proposal with an even
wider program of reform.
gold, rather than too low. This at least would avoid mass bankI
believe that if w e could solve our monetary dilemma in the way I
ruptcies, which, given the inability of our judiciary to keep pace even
explained—by ending inflation in an environment of great
with its current case load, would probably take a decade or more to
financial liquidity, that is, of large holdings of gold money relative to
get sorted out; which would mean that in the interval the economy
spending—we could also radically reduce the size of the governwould be largely paralyzed, because no one would k n o w just w h o
ment 's budget and the scope of government activity, without fear of
owned what.
causing mass unemployment or a depression.
BUT no matter what errors might be made in picking the right
It is widely believed that if w e seriously cut back government
price of gold, the adoption of the 1 0 0 % reserve gold coin system spending, w e would cause an enormous problem of adjustment and
would have to represent an improvement over our present, paper
probably a depression; and thus w e just couldn't do it
m o n e y system. A n d this is true even in the event of our having to
All this is probably true under present monetary conditions, where.
adopt the system unilaterally.
the debt structure stands like a house of cards and the least failure of
For suppose too high a price of gold were selected. That would be demand anywhere in the economic system is capable of producing a
equivalent to a burst of additional inflation from the perspective of wave of bankruptcies. But it would not be true if our economy
dollars. But whatever the size of this burst, the paper money system possessed the high degree of liquidity that a 1 0 0 % reserve gold coin
will soon produce m u c h more inflation, for it continues to inflate and system could give it.
does so at an accelerating pace, while the burst would be nonIf firms possessed large cash reserves and smaller debts relative to
repeatable on the gold system.
their revenues and incomes, they would be able to ride out the kind of
Suppose the price of gold were set too low and a depression did
temporary, localized failures of demand that would accompany
occur. The debt-paying power of the gold in terms of dollars could
slashing the government's budget. They would be in a position of
then be raised. But the crucial thing would be that the government
financial strength comparable to what they enjoyed in 1946.
would not be able to inflate the physical gold stock, which by then
It's been forgotten, but between 1945 and 1946—a period of just
would be the actual money of the country. Thus, it would not be able one year—federal government spending in the United States was
to go on with the destruction of money and of the whole division of
reduced by about 60% (from $85 billion to $35 billion) and more than
labor system, which depends on money.
ten million government employees were dismissed! This was the
Finally, even if w e adopted the system unilaterally, and did import conversion from the war economy to a peace-time economy.
a vast quantity of gold in exchange for our goods, our loss as
At the time, m a n y people feared that the result would be mass
indiviuals would be no greater—in fact it would be a lot less—than unemployment and a resumption of the depression. The actual effect
under the paper m o n e y system. Under the paper money system, every was not unemployment, but a rapid and radical change in the type of
year each ot us in effect imports paper money in exchange for goods
employment. The millions of former soldiers and sailors and war
or services. For each of us almost always finishes the year with a
workers quickly changed jobs and began producing goods and
larger holding of paper money (including checking balances) than he services of value to the lives and well-being of individuals. The net
began it; and w e have had to trade away our goods and services to do effect was simply an enormousrisein the standard of living.
All this was possible because the tremendousfinancialstrength of
But unlike gold, with paper money there is no end to the process, the economy—indicated by a velocity of circulation of money of less
short of the destruction of the paper money in a currency collapse. If than 2 in 1946—guaranteed that as government spending fell, private
w e had to import excess gold, not only would there be an end in sight, spending would increase correspondingly. For there was simply no
but w e could probably count on later exporting the gold at a higher
need to build up liquidity any higher than it already was.
value, so that our loss on that count would not be permanent. In fact,
If w e could achieve comparable financial strength today, as I
if w e used most of the excess gold coming in from a unilateral
believe w e could with a 1 0 0 % reserve gold coin standard, then I am
adoption of the system to build up our cash holdings, and did not
convinced our economy could experience a far more dramatic
gear the operation of the economy to it, w e might actually profit in improvement than it did in 1946. In 1946, our improvement came
the long run by being the first country to adopt gold. For w e would
from the fact that w e were able to disband an American army that
acquire gold at a relatively low value, when only w e wanted it, and had fought on foreign soil in the defense of the United States. Today,
then give it back to the rest of the world at a m u c h higher value, when our improvement would c o m e from disbanding a virtual enemy army
everyone else wanted it as well.
that operates on our o w n shores against the American people—I
T o summarize, the essence of m y idea is imply this. We can stop mean the massive government bureaucracy that redistributes and
inflation cold by switching to a 100% reserve gold coin system, which consumes the American people's wealth while doing its utmost
the government lacks the physical power to inflate. A n d to stop this to stop them from producing it. Disband this enemy army, and our
from producing a depression, w e call the country's gold money
output of goods and services must skyrocket.
supply the equivalent of enough dollars so that no matter h o w tightly
Thus, as I see it, the 1 0 0 % reserve gold coin standard is a critical
it is held, there is no contraction of spending calculated in dollars. element in the economic reconstruction of the United States. It could
Thus the critical factor in producing a depression is removed. At the stop inflation without depression and set the stage for the rapid and
same time, the upward revaluation of gold and the massive transfer
radical reduction of government activity.


B. L. R H O D E S C O M P A N Y
Quality products from the cider mill since 1870
329 PARK AVENUE • CHARDON, OHIO 44024 . 216/285-8711

November 9, 1981
Donald Regan, SecretaryUnited States Department of the Treasury
Chairman, United States Gold Commission
15th and Pennsylvania Ave.
Washington, D.C. 20220
Dear Mr. Regan:
r/ili you please accept and present the following as my
public testimony to the Gold Commission:
The proud company on whose letterhead I write will close
its doors at the end of this harvest season. A miserablyshort crop of apples in northeast Ohio this year will have
proved to be the cup of hemlock, but the demise of the business has been inevitable for some time. Management (that's
me) is unable to cope with the decades-iong government policies
of inflation and usurious interest rates.
In this huge and complex economy the loss of Rhodes Cider
Miill will be no more noticed than the death of a sparrow. A
few diabetics who have discovered that they can enjoy our
sweet apple jelly that is made without sugar may decry the
loss of the last American mill producing this venerable product. Those customers who think our fresh cider is the best
in the world will have to look elsewhere.
The loss of my very own business will mean the loss of a
degree of independence in which I once reveled. (Lately,
concern and fear have smothered the happier emothions.) With
few assets and a growing family, I will have to go to work on
someone else's ideas and ambitions. I expect the transition
will not be easy for I have not worked for anyone but myself
since I was discharged from the Army in 1961.
By the scales on which I measure freedom, mine will be
severely encumbered. I have driven myself to work as many as
120 hours a week in my own employ with the knowledge that
only God or the devil could make me work harder. Now I will
have to work for someone else (and my creditors), and even
JfO hours a week will be drudgery. I feel a tremendous loss
of individual liberty. I am certain that my loss was no
accident, but rather the careful contrivance of people within
my own government.

page 2
Inflation benefits but a few at the expense of many. A
cursory knowledge of human nature leads to the inevitable
conclusion that those who benefit have been culpable in the
continuance of this policy for decades. Only a blind fool
would believe otherwise.
As an exemplary victim of this monetary policy of inflation, I demand that it be halted forthwith. I will no
longer allow people of special influence to steal my assets
and destroy my liberty by reducing the value of my money,
I insist on a monetary system that allows me and my fellow
citizens to understand precisely how the value of our money
is determined. Don't ask me to trust the value of my money
to men. I want money that is free from policy. Men and
money with a value that is determined by policy are what
brought me to my low estate, and it enriched those men in
the process.
Give me a system of money that I can understand. Give
me gold, and I will give you back your worthless Federal
Reserve notes.
I want a monetary system that can be explained to the
majority of American citizens in 300 words or less. It
must be a system that they can comprehend fully lest they
continue to be cheated.
If you can explain the current system of fractional reserve banking to the average citizen in less than a month,
I will eat my hat. I have asked numerous senators and
congressmen to explain the system to me in their own words,
but not one has been able to do so.
Determining the factors
that effect the value of money under our current system is
so complex as to defy the most astute citizen and provide a
classic prescription for cheating. That is precisely what
is happening.
I want money that will be worth tomorrow what I labored
to earn today. Give me gold, or get the hell out of my

yOim Russell, President
B. L. Rhodes Company
329 Park Ave.
Chardon, Ohio kkOZk


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A return to the gold standard could beat inflation
Bv R O B E R T R. R U S S E L
This country's number one economic
problem is high and accelerating inflation.
T h e rate of inflation has been increasing for
the last 13 years. T h e general level of
consumers' prices has increased in that
period by 180 percent. O n e dollar n o w will
buy no more than 36 cents would buy in 1967.
Such inflation of prices, such a decline in
the purchasing power of our dollar, have
worked vast inequities between creditors and
debtors, have created great uncertainties for
businesses and for public fiscal authorities,
and have given us the highest interest rates
in the history of the republic.

even though it is issued by their o w n
government and m a d e legal-tender for all
taxes and all debts public and private in the
In pur o w n national history there have
been three other times w h e n our government
felt it necessary to issue legal-tender paper
currency that could not be redeemed in
standard coin or bullion; they were during
the American Revolution, in the course of the
W a r of 1812 and in early years of the Civil
W a r . In the history of the world there have
been scores of cases of governments being
forced by mismanagement or uncontrollable
circumstances to suspend specie payments
(as the phrase used to be) for their paper
currencies; and in every such case, depreciation of the exchange value of the paper
currency promptly set in and proceeded at an
accelerating rate.

base vear and call the price level then 100.
our present price level is 280. If. as some
hope, the inflation rate can somehow be held
to 8 percent next year, that would add
$22.40, not just $8. to the price of a
representative item that cost $100 in 1967.
As w e all know, high inflation and its
consequent economic and social ills have not
been confined to the United States. In the
last eight to 20 years, every other freeenterprise nation in the world has also
experienced high inflation and all the
accompanying ills. Only a few of them have
had lower inflation than the United States.
Every one of them had been on the gold
Standard, at least for a while; and every one
of them had been forced, or believed it was
forced, by circumstances and events to
abandon the gold standard and attempt to
carry on with inconvertible paper currency.
Space will not permit telling h o w these
wholesale departures from the gold standard, all within a short period, came about.
(Briefly, they came from the breakdown of

vertibility of paper currency into standard
comj)rJ)uj]ior£/In a'few instances "resump^
lion of specie payment" was achieved with
the same weight of gold or silver in the
standard dollar, pound, franc, or other unit
of value that there had been in it before
suspension. In the great majority of cases,
however, the paper notes had depreciated so
greatly that they were either repudiated
altogether or redeemed at a small fraction of
face value and replaced with new.

In view of all this evidence, it seems to m e ,
w e can only conclude that there is no w a y to
bring inflation under control and stabilize the
economy without first. re-establishing a
standard of value and convertibility for our
It is m y view, indeed m y firm conviction,
R. R U S
paper currency. A n d . in view of the
that the principal cause of this inflation and
SEL, 2120 Sheffield
experience of highly commercialized nations
its consequent ills was our federal govern*< Drive, is a Western
during the last century and more, it also
ment's abandonment of the gold standard for
seems clear that the standard must be gold. ,
our currency — practically in March 1968
|. professor of history,
A n d it is not impracticable to restore the,¥ emeritus. H e w a s eduand by act of Congress 'P. August 1971 — and
From Jan. 1. 1879 to early March 1968 this
gold standard. It is true that during the long cated at the University
our reliance since on inconvertible, unbacked
country was undeniably on the gold standard;
hiatis a lot of gold lias gone into the hands of of Kansas, the Universilegal-tender paper notes, "greenbacks,'' if
and during that period our paper dollar had
speculators and hoarders. But fortunately ty of Illinois and the
precisely the same purchasing power that the
you please.
the «r»ttAi^W^nris_Int^rnatinnal Monetar
and wisely ":»e governments of free world London School of Ecogold standard-dollar had. Prices commonly
T h e evidence in support of this view of the
Accord.) BtftQt would be difficult indeed to
nations have kept their gold reserves pretty n o m i c s . O r . Russel
went up somewhat in good years and down
matter seems to m e to bejconclusive:
oTahy other cause than going off the
well intact. T h e United States has by far the taught at W M U for 35
somewhat in poor years. Only in wartimes
''^Plocountry in the history of the world has\
largest reserve of all; and the 10 free world i.years and w a s chairand big booms did an inflation rate exceed 1
has persisted in ajj, of them from the time'
resorted to inconvertible legal-tender paper 1 pr 2 percent
nations with the largest holdings together If m a n of the History Oe^
currency and managed to avoid rapid <
with the International Monetary fund, which'* partmenr for a n u m b e r
depreciation in thjL purchasing power of itsj.
'/Tnlormer times, before the present crisis.^ they i-ur.trol. hold about 60 percent of the
of years. H e has written
standard. w » nave had a high inflation rate'
\unit of value/-And the simple reason for this
in every case of intolerable inflation follow- \ gold bullion in the entire world. With such a
a wide range of books
havTngTieen the case is that sensible people
ing a resort to greenbacks, the inflation was \ preponderance of possession, some arand articles on economTnflalion Is cumulative. Considerthis little bit
w h o earn, save and invest, rapidly lose
, eventually brought under control by re- j rangement for resumption can readily be ic history.'oto
of simple arithmetic: If w e take 1967 as a
confidence in the worth of such currency.
S establishing a standard of value and conmade.
,,i , • -~••j,-.r p •„.. .' v - '•..

Announcing a Second Edition of

An Analytical Review of Milton Friedman and Anna Jacobson
Schwartz's Monetary History of the United States, 1867-1960
Robert R. Russel, Western Michigan University
68 pages, $^.50 postfpaid

The Friedman, Schwartz Monetary History comes as near being the bible
of the monetarist school of economists as one can find.
The various monetarist definitions of "money supply" have no particular
The monetary authorities upon whom monetarists rely to control the
"money supply" have only a limited power over it; and the money supply is only
one of a great number of factors that determine the state of a nation's economy.
The monetarist idea that it is not essential to have a commodity standard, such as a fixed quantity of gold, for its paper currency is downright
pernicious. No country in the history of the world has ever tried to make do
with an inconvertible paper currency and succeeded in avoiding rapid inflation
and all the consequent ills.
There is no way under the sun to bring the present rampaging inflation
under control without fj.rst re-establishing a standard of value for our paper
currency; and, unless specialists can quickly devise a better one, the
standard had best be gold.
Every student of economics should at least have an opportunity to read
this devastating analysis of the upstart quantity theory of money.
Orders for THE FALLACIES should be accompanied by check or money order
and addressed to:
Robert R. Russel
2120 Sheffield Drive
Kalamazoo, Michigan &9008


The United States is now relying on a wholly Greenback currency, and
so, for that matter, is every other country in the free-enterprise world.
"Greenback" currency is paper currency issued solely on the credit of a
government, made legal tender for all debts public and private, and ggXconvertible per unit of face value into a standard amount of some commodity
of great intrinsic value and world-wide use, such as gold or silver.
The United States abandoned such converti.bility in actual practice in
1968 and by law in August 1971. Some other countries abandoned it before
the United States did; others including most of this country's principal
trading partners did so only after this nation had definitely ended convertibility.
In our own national history there have been three other times when
our Government and people were forced or felt forced to resort to inconvertible paper currency. In the history of the world there have been
scores of cases of governments being forced to or choosing to suspend convertibility and resort to Greenbacks. In every such case the purchasing
power of units of the greenback currency has rapidly depreciated with
consequent rapid rises in prices, i.e. "rocketing" inflation. History
has repeatedly shown that people rapidly lose confidence in inconvertible
paper currency even though it is issued by their own government and is
made legal tender for all debts public and private. And in all good sense
why should people not lose confidence in such "unbacked" currency?
Rapid inflation has a very unsettling effect upon the working of an
economy. Everyone who makes a contract requiring payment more than a
month or two ahead has to gamble on the rate of inflation. For example,

- 2 -

money lenders/in determining what interest rate to charge,add to what was
the usual rate back in normal times, say 5 or 6 percent, what they guess
the inflation rate will be during the time until the loan is due. Rapid
inflation creates vast inequities as between creditors and debtors, employees and employers, and the poor and the affluent.
In no case of a resort to a greenback currency has a government been
able to maintain stability in its nation's economy while still relying on
such currency. But, it should be noted, national economies are quite resilient systems. Currency disorders unsettle them and may slow economic
activities, but such disorders never bring an economy to a halt.
It has been possible to mitigate to some extent the inequities worked
by rapid inflation; by increasing the dollar (or other units-of* value)
amounts of pensions and welfare payments^ for example. But the inequities
that remain far exceed those mitigated.
Up to now every case of forced or chosen reliance on an inconvertible
paper currency has eventually ended in the relstablishfflent of convertibility.
In a few instances, that of our Civil War greenbacks for one, convertibility
was restored after a number of years at face value into coin or bullion of
the same weight per unit that had served the purpose before the suspension.
In the great majority of cases, however, the greenbacks have depreciated in
purchasing power so greatly that they have either been repudiated altogether
or redeemed in specie at a fraction of face value and withdrawn from circulati
I do not believe our people generally are sufficiently acquainted with

the simple facts of history stated above., or sufficiently understood the importance of a stable unit of value to the good working of a nation's economy,
°r fully understand how difficult it has been at times to maintain a high

- 3 -

degree of stability in the purchasing power of the dollar, or are sufficiently aware of the events and developments that led or forced our government to
abandon the gold standard for our currency, after the country had been on that
standard uninterruptedly for eighty-nine years.
This country has not had a thorough going debate on the essentials of a
sound currency system for over a generation; in fact7not really since that of
1896-1901. The debate evoked by the designing of the Federal Reserve System,
1908-15, turned almost altogether on the issue of who should control banking
and how. The debates at the time of the devaluation of the standard gold
dollar, 1933-34, were quite superficial. If during the last half century,
any objective history of currency in general or of United States currency in
particular has been published, it has escaped my notice and certainly has not
been cited in the recent extensive discussions of the causes of our present
inflation and how to control it.
In the remaining pages of this article, I sketch the history of United
States currency. I am certain that the history of our currency supports and
illustrates the statements I have made above about the history of currencies
in general. I believe that, if there had been a more widespread knowledge of
our economic history in general and, more particularly, of our financial
history among our more thoughtful citizens, our people would have been better
prepared to understand what has happened to them in the last 'dsaen years and,
indeed, that it might not have happened at all.
I want readers to understand in advance, though, that I have not concluded from my long study of economic history that our abandonment of, or our
having been forced off, the gold standard is the sole cause of the present inflation; only that it is the principal cause. I do not conclude that the re-establishment of convertibility will by itself end inflation; only that it

- A -

is a necessary condition for a practicable control of prices and wages.


do not conclude that a gold standard of value is a perfect standard; only
that during the last century or so it has been found the best one available
in free-enterprise, highly commercialized societies.
During the American Revolution, our fledgling central government,
having no revenue system and having little credit at home or abroad, issued
approximately $240 million, face value, of "Continental (paper) currency" and
pledged that in due course the several Thirteen States each would redeem its
quota in specie. This they never did. In fact, most of the state governments
also issued paper currency in large amounts, bringing the total, United States
and state issues combined, to the neighborhood of $400 million face value.
All of this currency rapidly depreciated and^became virtually worthless. During Washington's Administration, provision was made for the redemption of the
Continental issues at one cent on the dollar. Of the original $240 million
only about $6 million was brought in for redemption^ and, so, the cost to the
Treasury for acquitting all claims was about $60,000.
The framers of our Constitution, in 1787, having an enlightened view of
the advantages of a common currency throughout a nation and having had first-r
hand experience with the inconvertible currency just described, put provisions
in that document giving Congress the power to coin money and fix the value
thereof and of foreign coin and forbidding the states to "coin money; emit
bills of credit {or} make anything but gold and silver coin a tender in payment of debts." Whether or not the framers intended this latter provision
to also forbid Congress to issue bills of credit and make them legal tender
does not clearly appear. However, this question became an issue in cases
before the Supreme Court some eighty years later, and the Court held that
there are no constitutional limitations on the power of Congress in providing

- 5 -

or regulating currency.

That decision still stands.

Congress under the new Constitution early provided for both a standard
silver dollar and a standard gold dollar, that is, for bimetallism, and technically we had bimetallism until 1900. Practically, because the gold in the
standard gold dollar was worth more 4£&en the markets of the world than the
silver in the silver dollar, little gold came to the mints or into the country -4ftJL
we had a silver standard for many years. In 1834 Congress changed the relative wieghts of the metals in the two standard dollars from 15 (silver) to 1
(gold) to approximately 16 to 1. That, as it soon turned out, undervalued
silver, silver dollars shortly disappeared from circulation, gold coins replaced them, and the country was, for practical purposes, on the gold standard.
From 1789 to 1862, except for a few small and temporary issues, we had no
legal-tender paper currency. We did have a growing volume of bank, notes,
mostly issued by state-chartered banks. They were not legal tender, but the
banks were required by law to stand ready at all times to redeem their respective notes in specie. Generally they did. But there were frequent defaults
and suspensions of such payment by individual banks and occasional general
suspensions throughout the country or whole regions thereof. Such suspensions
always caused derangement in prices, wages, and interest rates, worked inequitities between debtors and creditors and between wage earners and employers, and in general adversely affected the state of the economy.
Our most notable experience with suspensions of specie payments prior to
1968-1971 came during our Civil War and a period of fourteen years thereafter.
After the Civil War started, several New York City banks that had extended
large loans to Southern firms were hard hit by their inability to collect

Knox v. Lee and Parker v. Davis (1871) in 12 Wallace, 457.


ch loans and, in December 1861, suspended specie payment of their bank.
res. Shortly, as if by one accord, all the other banks in the loyal
tates east of the Rockies followed suit. In doing so they all were vio1 ting their charters and the laws of their respective states but assumed,
orrectly as it turned out, that, if all violated the law, none would be
penalized. Neither the state authorities, who under the existing set-up had
the prime responsibility, nor the Federal authorities, who had very little
cont^l^ over state banks, could prevent suspension or force resumption. Soon
the Union government, faced with unusually large expenditures, having not yet
devised an adequate tax system, and finding it impossible to borrow the needed
funds, wisely or unwisely issued about $450 million, face value, of noninterest-bearing notes, commonly called greenbacks, and made them legal
tender for most payments. The Federal Government at the time could not keep
its promisH. (printed on the notes) to pay holders in standard dollars on
demand. Somehow the failure to even begin tfr redeem .the notes came to be
called "suspension of specie payments." The gold dollar remained the legal
standard of value, and the Government paid the interest on its bonds in gold,
and promised to pay the principal in gold when the bonds should mature, and
continued to collect duties on imports / Athe principal form of Federal


in gold. But because of uncertainty as to when, if ever, the Union

government could and would "resume" specie payments,, the greenbacks soon began
to depreciate in purchasing power, or, in the parlance of the day and of most
historians, gold "went to a premium," in terms of greenbacks, that is. Since
they were legal tender, everyone in his right mind paid his bills in greenbacks,
the cheaper money. The greenbacks, accordingly.-became the common currency in
the loyal states and the money of account. Banks were allowed to keep their
reserves in greenbacks and, in order to keep their bank notes in circulation,
had to stand ready to redeem them on demand in Greenbacks.
As greenbacks continued to circulate below par in terms of gold, the inevitable tribe of speculators tried to turn an honest penny by s^Culating on







64 65







\ .

/ T> J>'-.










77 78

nthe price of gold in terms of greenbacks; that is, in reality, on the future
of the greenbacks. They set up a "gold room" in New York, and the price
of gold there was quoted from day to day by all the media of the time,
pretty much as the price of gold in terms of various paper currencies is
now being quoted by all our present-day media. During the War the price
of gold in the gold room fluctuated rather violently with the fortunes of
the Union military forces and the state of public expectations as to the
outcome of the War and the economic consequences of victory or defeat^**-'
General prices of goods and commodities in paper currency rose as the purchasing power of the paper dollar declined. They also fluctuated with
changing fears and hopes, but not so widely as the speculative price of gold.
The general trend of prices during the War was upward until near the end of
the struggle. Wages increased also but not £s rapidly as prices of goods
did. Interest rates rose to abnormal heights. People on fixed incomes were
hardest hit by the inflation?*^ When legal-tender prices during the War
are translated into prices in gold as set in the markets of the world, it
is found that there was no notable inflation of such prices until the final
year of the War.
The Confederate experience with irredeemable legal-tender currency was
far worse than that* of the Union. The Confederate government had much greater
difficulty in marketing bonds and collecting taxes and had to rely excessively
on the issuance of legal-tender notes. The notes depreciated rapidly in purchasing power as prospects of Confederate independence waned and in the later


^457***^^ for''**!?**1*
§^ ^cf^^^^S^^^^^


* An old account, V^^&on^oT^e^e^ ac^mts; of the incidence of
A., j. r ' inflation of prices during the Civil War is in Emerson D. Fite, Social a
^ ;"' | Industrial Conditions in the North During the Civil War <New York» 1910) '
"u'^i chapters VII and X.

4J ~

years of the War became virtually worthless.

At the War's *"v*.^rf coaxac,

they became scrap paper.
After it became certain, in the fall of 1864, that the Federals would
win the war and the Union would be preserved and especially after Lee's
surrender, the premium on gold fell sharply. The prices -ia^goird of sreenbacks, accordingly rose sharply, interest rates fell, and general price
levels, in paper currency, also fell but more slowly.
After the Civil War ended there was quite general agreement that the
Government should "resume specie payments" and in coin of the existing
standard weight per dollar. Devaluation was scarcely thought of*A-Tt might
well have been—f The big question was when and how, to resume. On that issue
^9ga: people divided. The division was between creditors and debtors. The
former wanted to hasten resumption so as to be-paid in dearer money. Debtors
wanted to postpone it until they could pay their debts in currency still
depreciated in value. Meanwhile,greenbacks and the other currency sustained
by them continued to circulate at a discount but with the discount, or the
premium on gold if one prefers to put it that way, gradually declining as
the outlines of the eventual settlement of the various issues took shape.
After much debate and maneuvering, resumption was finally achieved in this
manner: Congress, by an act of January 14, 1875,. set a date several years
ahead, January 1, 1879, to be precise, when redemption of the greenbacks was
to begin and instructed the Secretary of the Treasury to accumulate a fund of
gold large enough to serve the purpose. The Secretary in office when the
fateful day approached accumulated a fund of gold coin of over $100 million.
On the day assigned and subsequently, few greenbacks were presented for
redemption. It transpired,- that when people had been assured, presumably by
the large size of the gold reserve, that they could convert their paper

- 9 -

dollars, dollar for dollar, into coin of the realm, they did not care to
do so. And what is more, when greenbacks were "redeemed," they were not
cancelled or destroyed but restored to circulation; and thus all the
greenbacks outstanding as of January 1, 1879, $346,681,000 face value of
them, ceased to be a debt of the Government and became an honorable part
of our currency system.

Officially, they were called "lawful money."

By an act of 1863 and subsequent amendments, Congress provided for the
chartering of national banks and conferred upon them the privilege of issuing
limited amounts of National Bank Notes under what were considered adequate
safeguards of the public interest. National banks were required to stand
ready to redeem their notes on demand in legal-tender currency. As surety
that they would do so, they were required to deposit U.S. bonds with the
United States Treasury of both a face value and a market value in excess by
a stipulated percentage of the face value of the notes. In case of the
failure of a bank to redeem its notes on demand in lawful money, the Treasury
would sell the bonds deposited and take over the obligation of redeeming the
notes. So the bank notes circulated at par with "Jreenbacks ~*£0 1879 and
thereafter at par with gold, and in last analysis it was the Federal government that insured their convertibility, upon request of holders, into "lawful
money" or into standard coin.
It had been the expectation of Congress when it provided for national
banks that they would supplant the state banks and thus rid the country of


As of June 30, 1978 there were still $322,539,016 total face value of these
"United States Notes" in existence, no doubt after many launderings and reprintings. They are now being slowly retired. By an act of Congress approved
March 18, 1968 (Public Law 99-269), laws making them redeemable in standard
gold dollars were repealed; for at that time the United States suspended the
convertibility of all its paper currency. See below, p.

- 10 -

the troublesome state-bank notes.

The expectation proved false in both

respects, but in 1865 Congress imposed a ten percent annual excise tax on
state bank-note issues and that promptly ended them.
From 1875 at the very latest to the 1960s at the earliest, it is safe
to say, there was general agreement among our thinking citizens that the
following were the essential features of a sound currency system: 1) A
standard of value must be maintained, and the standard should be a fixed
quantity of one or the other or of each of the money metals named in the
Constitution of the United States. 2) It is possible and proper to keep a
volume of legal-tender paper currency circulating at par in purchasing
power with standard coin provided the monetary authorities keep in reserve
at all times a stock of the standard money metal large enough to assure people
that, if at any time they should wish to convert paper dollars into standard
dollars, they can do so. 3) The reserve of standard money need not be
larger than a sizable fraction of the face value of the paper notes that
might be issued, but*whatever fraction is required, convertibility must be
To avoid misunderstanding, I should note that underlying this consensus
view of the essentials of a sound currency was the assumption, not often

^There were really two main reasons for the use of paper currency, namely,
1) paper is far cheaper than money metal and the use of paper renders it
possible to make an amount of standard coin go farther, perhaps several times
as far; and 2) the persistent insistence of the banking fraternity that banks
be allowed to enjoy the profits which arise from issuing bank notes. If,

- 11 -

analyzed but approximately valid and defensible at the time, that there was
enough competition in our markets and in world markets to insure that our
general price level, taking one year with another, would be determined by
the purchasing power of gold in the markets of the world.
For long the only noteworthy dissenters from the consensus view of the
essential features of a sound currency system were a small group of theorists
in the Greenback Party, a party that was active in the 187C/s and 1880rs.
They advanced a quantity theory of money. The Greenbackers asserted that
the purchasing power of a dollar varies inversely with the number of dollars
in circulation; that it is not necessary to have a commodity standard of
value, the currency may as well all be greenbacks; that the Federal government should* have the sole authority to issue the currency of the nation, no
bank should have a hand in it; and that* with such a system, the monetary
authorities can maintain stable prices by manipulating the amount of currency
in circulation. The great majority of our people at the time looked upon
the Greenbackers as crackpots.
It should be recalled that from 1792 on, until 1900 in fact, the United
States had, by law, two standard dollars, a silver dollar and a gold dollar,
but that from shortly after 1834 we were practically on the gold standard.

- 12 -

from the later 1960s to I896 or 1897 the purchasing power of gold gradually
appreciated. The cause was that several countries were changing from the
silver standard to the gold standard and were building their gold stocks while
at the same time there was a great falling off in the annual increments of
newly mined gold. As the purchasing power of the gold in a standard dollar
rose, prices in gold dollars and other currency convertible into gold fell.
By 1896 such prices had declined by 4fi2tiEt50 percent. The great and
rather rapid decrease in prices in terms of standard dollars worked great
injustices upon people with long-term debts and provided quite a windfall
for numerous creditors, including all on fixed incomes.
Meanwhile, during the period under discussion, the purchasing power of
a given amount of silver did not increase so much as that of the gold dollar,
i£ indeed, it increased at all. By the middle. 1870s the silver prescribed by
law for a standard silver dollar was worth less than a gold dollar and by 1896
was worth only about fifty cents in gold. This change in the relative values
of gold and silver led to efforts by silver miners, who wanted to improve
the market for their product, and by debt-burdened people generally, who were
anxious to ease the burden with cheaper dollars, to restore the "fj'ee and &£.?.*•
unlimited" coinage of standard silver dollars and require the United States
Treasury to redeem our

-13paper currency therein.

This effort substantially failed. All that the

free-silver forces were able to get from Congress was an act, 1876, requiring the purchase of limited amounts of silver per month and its coinage
into standard-weight silver dollars, and an act of 1890, superseding the
act of 1876, requiring the Treasury to buy a certain amount of silver per
year and pay for it with new legal-tender notes, commonly called the Treasury
Notes of 1890. The act of 1890 was repealed in 1893. The Presidents and
Secretaries of the Treasury at the time were all determined to maintain the
gold standard. They managed to do so by paying out gold on demand to
redeem nongold currency, including silver dollars and Treasury Notes of 1890.
The advocates of "free silver" had just grounds for complaint. But it
was well that their "silver crusade" failed; for, if their proposed remedy
had been adopted, say in 1896, the effect wp.yld have been to raise prices
about 100 percent as soon as adjustments could be made, and that would have
worked far greater inequities than it would have remedied. But, it should be

noted in passing, tftSt William Jennings Bryan and his supporters held the sa
understanding of the essentials of a good currency system that William
McKinley and his followers had; the Bryan people wanted to change the stan-

whatever the merits of bimetallism may be or have been, Congress rendered
the matter moot by the Gold Standard Act of 1900. That act made the existing
gold dollar the sole "standard unit of value" and stipulated that "all forms
of money issued or coined by the United States shall be maintained at a
parity of value with this standard. . ." We continued to be on the gold
standard until A^gosis^^ 1971, wh^ng^r^ski-teiir^^

Between about 1897 and 19^7 changes in the supply, especially, and
demand for gold caused the purchasing power of gold to fall about 50 percent
and, accordingly, general price levels to T±SQ^^%Q percent. This
worked to benefit debtors and injure creditors, including all on fixed
incomes. But, of course, those who benefited in this later period were not
the same people, in most cases, who had been hurt by the fall in prices in
the preceding period of thirty years.
Advocates of the gold standard for currency can'^praSrfy olftam^only that
the purchasing power of gold^is less subject to changes from year to year or
from decade to decade than that of any other cozsiodity suitable for a medium
of exchange and a standard of value. The explanation why the purchasing
power of gold is relatively so stable is the circumstance that a very large
proportion, perhaps about one half, of the _gld mined through the ages is
still above ground in forms that leave it available for monetary and other
purposes^''and/ consequentlyf a wide variation in the amount of newly mined
gold from year to year will not cause any considerable or sudden changes in
gold's purchasing power.
From 1879 to 1900 somehow a consensus was arrived at that a gold reserve
of $100 million in the U.S. Treasury was the minimum required to maintain
the convertibility of our nongold currency. During the "free silver" crisis
nentioned above, the reserve fell below that figure;and the Treasury had to
Pay a premium to get enough gold to prevent depletion. The Gold Standard
Act of 1900 set the minimum^at $150 million but gave the Secretary of the

Treasury a ngjylafcg,. to maintain convertibility, presumably by increasing th
gold reserve if necessary. In 1900 the total face value of all our nongold
currency outstanding (not counting gold certificates, of course, but includ-

- 16ing national bank notes and counting only that portion of the face value in
gold of said silver coin in circulation and coin or bullion in the Treasury
represented by silver certificates) was approximately $950 million, a total
over six times as great as the minimum reserve deemed necessary to insure
convertibility and over four times as large as the amount of gold actually
in the Treasury at the time. After that the ratio of monetary gold in stock
to nongold currency in use never fell below one to four until 1967.
As a matter of fact there is no scientific way to determine how large
a reserve of standard coin and bullion must be maintained to insure the
convertibility of a given volume (face-value) of legal-tender paper notes
and coins of nonstandard cheaper metals. It depends upon the state of the
economy, the political stability of the country, the degree of public confidence in the money authorities at the time^.. and how alert people are to
signs of weakness.
The Federal Reserve Act of December 28, 1913 gave us still another type
of paper currency, the now familiar Federal Preserve Notes. The Reserve Act
provided for the establishment of a number of Federal Reserve Banks. The
Banks were designed to serve a number of worthy purposes, one of which was
to "furnish an elastic currency." Earlier currency laws did not do that.
At the time there was an adequate volume of currency in the country to meet
all normal needs; but there often had been shortages of currency in some
localities or even regions, and in 1907 there had been a "money" panic in our
largest commercial centers occasioned by the difficulty in getting cash. It
was the intention and expectation of the framers of the Reserve Act that
Federal Reserve Notes would be issued only to avert such shortages and that,

- la-

ttice emergencies had passed, the notes issued to them would be retired
But/as we have noted, the privilege of issuing paper currency offers an
easy way to make a profit. So, to discourage excessive issue, Congress set
strict conditions for issuance. To secure Reserve Notes a Reserve Bank
nust furnish the U.S. Treasury Agent collateral of specified sorts of high
grade commercial paper equal in amount to the face value of the notes and
nust maintain a gold reserve against them of not less than 40 percent of
the face value. Also the Reserve Notes were not made legal-tender for all
transactions. As an added safeguard, Federal Reserve Banks were required
to pay into the United States Treasury all their net earnings after meeting
proper expenses and paying a 6 percent annual dividend on their respective

paid-in capital stocks.
But the expectations of the franers of tshe Reserve Act soon proved unrealistic. The demand for cash for pocket money and bank reserves mounted
very rapidly, and the Federal Reserve Banks were anxious to meet the demand.
Various amendments to the Reserve Act made it easier for them to do so. An
early amendment, 1917, reduced the coinmercial-paper-collateral requirement
from 100 percent of face value to 60 percent. During the banking crisis
that accompanied the Great Depression, more sorts of member-bank assets were
nade acceptable as collateral, most notably Federal tjovernnant securities,
and the notes were accorded full legal-tender status. The requirement that
the Banks pay all their net earnings into the Treasury was eased by amendments from time to time and was not fully net until 1959. Our people seem

federal Reserve Banks were also authorized to issue limited amounts of
Federal Reserve Bank Notes on the same condition that other national banks
aight issue notes, butjbecause of the superior advantages to the Banks of the
Reserve Notes,they issue^lparatively saall amounts of the Reserve Bank hotes

- :fi -

to have had no hesitancy in accepting Federal Reserve Notes at any time
As early as 1919 the face value of the Notes in circulation exceeded that
of all other paper currency combined. In 1945 the ratio of the two volunes
was approximately 8.5 to 1. Now it is about 130 to 1. Other types of
legal-tender paper currency have either been redeemed and retired or put in
the way of retiresent .*
In 1933-34, at the depth of the Great Depression, the Franklin D.
Roosevelt Administration reduced the gold content of our standard dollar
to 59.06 percent of the content it had possessed for a century. This action
was not occasioned by a shortage of gold; there was plenty of gold in the
country. Its purpose was to raise prices and wages and, thus, make it
easier for debt-burdened individuals and companies to pay their debts and
interest and save their homes, chattels, an& businesses. No doubt in the
long run it did contribute to the inflation of prices and wages. But it
did not have the iizmediate effect hoped for; and among the welter of New

Deal recovery measures it is difficult to discern whether or not it had any Sttf

effect while the Great Depression still continued. ' _Lq )~ZXW*/&«-M ^wW^^xutaru
' From the early years of the Republic until 1933 the principal reliance
of our Federal Government for providing the standard coin or bullion required
for currency purposes had been "free and unlimited coinage," so called. That
is to say, the Government accepted all the standard money metal offered and
either coined it "free" and delivered the coin to the parties who had brought

^These redemptions and retirements are described in considerable detail
in Historical Statistics of the United States, Bicentennial Edition, 990-991.
^Elsewhere I have presented the view that the inflationary effect was faffo'V
delayed until wartime price controls were removed at the end of World War II.
A History of the American Economic System (New York, 1964) 594.

-Jtfin the bullion or gave them gold certificates for the coin the bullion would
afford. (There were small fees to cover costs of assaying and other expenses.)
In general the plan of "free coinage" had worked quite well. But the New Deal
Administration changed the method. As a necessary step to devaluation it
required all the gold coins in the country to be turned in to the Treasury,
compensating the holders with gold certificates. Congress, by the Thomas
Amendment (Title III, Section 43) in the Agricultural Adjustment Act, of May 17
1933, delegated to the President the authority to fix by proclamation the weight
of the standard gold dollar as he might deem necessary but in "no event" to
reduce it by more than 50 percent of its existing weight. Then instead of
melting the old coins and issuing new with less gold content, as had been
done so many times in history, President Roosevelt chose to keep the gold
in stock and set the price in paper currency at which the Treasury would buy
and sell gol^r . After some testing of the market, he set the price at $35 per
troy ounce of pure gold. This in effect reduced the gold content of the standard dollar to 59.06 percent of its former content.
It appears that the rationale for delegating authority to the President
to change the gold content of the dollar at his discretion was the belief thatT
by altering the content from time to time as changes in price-level trends
might suggest, it would be possible to maintain an approximately stable
level of prices year after year. President Roosevelt, in a statement, July
3, 1933, said the United States "seeks the kind of a dollar which a generation
hence will have the same purchasing and debt-paying power as the dollar we
hope to attain in the near future ..."^ President Roosevelt is supposed

To avoid misunderstanding, it should be noted that the Treasury sold gold
only through licensed traders, who undertook to supply the metal only for use
in industry and the arts. The object of this practice was to try to keep it
rom going to speculators a^
hn#tcS&r% <
So quoted in Benjamin H. Beckhart, Federal Reserve System, 306.

to have been persuaded to this view of how to stabilize the value of the
dollar by the exposition of it presented by two professors of agricultural
economics and management at Cornell University, George F. Warren and Frank
A. Pearson.-

It should be observed that the new method of acquiring the gold necessary
to maintain the convertibility of our nongold currency (and thus, keep us on
the gold standard) was quite as effective for the purpose as the old free^
coinage method. But, although the President did not again change the gold
content of the standard dollar, the power to do so must have had an unsettling effect on long-term borrowing and lending. At any rate the delegation of the discretionary power was withdrawn in 1945 as a condition of our
adherence to the Bretton Woods Internationale-Monetary Agreement.
The Bretton Woods Agreement was negotiated at a conference held in
Bretton Woods, New Hampshire, July 1944, and sponsored by the then unchartered
United Nations Organization. The United States delegation played a leading
role in the negotiations. The Agreement provided for the establishment of the
International Monetary Fund (IMF); and,in accord^the Article^of Agreement of

rwil ,'


the IMF were formulated.

Eventually 126 nations, all in the Free Worl^,


«*Be3£ ratified the Bretton Woods Agreement and became members of the IMF.
0he term IMF, it should be noted, is used to designate both the actual fund
of gold and of paper currencies contributed by members on a quota basis and
the international organization set up to administer the fundj The signatories
negotiated a set of fixed parities for their respective units of value

•Their exposition may be found in their book, Prices (1933).

- 20 -

(dollar, pound, franc, etc.).

Each of them per Article IV was to be wext>r


in terms of gold as a common denominator or in terms of the United States
gold dollar of the weight and fineness in effect on July 1, 1944."
A number of the nations that joined the IMF fixed the par values of
their respective units of value in terms of the U.S. dollar instead of
directly in weights of gold. Each member nation was permitted to keep the
reserves deemed requisite to maintain the convertibility of jf-f paper currency
either in gold gjc in paper currencies that were convertible into gold,
whether its own currency or currencies of other signatories. Each member
might buy or sell gold at prices in its own currency not more than one
percent above or below the par of said currency. The IMF was supposed to
give advice to member governments and might make loans to members to help
them maintain the exchange value of their currencies. But, sooner or later,
borrowing members must repay the loans either in gold or in paper currencies
convertible into gold at par. Thus, although it was not spelled out in the
Articles of Agreement of the IMF, it was understood that each signatory
government assumed the obligation to so discipline the economy of the nation
as to keep the country on the gold standard.
It almost goes without saying that the Bretton Woods Agreements were
designed to promote freer trade and financial relations and friendlier politr

-ical relations as well among the signatory powers by minimizing the impedi-

ments and irritations that might otherwise arise from unstable currency
management on the part of some or all. Of such unstable management and the
ill feelings engendered thereby, there had been numerous instances and
illustrations during the period of the Great Depression and the New Deal.
In the further interest of freer trade and friendlier international
relations, Bretton Woods and IMF were supplemented by a series of treaties

- 21 -

providing for the reduction of tariffs and the removal of other barriers to
international trade. These treaties were mostly negotiated at long
General-Agreement-on-Tariffs-and-Trade (GATT) Conferences, 1947 and following
years. The United States Government was the leader in these negotiations also.
By the Bretton Woods Agreement Act of July 31, 1945, the United States
Congress accepted membership in the IMF and, as noted above,repealed the provision of law that gave the President authority to change the gold content of
our standard dollar at his discretion. In view of the action of Congress
described here and of the leading part our government had taken in negotiating
the Bretton Woods Agreement, framing the Articles of Agreement of the IMF,
and negotiating the GATT trade treaties, it would appear that the United
States had a special obligation to make Bretton Woods and the trade treaties
work^and to maintain the gold standard for our currency,and to keep the price
of gold at $35 per ounce.
It is my considered judgment that the international monetary and trade
agreements were in general well designed for the purposes intended. However,
one feature of the Articles of Agreement of the IMF was ill advised. That
was the permission for signatories to use foreign paper currencies as part
or even the whole of their respective bank reserves

provided said currencies were convertible into gold at face value in the
countries of issue.
That feature may have been desirable at the outset
of the new international monetary arrangement} Imt/once the accord was well
launched, it should have been abandoned and the requirement substituted that
all signatories, except possibly those with insignificant amounts of commerce,
must keep their bank reserves in gold and their own currencies. The objectionable provision, retained as it was, was bound to cause trouble and did so
as is noted shortly in this account.
For a long period after the stringency of 1896, our Treasury and our
Federal Reserve Banks also (while the Banks were required to keep gold
reserves against their notes) had remarkably little difficulty in getting gold
to maintain the convertibility of our nongold currency. During the period, the
balance of payments between this country and^foreign nations was nearly always
in our favor, and*as a consequence,,gold flowed in faster than it flowed out.
The balance of trade was quite regularly in our favor. This was especially
the case during the two World Wars of the time and the periods of recovery
following the Wars, while other participants more deeply involved than the
United States were repairing damages . The net flow of capital investments also
was in general in this direction. And during the Great Depression and after
World War II, especially, there were political disorders and devaluations of
currency in some of our principal European trading partners: wS§* occasioned
a "flight of gold" to other countries, especially to the United States.

1 £
See Article XX, Sections Ac and d. The permission allowed a practice^already
-.followed by a number of governments, /^ofaij^j fasa tfifajpiy(''tj BJBL +

See above ,



, _ B u t in the later 1950s and especially in the 1960s, after Japan, West
Germany, and France and to some extent other European countries had rebuilt
their factories and transport facilities and had stabilized their economies
and polities, the balance of payments turned strongly against us and as a
consequence our gold reserve dwindled.
The principal single explanation for the balance of payments turning
against us was our failure to keep a high-enough degree of competition in
our domestic markets. As a consequence of this decline of competition at
home our producers of goods and services largely priced themselves out of
foreign markets. In great sectors of our economy we had allowed giant corporations and combinations of corporations to develop which could avoid
competition and administer prices. In a number of key industries,,labor
unions had become so powerful that they coujld virtually dictate wage scales
and fringe benefits. In monopoly-dominated industries, employers could
gracefully agree to liberal wage scales and pass the high labor-costs on to
consumers in the form of higher prices. Many concerns, indeed, made large
enough profits at home that they could invest great amounts of capital in
other countries where labor costs were lower and from there perhaps export
products (automobiles and parts, television* sets, and what not) back to the
United States and undersell their own domestic products and/thusrreduce our
exports and increase our imports. It would take us too far afield from our

theme to try to explain how we came to allow this state of affairs to develop

It will have to sufficed to say h-sass that our antitrust laws have been adequate
but have not been well enforced. Businesses in countries such as Japan, the

, I have stated my understanding of this matter rather forthrightly, I think,
I in A History of the American Economic System (1964), especially chapters 'J,
[JSjand 38.

- i


United Kingdom, and West Germany, whose economies are more largely depende

exporting and importing, are more likely to be highly competitive both in

foreign and internal trade than those in a country such as the United States
whose internal commerce exceeds its foreign many times over.
Our Government, especially in the last few years before the great deba
complained that foreign governments, notably that of Japan, were using unfair
trade practices, such as the subsidizing of exports and placing various impediments in the way of imports in violation of the trade treaties. All governments in these later years, anxious to promote business activity and improve
the standards of living of their people, have come to control their economies/
for good or ill; in a great variety of respects. In the matter of foreign
trade, our Government, with its quotas on imports and exports and subsidies
of divers exports, has been not the least of the offenders against the spirit
if not the letter also, of the GATT Trade Treaties.
Another set of circumstances that contributed greatly to our balance-ofpayments deficits was the large expenditures abroad by our Government and private
citizens. Since World War II the Government has given extensive economic aid
to foreign nations. It has maintained large military establishments abroad
and has spent great sums in foreign markets in connection therewith. Military personnel stationed abroad and families that followed them over did likewise. Hundreds of thousands of our opulent citizens, in search of culture
and diversion, spent vast sums traveling abroad, much greater in total than
foreign visitors spent in this country. And a great many of our foreign-bom
people sent money back to their old countries to assist needy relatives;
"any, indeed, upon retiring from jobs here, returned to their native countries

spend their last years, taking their savings with them and receiving their

social security checks to the end of their days.
Investments of capital in foreign lands have the same effect on the
balance of payments that imports have. During most of our history the net

- 25 -

flow of capital favored this country.

Since World War II the net flow has

been out, at least until quite recently. The framers of the Bretton Woods
Agreements and the GATT Treaties recognized that the flow of capital from
country to country is the most disturbing factor affecting balances of payments and placed no impediments to its control by individual governments.
For long our Government made no effort to curb such outflow of capital.
I have decried the fact that there was nothing in the Articles of
Agreement of the IMF to prevent national or central banks from holding the paper currencies of other countries as part or even the whole of the
reserves kept for the purpose of maintaining the convertibility of their
national paper currencies into gold at par, provided, of course, that the
foreign currencies held were convertible into gold at par in the countries of
issue. This practice together with 1 CJjyencies. on the part of our foreign
friends in collecting short-term obligations owed by Americans resulted in a

l#fi£2.overhang of United States currency and overdue bills, the so-called Eurodollars, all technically redeemable in gold at the Federal Reserve Bank of
New York and thus a charge upon our gold reserve. In effect our gold reserve
became the gold reserve to maintian the convertibility of a mass of foreign
currencies, as well as of our own. It would have been more conducive to the
disciplining of our economy by our Government if foreign central banks had
Promptly sent collections of excess Eurodollars to the Federal Reserve Bank
of New York and demanded their conversion into gold. Our people generally,

including many of our economists, for long saw no danger in the big balance-ofs.

Payments deficits. Many took pride in having dollars so welcome in other countri

Some even thought dollars bade fair to become the currency of the whole free wor

16,, '^jS
P.> above.
"Robert V. Roosa, a former Under Secretary of the Treasury for Monetary
"fairs, said, "The dollar, convertible into gold at *35 per ounce, hasWome
the central influence for monetary stability throughout the past period.
SSSetary Reform for the Unrld Economy. If: (New Jo^i l^v

- 26The Kennedy-Johnson Administration showed considerable concern over
inflation at home and our balance-of-payments deficits. It tried to keep
domestic prices from rising by "jawboning" and to curb excessive labors
union demands for wage increases by establishing "guidelines," i.e. officially approved limits of increases within which wage increases were a^e"
to be non-finflationary. Neither jawboning or guidelines proved effectual.
President Johnson tried with little success to persuade our citizens not to
travel so much abroad and not to spend so heavily when they did travel.
Better calculated to restrain the increase in balance-of-payments deficits
were an interest-equalization tax, 1963, designed to slow the flow of money
to foreign countries when interest rates were higher there than at home, and
the imposition of controls on foreign investments, 1965. Both measures were
hard to enforce.
In spite of the measures recited above aricT'other expedients and the
leniency of our foreign creditors, our gold reserve continued to decline.
In 1960 the ratio of the volume of our paper currency to our gold reserve
v-*fe»«€ &. $3>§ a»-<MH^e. was only 1.6 to 1. By 1967 the ratio was up to. nearly
4 to 1 and increasing fast. Speculators took notice, decided the dollar
was weakening, and began to buy up supplies of free gold at prices above
our official price of $35 per ounce and to buy other currencies 7^ (West German marks, Swiss francs, etc.) f- supposed to be stronger. In 1968 our Government and those of our principal trading partners felt compelled to agree that
their central banks and our Federal Reserve Bank of New York would pay out
gold only among themselves, such transactions tc continue to be at the official
Parities. No gold was to be paid out to speculators or other private parties.
This arrangement was dubbed the "two-tier system". It was hoped that the.
foreign central banks would exercise restraint in demanding payment of balances
due until the balance-of-payments should have swung in our favor. It is clear

- 27that the two-tier system left speculators plenty of room to speculate in free
gold, paper dollars, and other paper currencies. It virtually ended the convertibility of our paper currency, that is to say, virtually took us off
the gold standard.
The Nixon Administration blamed the policies of the previous administration for inflation at home and the deficits in our international financial
dealings. The President's Council of Economic Advisers said, "The United
States has full responsibility for a norrlinflationary expansion of its dotf< '

teestic economy. This responsibility was not met in the latter half of the

1960's ..."

The Nixon Administration did not meet it either.

It preferred

to put its trust in the free play of market forces to control inflation.
It, quite properly, eschewed jawboning and wage guidelines as ineffectual.
It dropped some of the Johnson measures designed to reduce balance-of-trade
deficits; most notably it relaxed restraint^ on American investments abroad.
Our gold reserve continued to decline.
The IMF tried to help countries in balance-of-payments difficulties by
creating Special Drawing Rights (SDP3p for members, and our Government accepted
the allocations to the United States. The Nixon Administration hailed the
SDR^as a possible addition to members' reserves that would ease the demand
for U.S. currency for that purpose.7 SDR^ were, in factfloans at a low rate
of interest and sooner or later would have to be repaid and, therefore, only
a temporary relief.
It should be noted that one thing that helps to explain why our Government especially during the early Nixon Administration handled the matters of
inflation, balance-of-payments deficits, and the maintenance of the conver-

*gEconomic Report of the President, 1971, p. 151.
'Economic Report of the President, 1970, pp. 131-135.

-i&tibility of our paper currency so cavalierly was the lack of a strong, informed public opinion to keep Congress and the Executive in line. A very
large proportion of our publicists, commentators, and officials came somehow
to believe that there is a trade-off between inflation and the rate of unemployment. Economic history teaches there is no such trade-off. A large proportion of the same groups came somehow to believe that one nation can gain
an advantage over others in international trade and finance by devaluing its
currency. Economic history teaches that this belief is almost utterly fallacious: Foreign residents do not have to accept devalued dollars at face value;
they are not legal tender over there. Then, a large proportion of our people
and Congressmen and responsible administrative officials came somehow to accept the view that in this sophisticated age the maintenance of the convertibility of paper currency into some commodity of great value, such as gold, is
no longer an essential condition for maintaining the purchasing power of the
paper dollar.
It is difficult to know what President Nixon's views on currency were.
At any rate, after two and one-half years into his first term, he decided that
he could not safely allow our gold reserve to decline any further. On August
15, 1971, he closed the "gold window" of the Federal Reserve Bank of New York
to the central banks of other countries -—It had been closed to all other
claimants in 1968^-i thus ending the last shreds of convertibility for our
non-feold currency. At the same,}time without prior approval of the IMF or of

"*^In Ex-President Nixon's RN, the Memoirs of Richard Nixon (1978), he gives
short shift to economic issues, pp. 515-520. He gives closing the gold window
about one page (518). The substance is he accepted the proposals of Secretary
of the Treasury Connally and the only advisor who strongly opposed was Arthur
Bums, Chairman of the gsfrsxAr^sexasm. Board of QoV&r7\6YS &f Th* fe-feYa/ ry&rY&


S*fzfetr\ .

- 29 -

other governments, he raised our official price for gold from $35 to $38 per
ounce, thereby devaluing the dollar and all domestic contracts calling for
payments in dollars by 8.6 percent. Although soon approved by Congress, these
acts were in clear violation of the Articles of Agreement of the IMF. At the
same time the President by proclamation raised our import duties by 10 per22
cent all along the line and in doing so violated all the GATT trade treaties.
Other governments protested. In a monetary conference in Washington in
December 1971, the controlling members of the IMF agreed to accept our 8.6
percent devaluation of the dollar, and our Government agreed to withdraw the
10 percent increase in our duties on imports. Presumably our Government was
expected to resume paying out gold at $38 per ounce to redeem dollars of our
currency properly presented by central banks of other members of the IMF. This
our Treasury did not do and has not done to this day.
For a time the central
banks of some of our financially-strong trading partners tried to maintain
the purchasing power of the dollar by buying Eurodollars at the official
prices. They soon abandoned the effort. And shortly, either because they
were short of gold or felt they should hang on to what they had, all other
Free-World governments that had not already done so followed our example
and suspended specie payments, that is, went off the gold standard, the last
in early 1973.

Benjamin H. Beckhart, Professor Emeritus, Columbia University, scathingly
criticized both the substance of these actions and the manner of taking them in
his Federal Reserve System (1972), chapter 17.

In February 1973, the United States again officially devalued the standard
dollar, this time by 10 percent; but, since the paper dollar had been floating
since 1965, this devaluation, like that of 1971, had no effect upon the purchasing
power of the paper dollar at the time and will not be binding in the future.



| Inflation of Consumers1 Prices in the, 195g|-81Depreciation of the Purchasing Power of dollars—i
Source: Bureau of Labor Statistics


;-" 200-






— I





! 39 *
58 59^60 61*62 i63:6A 65 66 67 68 !69'70 71 72:73*7A75 76!77;78 79 ;80 ,81





*- w




fa. tT*I

- 30 -

So, since early 1973, except for ad hoc agreements among some central
banks to maintain negotiated parities among the currencies of their countries,
the paper unit of value of every country in the Free World has been floating
against that of every other country. The Bretton Woods Agreement, which
our Congress had solemnly ratified, is in shambles. The trade treaties,
negotiated with so much care and labor under the auspices of GATT,- have been
violated right and left. The IMF has been almost impotent.
Since its suspension of convertibility for its paper currency, every nation in the Free World has experienced rapid inflation of prices and all the
ills that have always accompanied such inflation. Some governments have succeeded better than others in slowing the rate of inflation. But no Western
nation has escaped rapid inflation;and the rate in most is accelerating. A
reputable American journal made a calculation.-gf the inflation rates in fifty
Free World countries during the 1970s. It found that the "compound annual"
rates ranged from 5.2 percent to 117 percent. Of the fifty, forty-one had
rates higher than that of the United States; only eight had lower rates
The United States rate was 6.7 percent. Since 1967 the general level of prices
in this country has increased by fife percent. The purchasing power of the
paper dollar is now only 3 b percent of what it was in 1967. History has been
repeating its lessons with vengeance.
No nrqfimT free-enterprise nations can expect nInarm to bring JL*& current
rampaging inflation under control without first re-establishing convertibility
for xfc paper currency into a fixed amount per unit of value of some
commodity or combination of commodities of worldwide use and comparatively
stable purchasing power. And, unless money specialists can soon devise a better
one, the commodity had( best be gold.

Vs^ News and World Report, October 1, 1979, pp. A8-49, using data
supplied by the I M F .

- 31 -

It would be much better for the functioning of the economies of Free World
nations, including the United States, if the re-establishment of convertibility
could be accomplished by another international monetary accord. Such an accord
might well include the better designed features of the late Bretton Woods
Agreement but should avoid its faults. Indeed, it must be said, in view of some
developments of the last fourteen years it is extremely doubtful that any one
or few nations could alone re-establish the gold standard for its currency?
Nations have become more economically interdependent. There are too
many Eurodollars, so-called, floating about in too many financial centers;
some sort of a composition with regard to them will have to be worked out by
financially strong countries before or as a new monetary accord in negotiated.
Another obstacle is the great increase in the amount of gold in private hoards
that has occurred during this long greenback ^*eriod.£
Most of the governments of Western nations, including our own, have kept
their gold reserves fairly intact during the long hiatus. But the leakage
has nevertheless been considerable. In 1965 all the governments of Free World
nations and the IMF together held 1186 million ounces in reserves. As of
January 1, 1980 they held about 930 million ounces. So at least 3^6 million :
ounces have escaped from said reserves since 1965. Also,, since governments
stopped buying gold, about 552 million ounces have been mined and marketed.
Ordinarily about half of the gold produced from year to year has gone into
industry and the arts. So it may well be that about 276 million ounces plus
the $&million have gone into private holdings since 1965. An amount in the
neighborhood of^3 2 million ounces would aAmas^be too great for any one or
few nations to bid for and buy at a fixed price in the gold markets of the


s?<*e <*£*>•£• ftk zr'rZ*

- 32 -

However, if a goodly number of the financially strongest nations of the
Free World would enter into a proper accord and fix the price in their
respective units of value at which they each would buy and sell gold, they
could almost certainly re-establish the gold standard for their currencies. If/
for instance, gthe .ten Free World nations whose treasuries and central banks
hold the ten largest gold reserves would enter such an accord, they could
almost certainly achieve the desired result. The ten, together with the
International Monetary Fund, which they control, hold about 90 percent of the
gold reserves in the Free World. That is about 60 percent of the gold bullion
in the entire world. With such a preponderance of ownership, the ten could
effectively set the price of gold in terms of their respective currencies
and thus tie the purchasing power of the dollar, mark, franc, yen, pound, etc.
to the purchasing power in the markets of the world of the money metal whose
purchasing power has proved the most stable of all commodities and articles
entering into commerce.

The ten nations are in order of the size of their holdings,fcieUnited
States, West Germany, Switzerland, France, Italy, Netherlands, Belgium, Japan,
Canada, and "the United Kingdom.


Knox y Lee and Parker v Davis (1871) in 12 Wallace, A57.
The accompanying graph is adapted from David R. Dewey, Financial
History of thg United States, p. ^7&/
An old account, but still one of the best accounts, of the incidence
of inflation of prices during the Civil War is in Emerson D. Fite, Social and
Industrial Conditions in the North During the Civil War (New York, 1910),
chapters VII and X.
As of June 30, 1978 there were still $322,539,016 total face value of
these "United States Notes" in existence, no doubt after many launderings
and reprintings. They are now being slowly retired. By an act of Congress
approved March 18, 1968 (Public Law 99-269), laws making them redeemable in
standard gold dollars were repealed; for at that time the United States
suspended the convertibility of all its paper currency. See below, p..
There were really two main reasons for the use of paper currency, namely,
1) paper is far cheaper than money metal and the use of paper renders it
possible to make an amount of standard coin go farther, perhaps several times
as far; and 2) the persistent insistence of the banking fraternity that banks
be allowed to enjoy the profits which arise from issuing bank notes. If,
perchance, any reader has trouble seeing how the profits arise, please consider this illustration: A bank invested $100,000, let us say, in U.S. bonds
of that par value and of at least that market value and deposited them with
the U.S. Treasury. It might then issue $90,000 face value and par value of
notes. Suppose also it was required by law and discretion to keep a cash
reserve of 10 percent against deposits. It would now draw interest on the
$100,000 of U,S. bonds and also on the $81,000 it could loan out (90 percent

of $90,000) as the result of its note-issuing privilege.
loanable funds had grown to $181,000,

Thus, $100,000 of

Not bad

P. "-5
Federal Reserve Banks were also authorized to issue limited amounts
of Federal Reserve Bank Notes on the same condition that other national banks
might issue notes, but, because of the superior advantages to the Banks of the
Reserve Notes, they issued only comparatively small amounts of the Reserve
Bank Notes.

These redemptions and retirements are described in considerable detail
in Historical Statistics of the United States, Bicentennial Edition, 990-991.
Elsewhere I have presented the view that the inflationary effect was
largely delayed until wartime price controls were removed at the end of
World War II.

A History of the American Economic System (New York, 196A) 59A.

To avoid misunderstanding^it should be noted that the Treasury sold gold
only through licensed traders, who undertook to supply the metal only for use
in industry and the arts.

The object of this practice was to try to keep it

from going to speculators and hoarders.
So quoted in Benjamin H. Beckhart, Federal Reserve System, 306.
Their exposition may be found in their book, Prices (1933).
See Article XX, Sections Ac and d. The permission allowed a practice
already followed by a number of governments, notably those of the Sterling
See above, pp _..;? --- ~
I have stated my understanding of this matter rather forthrightly, I
think, in A History of the American Economic System (196A), especially chapters
23, 29, and 38.


See above p^
Robert V, RoOsa, a former Under Secretary of the Treasury for Monetary
Affairs, said, "The dollar, convertible into gold at $35 per ounce, has become
the central influence for monetary stability throughout the past period."
Monetary Reform for the World Economy (New York, 1965), 17.
Economic Report of the President. 1971, p. 151.
Economic Report of the President. 1970, pp. 131-135.
In Ex-President Nixon's RN, the Memoirs of Richard Nixon (1978), he
gives short shrift to economic issues, pp. 515-520. He gives closing the gold
window about one page (518). The substance is he accepted the proposals of
Secretary of the Treasury Connally and the only advisor who strongly opposed
was Arthur Burns, Chairman of the Board of Governors of the Federal Reserve
See above, p-^Ki
Benjamin H. Beckhart, Professor Emeritus, Columbia University, scathingly
criticized both the substance of these actions and the manner of taking them in
his Federal Reserve System (1972), chapter 17.
In February 1973, the United States again officially devalued the standard
dollar, this time by 10 percent; but, since the paper dollar had been floating

since 1968, this devaluation, like that of 1971, had no effect upon the purchasing
power of the paper dollar at the time and will not be binding in the future.
U.S. News and World Report. October 1, 1979, pp. A8-A9, using data
supplied by the IMF.

See above, pp. g'-.*-* *

The ten nations are in order of the size of their holdings, the United
States, West Germany, Switzerland, France, Italy, Netherlands, Belgium, Japan
Canada, and the United Kingdom.

Quality Money I
725 E. Maple Street
P.O. Box 452

Harry R. Scharlach ^^mssu 6°942' U"S"A'
November 16, 1981
Mr. Ralph Korp
Office of International Monetary Affairs
Room 5050, Treasury Department
15th. and Penn. Ave., N.W.
Washington, D.C. 20220
Dear Mr. Korp:
I respectfully submit my thoughts on gold's role in our
monetary system , for consideration by the Gold Commission.
We have had ten years of experience with fiat U.S. Dollars,
since August 15, 1971.
The massive "new" economic approaches to achieve monetary
stability have all been found lacking in credibility.
High Interest rates do not stop inflation. Inflation and
bankruptcies have increased.
The U.S. should adopt the old classical monetary approach
to reduce inflation and interest rates.
A return to gold standard dollars is required.
This would reduce insolvencies among our U.S. financial and
business institutions and give them a chance to function
The rule of QUALITY MONEY backed by gold should now be accepted
as the only viable substitute for depreciating fiat money.
The "quantity" theory for dollars has been proven a failure.
The price for gold when returning to any kind of gold standard,
must be, at the least, somewhat more than the market price on
the day of official recognition that gold is the most stable
backing for our dollars.
Some persons on the Gold Commission may feel that a return to
gold would be a step backwards in our quest for a more stable
economy. However, it is necessary to take such a step so that
the U.S. can again make the start toward future giant steps
forward toward stable economic gains and progress.


In the history books of tomorrow the decades of the 1970«s
and 1980VS will probably be called the era of world-wide inflation and currency disorder. In 1970, only a few industrial
states, such as Japan, Denmark, Iceland, Spain and Turkey ex- '
perienced inflation rates of slightly more than 5%.- In 1980,
even Switzerland suffered a currency depreciation of 5.4%, West
Germany 5.5%, Austria 6.4%, the Netherlands 6.5%, Belgium 6.6%,
and Japan R%. All others suffered double-digit rates: Australia
10.2%, Canada 12%, Denmark 12.3%, U.S.A. 13.5%, France 13.6%,
Spain 15.5%, Great Britain 18%, Italy 21.3%, Greece 25%, Turkey
94%. In some South American countries the rates were even higher.
Despite all the government powers of controls and stabilization the paper currencies are depreciating competitively at feverish rates. The prices of basic commodities are changing erratically and violently. Interest rates have soared to unprecedented levels and the market prices of long-term bonds have fallen to unprecedented lows. Productive capital is consumed or
destroyed in many places, lowering labor productivity and levels
of living. The international division of labor, which in the
past contributed so much to economic wellbeing, is chafing under
new trade restrictions and growing monetary disorder.
In the U.S. persistent inflation has created a complacency
that beclouds economic judgment and prudence and casts doubt on
the future of the dollar. Popular thought distinguishes between
"double-digit" inflation, • which commands some attention and concern, and "single-digit" inflation, which is accepted as a minor
affliction, even at a 7% or 8% rate. The former is suffered

-2durinq the boom years of the business cycle when production expands, profits improve and unemployment declines. The latter is
a symptom of depression or recession when industrial production
is declining persistently and unemployment is rising steadily.
Inflation endures in a never ending cycle of boom and recession.
The fear of unemployment seems to be implanted in the American conscience. But instead of stimulating economic reason, fear
acts to overbear it and supports ancient fallacies that lead to
more unemployment. Fear guides government to resort to inflation,
which in the long run is sure to aggravate the evil from which it
was supposed to save us. To the press, the Mainstream economists
and their students in the Carter Administration, it was an insoluble puzzle that both evils, inflation and unemployment, should
occur simultaneously.
After nine months of the Reagan Administration it is not difficult to perceive the economic trend. Spending is increasing
faster than tax revenues. The budgetary deficits are likely to
be larger than anything witnessed heretofore. Exhausted capital
markets and record-high interest rates are squeezing the life out
of business. Economic output is declining, unemployment is rising
and bankruptcies are multiplying. The recession of 1981-1982 promises to become the deepest and most painful recession since the
Great Depression of the 1930's.
Eventually, the Federal Reserve System will be called upon
to alleviate the suffering. It will issue a new round of paper
money in order to reduce the interest rates, stimulate the economy,

-3and finance the deficits. The "reinflation" will cause the dollar to lose purchising power even more rapidly than during the
1970's. It took that entire decade to reduce it by one-half.
In the coming years it may take only half the time.
A Disreputable Dollar Standard
Inflation creates problems not only at home but also abroad.
Until 1971, when gold was the international money and the U.S.
dollar was payable in gold, inflation generally caused an outflow of gold from the country with the highest rate of inflation.
Threatening inability to pay in gold tended to restrain the country from inflating any further, or force it to devalue its currency toward gold. But in 1971, the United States refused to
honor its growing foreign obligations to redeem its currency in
qold. Fearing more losses it denounced gold for being "unsuited
for use as money," and vowed to remove gold from the monetary
system of the world. When other major countries followed suit
the transition from the traditional gold standard to irredeemable
paper issues was completed.
The U.S. dollar emerged as the primary international currency
serving trade and commerce the world over. It already had acquired a leading position under the Bretton Woods system that had
made the U.S. dollar the international reserve money payable in
qold at a price of $35 per ounce. When, in August 1971, President
Nixon repudiated the agreement the world continued to use the U.S.
dollar without its redeemability. After all, the world's merchants and bankers had grown accustomed to it. It afforded access to the markets of the most productive country in the world,
*nd its record of relative stability was one of the best in recent

-4monetary history despite its devaluations in 1934 and 1971. But
above all, the official repudiation of gold created a void which
no other fiat currency could possibly fill. it left the U.S.
dollar in the most prominent position for becoming the world
medium of exchange and reserve asset.
The world desperately needs a common money that facilitates
foreiqn trade and international transactions. For hundreds of
years qold served as the universal money uniting the world in
peaceful cooperation and trade. Today, the U.S. dollar is called
upon to assume the very functions of gold. But in contrast to
the gold standard, which was rather independent of any one government, the dollar standard depends completely upon the wisdom and
discretion of the U.S. Government. That is, the world monetary
standard now rests solely on the political forces that shape the
monetary policies of a single country — the United States.
We can think of no greater responsibility for any country
than that of the United States to the world. Every day assumes
a fearful responsibility when we view the fate of the free world
that rests on the U.S. But unfortunately, the dollar standard is
a political standard in which the purest motives are mixed with
the most sordid interests and fiercest passions of the electorate.
The dollar standard itself is the outgrowth of an ideology that
Placed government in charge of the national monetary order. It
is the handiwork of governments and their apparatus of politics.
To expect much of such a creation is to invite bitter disappointment.

-5The world fiat standard leads to temptations which no contemporary government can be expected to resist. The world demand
for a reserve currency constitutes an extraordinary demand that
tends to support and strenqthen its purchasinq power. It affords
the country of issue a rare opportunity to inflate its currency
and export its inflation without immediately sufferinq the dire
consequences of currency debasement. In particular, it presents
an opportunity to the administration in power to indulqe in massive deficit spending, which hopefully bolsters its popularity
with the electorate, while its inflation Is exported to all corners of the world. The country that provides the world reserve
asset can, for a while, live comfortably beyond its means, enjoy
massive imports from abroad while it is exporting its newly created money in payment of such imports. In short, it can raise
its levels of living at the expense of the rest of the world.
For more than a decade the U.S. Government has been the beneficiary'of this ominous situation. It engaged in massive deficit
spending and currency expansion with minimal inflationary effects
as the dollar inflation was exported to foreign countries. For
several years the foreign dollar holders even financed most of
the budgetary deficits which the U.S. Government was incurring.
Inevitably they suffered staggering losses on their dollar holdings which they had earned in exchange for real wealth.
Many years ago (1914), the Austrian economist, Eugen von
Boehm-Bawerk, wrote a brilliant essay in which he raised the
question: Can government coercion of any kind permanently and
successfully neutralize or overwhelm "economic law or principle"?

-6A similar question should now be raised about the international
dollar standard: "Is the dollar standard overwhelming economic
law, or is it reflecting the working of inexorable law?" The
answer to this question is clearly visible in the chaotic conditions of the world money and capital markets. Inexorable economic law is slowly qrindinq the U.S. dollar to a token chip and
reducinq it in prestige and importance.
As the U.S. dollar retreats from the center of the world's
monetary stage, other national currencies are trying to take its
place. The yen and the mark have assumed minor roles as world
currencies, but then have come under the same political and economic pressures as the U.S. dollar. In response to a growing
world demand for marks and yen, the central banks embarked upon
expansionary policies. They may have yielded reluctantly and
slowly at first to the world pressures for expansion, which to
their own amazement did not precipitate the dreaded depreciation
and other undesirable effects. For a while a new reserve currency seems to be immune to the inexorable laws of valuation: the
central bank expands at courageous rates while the purchasing
nower of its currency is barely affected. The country now enjoys
all the advantages which Great Britain savored so greatly during
the 1940,s and the U.S. during the 60's and 70' s. It can expand
money and credit at astonishing rates and export its inflation to
its trade partners. The holders of the new reserve currency are
welcome everywhere as the new lenders and financiers, which brings
international prestige and, above all, yields enviable profits.
They can make large foreign investments and expand their holdings
to all corners of the free world.

-7But the new reserve currency also suffers from the disadvantage of an enhanced propensity for depreciation. Its relative
strength tends to qive rise to a national euphoria of financial
strenqth, for which national characteristics, real or presumed,
are credited rather than the world demand for reserve cash holdinqs. While the world monetary order is disinteqratinq, which
causes private capital to search in frustration and desperation
for the least unreliable currency for reserve holdings, the popular explanation points at "national ability," "discipline," "energy,"
etc. Surely, most Americans believe that their productivity and
know-how afford the U.S. dollar the eminent position of a world
currency, as do most Germans, Japanese, and Swiss of their own.
This self-serving attitude that tends to blind even the most
careful thinkers is sowing the seeds of financial disaster. The
international fiat order divides and conquers all important fiat
currencies. It afforded the U.S. the opportunity to export its
inflation and bestowed incalculable benefits to its issuers. Most
Americans loved it and defended it with specious reasoning. When
the dollar began to crumble and the world sought temporary refuge
in marks and yen, the Germans and Japanese rejoiced in their moments of glory and the opportunity to export their inflation as
the Americans had done before them. It was their turn now to
finance the world and reap the enormous gains that flow from the
international fiat order.
Monetary expansion in both Germany and Japan has been very
sharp in recent years, and yet its impact on domestic prices has
heen less than expected. The rising world demand for marks and

-8yen acts as a countervailing force to the expansion in money stock.
It may take many months, perhaps several years, before the expansion is translated into domestic price inflation. But in the end
they all tend to suffer the same inexorable depreciation.
Gold Will Prevail
Most economists summarily reject the thought that once again
qold may become the money of the world. It is just another commodity, they tell us, which has lost its usefulness as international money. They use epithets such as "outmoded," "irrational"
or "superstitious" which are not very useful in the discussion of
monetary phenomena. The fact is that throughout the ages man has
made gold the most marketable economic good and thereby his money.
The gold market is the oldest continuous market of mankind.
Gold is more marketable than any other economic good. Economizing man likes to carry a reserve in the form of gold — coins,
nugqets, bullion, gold ornaments and plate — because it is readily
saleable and acceptable in trade. It can be exchanged easily on
the markets for other goods and can be hoarded for exchanges at a
later date. It can be readily sold in small quantities or larger
sums, without much difference in price, to individuals of all races
and nationalities. Every individual is a potential buyer although
he may not need the gold. It may be added to the store of personal
wealth and is passed from generation to generation as objects of
family wealth. There is no other economic good the marketability
of which compares with that of gold.
Gold is the most abundant commodity of mankind, accumulated
over more than two millenia, least needed for immediate consumption,


and therefore, available to serve as money. Existing supplies
in the possession of millions of people around the globe are
vastly greater than annual production or consumption, which
make annual additions through new mining appear negligible.
This anomalous ratio, in which it differs from all other economic goods, assures everyone that further accumulations are
safe. It confers upon gold the "supreme marginal utility " Its
subjective value varies least with changes in quantity.
It is not within the power of governments to interfere with
marginal utility, or to declare marginal utility inoperative.
Government legislation cannot negate human nature. Carl Menger' s
law of marginal utility is applicable to all economic goods, including gold.
To the individual, the ready marketability makes the subjective exchanqe value of gold, rather than its use value, the crucial
economic value, i.e. the importance he attributes to the satisfaction of his wants. Therefore gold may be looked upon as that economic good the subjective exchange value of which tends to change
least with variations in quantity. If I were to offer this audience 100 ounces of gold as coins, bullion or jewelry at the world
market orice, the sale might be completed in a few minutes. It
would not in the least depress the price of gold. If I were to
arrive with 3 tons of copper, or 1.5 tons of coffee, or 3.3 tons
of pork bellies, which are presently selling at the price of 100
ounces of gold, I would find no ready market here. I would have

TTj~Cf. Carl Menger. Principles of Economics, (1871), The Free

land. St.. John's, O n t h e M a r o g i n ^ ^



-10to contact a merchant in town and arranqe a distress sale that
may inflict heavy losses on me. My losses would illustrate the
volatility of the exchange value due to quantity changes and my
very low marginal utility of 3.3 tons of pork bellies.
Despite the persistent efforts of governments throughout
the ages to concentrate gold in their treasuries, the possession
of gold has become more diffused with the passage of time. There
is no chance whatever that any other metal such as platinum, palladium, or any other precious metal will ever displace gold because of their limitations of ownership and limited marketability
throughout the world. Even silver cannot compete effectively
with gold because its current production relative to its visible
supplies is rather large, and its marginal utility declines quite
rapidly with new production. No other commodity exists in stockniles as larqe and with diffusion as wide as gold. Every addition to its hoard and every further diffusion are enhancing the
nosition of gold. It is naive to believe that irredeemable paper
money based on the debt of defaulting and insolvent governments
could ever acguire the universal marketability and take the position of gold.
We remember the predictions of many experts that the value
of gold would collapse if the central banks would ever refuse to
accept it in unlimited quantities. Most of the demand for gold
would simply disappear, so they proclaimed, if the monetary demand were eliminated. After more than a decade of official proscription, gold has not collapsed. But its substitutes are showing signs of disintegration. The public was not to be cured of

-11its taste for gold by official denunciations.

On the contrary,

it rushed into gold and out of paper, which lifted the price of
qold to lofty levels. In due time the demonetization of gold
by the U.S. Government will result in ever greater demands for
gold in the world markets and the abandonment of the dollar as
international money.
We are observing the dramatic spectacle of central bankers
around the qlobe cryinq out aqainst the U.S. dollar: "We have
enough! No more please!" The marqinal utility of the dollar
is declininq at alarminq rates. The marqinal utility of the
qold in private and public possession remains unruffled despite
the threats of some qovernments to dump the balance of their
qold reserves. Gold remains the only asset that can be hoarded
with confidence in any amount.
Monetarists believe that any "token chip" can be used as
money, provided its supply is limited. The only difficulty they
foresee is the judicious increase in the supply of the tokens
to be commensurate to the qrowth of population and of gross national product. But unfortunately, minor changes in quantity
immediately affect their value and impair their marketability.
The tokens of the world are the time and sight obligations of
the U.S. Government. They have depreciated significantly in recent years, especially toward gold. If large quantities of these
Papers had not been forcibly placed with commercial banks, savings banks, trust companies, insurance companies and other financial institutions, their depreciation would have been even greater

-12The financial institutions of the world are sitting on a huge
pyramid of dollar losses. They are under pressure to cut their
losses and salvage what they can. The temptation to dump the tokens is qettinq stronqer with every day of dollar depreciation.
This is why we are nearinq the end of the world dollar standard.
Too many countries have lost too much wealth as a result of their
dollar holdinqs.
There are no central bankinq authorities that can prevent the
decline of the dollar and the return of gold. Nor can we expect
a system of Special Drawing Rights (SDR's) that is based on a collection of national fiat currencies and the issuing powers of
several qovernments, to prevent the inevitable. In fact, such a
composite currency would aggravate the world situation as it relies on international politics and is susceptible to more distrust.
Currency Reform
If it is true, as Carl Menqer already observed more than 100
years ago, that money is the natural product of exchange, independent of the power of the state, then it is also natural to
question the role of the state in our monetary affairs. Our
question becomes all the more urgent and cogent if we observe the
dismal role government has played in managing the people's money
throughout most of this century
A deep distrust of monetary authorities has spread throughout the world. People have learned not to believe in sweeping
Political promises that, in the future, government will exert
more discipline and print less money. That's why they are demanding real money untouched by government and its agents.

-13Many economists favor an early separation of government and
money. They are advocating a "parallel standard" that would allow the free use of both fiat money (without legal tender quality)
and qold, silver, or any other commodity. They work diligently
to free all financial institutions from their present restrictions
on the use of gold or silver in contracts, as medium of payment,
as financial assets, reserves, investments, etc. Obviously they
are opposed to any government fixing of exchange rates between
fiat money and the precious metals, and to any legal limitation
of fiat money issue. They are longing to write contracts in gold
and to conduct their international business with trade partners
who are free to enter gold contracts and 3ign gold clauses. (Cf.
Hans F. Sennholz, Inflation or Gold Standard, 1973 and F. A. Hayek,
Denationalization of Money. 1976).
It is illusory to expect a government that indulges in massive deficit spending to consent to the discipline of a gold standard. But it is conceivable that the people may succeed, step by
step, in reclaiming their freedom of contract. The gold standard
is a beautiful artifact of that freedom.
Such a "reform" can be conducted in any country, independent
of all others, where the freedom of contract can be restored. It
would set an example that would shine across all borders and give
new hope and encouragement to people everywhere.
A limited currency reform that would merely circumscribe the
role of government in monetary affairs would restore the classical
qold-coin standard. Despite all the assertions to the contrary,
re-establishment and preservation of the gold standard is possible.

-14Such a reform would follow in the footsteps of Britain's Peel's
Act of 1844. In particular, it would leave all present moneys
(central bank credit, M1 and M2) in "circulation." No gold
cover would be required. But all future moneys would have to
he backed 100% by qold. That is, all new notes and credits
would have to be fully backed, which would prevent fiduciary expansion. The full backinq would be based on the gold-fiat money
exchange rate that exists on the day of reform. If it should be
450.50 or 590.30 fiat units per ounce of gold, or any other rate
(unaffected by government intervention), this would be the redemption rate henceforth. We would then be back on the goldbullion standard. The gold-coin standard can come later. (Cf.
Ludwig von Mises, The Theory of Money and Credit, The Foundation
for Economic Education, 1971, Part IV, Chapter III).
The international exchange rates of such a redeemable currency to other fiat currencies should remain floating. Hopefully,
in time, other governments would follow suit and conduct similar
reforms, which, on the days of their reforms, would stabilize
their exchange rates to gold and thereby to other gold currencies.
There is no other way of stabilizing paper money than making it
convertible into gold.
The sine qua non of such a reform is the complete separation
of government finance and the people's money. The central bank
must be kept away from the reform, and no one connected with
government finance in the past or present must be permitted to
influence monetary conditions. If the government suffers a budqetary deficit it must raise the needed funds in the loan market

-15in competition with business and other borrowers. Of course,
deficits of the magnitude suffered in recent years would be out
of the question. No loan market offerinq genuine savings only
would be capable of financing such staggering deficits as are
suffered today, on-and off-budget deficits and "sector deficits"
with prodigious federal loan accommodations and credit guarantees
Confronted by mammoth deficits and intimidated by the likelihood
'of new confiscation, gold would go into hiding and register, like
a seismograph, all the misdeeds of government.
The cause of sound money is identified with the freedom and
prosperity of mankind. Wherever it gains ground it is a common
qain that is acclaimed by all.

Hans F. Sennholz

25 Carlisle Street
Hanover, P A 1 7 3 3 1
(717) 637-2201

November 4, 1981

$ Trust Company

Mr. Ralph Korp
Office of International Monetary Affairs
Room 5050, Treasury Department
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dear Mr. Korp:
In response to your office's requests concerning
bankers' thoughts on gold role in the monetary system, I
offer the following observations:
It appears that some form of discipline is needed in
controlling the level of money supply in our economy. This
also appears to be the case with other industrial nations
in the world. Central banks seem to lack the fortitude to
control money supply, without making concessions to the
political pressures and desires of the elected government.
We seem to have fallen into a pattern where the central bank
accommodates deficit spending by monetizing the Treasury's
debt issues and, in so doing, creates new money reserves.
A return to "the gold standard", as existed prior to 1933,
would provide the external discipline needed to control the
growth of money supply in the country, and keep inflationary
pressures in check. A return to such a system of external
disciplines would require a higher degree of political
sophistication than seems to exist in any of the industrial
countries today, with the possible exceptions of West Germany
and Japan. In addition, a return to the gold standard would
create an immediate problem for the United States government
in devising ways to balance the budget in a very short period
of time. This would require either drastic cuts in the^
spending level or very substantial increases in the taxing
level, or a combination of both.
While I personally question the political feasibility
of making such drastic changes in our government's fiscal
management policies, I am convinced that the long range
effect of a return to a gold standard would be extremely
beneficial. If our currency were immediately convertible
into gold, long range planning could be undertaken by
individuals and businesses with the assurance that a price
stability could be forecast into the future. The cost of
a long term investment could be measured in terms of actual
on-going dollar expenses, without having to consider the
impact of inflation on actual dollar returns on the investment and financing costs.

Mr. Ralph Korp


November 4, 1981

We have reached the unfortunate position where lenders and
investors are not willing to provide funds for long term fixed asset
investment at fixed rates of interest. As a result, lenders and
depositors are requiring floating rates of interest to be applied to
all types of loans and deposits. Businesses cannot project fixed
asset investments, in terms of estimated units or production to be
derived from such an investment, with the application of historic
profit margins and cost factors. As a result, I find the businesses
we deal with plan only for investments that promise a very quick
repayment of invested dollars. Consequently, our industrial investment in plant and machinery has slowed down to the point where productivity gains are hard to develop.
In summary, I feel that a return to the gold standard would be
difficult - if not impossible - to impose on the American public.
However, a failure to build some type of external discipline into
our monetary affairs will eventually lead us to an economic collapse
that may be even more intolerable.
I suggest the consideration of a modified gold standard such as
that which has been recommended by the Council for a Competitive
Economy. As I understand this proposal, it calls for a return to the
issuance of gold coin that would be allowed to circulate as currency
in the country. The proceeds of the sale of these coins by the
Treasury would be used to pay off existing Treasury debt, and could
not be used to finance current expenses of the government. In addition, the proposal calls for allowing other currencies to circulate
in the country and be used at the discretion of the individual citizen
Under this plan a contract could call for a payment in dollars, gold,
or any foreign currency that the parties entering a contract might
agree to. Consequently, if the Federal government insisted on continuing its uncontrolled spending habits, the citizens themselves
would be motivated to bring such spending policies under control by
refusing to accept the currency of the government. Since other
currencies would readily circulate, along with dollars, the burden
of mismanagement would fall where it rightfully belongs - on the
I refer you to Mr. Joseph Cobb, economist for the Council for a
Competitive Economy at 410 First Street, S.E. , Washington, D.C. 20003
for a scholarly analysis of the plan I refer to above. While there
do not appear to be any ideal solutions to the problems of deficit
spending and inflation, there are alternatives. In my opinion, the
Plan that Mr. Cobb proposes seems to hold some merit.

John V. Silcox'

Sound Dollar

P.O. Box 226 Fort Lee, NJ. 07024

January 22, 1982

Gold Commission
C/o Mr. Ralph V. Korp
Director, Office of International Monet ary Affairs
Room 5050
Treasury Department
15th and Pennsylvania Ave. N.W.
Washington, D.C. 20220
The following statement is submitted in response to the
Commission's general invitation of October 22nd for comments.
It is inevitable that sooner or later the United States
will return to a specie-backed currency. The following statement concerns the transition period from our present irredeemable paper to a new specie-backed currency.
Court action (Law No. 56,182) to test Constitutionality of
irredeemable paper is under way in Montgomery County Maryland.
The appeal process for a new trial began on January 14, 1982.
A favorable court decision will not cause any great upheaval;
in fact, a transition period will be provided automatically. The
result of a favorable decision will be that only the States will
have had taken away from them a priviledge they now think they
have - - the practice of extinguishing their debts with irredeemable Federal Reserve notes. It will set the stage for the
following scenario.
At that point in time:
1. Federal Reserve no^es will continue to circulate but
^thfiir_u-se^y-^th^^3tates will have been prohibited.
2. This will force the Congress to reassurae its Constitutional obligation & prerogative of coining money
and regulating the value thereof.
3. A bill will be passed creating a new specie-backed
currency; interest free and fully redeemable.
4. The Congress will instruct the U.S. Treasury (not
the Federal Reserve banks) to issue this new money.
5. This new currency will NOT be issued directly to
the public.

2 Gold Commission, Jan. 22, 1982; pg. 2


The new currency will be issued by the U.S. Treaaury
to the 50 State Treasurers in exchange for "X" number of
Federal Reserve notes, say - - one for twenty greenbacks.
7. The State Treasurers will use this new currency to
extinguish their State's debts in compliance with
Article I; Section 10 of U.S. Constitution which says:
"No State shall . . emit Bills of Credit; make any Thing
but gold and silver Coin a Tender in Payment of Debts; . .
8. Then, two currencies will be circulating simultaneously,
irredeemable Federal Reserve notes and the new speciebacked currency. Similar situations have existed in
the past in this country. Citizens will then make their
"preferred choice" and one or the other will dominate.
9. This scheme will introduce a new specie-backed currency
into the monetary blood-stream with least disruption to
industry, banking and commerce. It will, at the same
time, sop up much of the debt-ridden paper money now
causing ruinous inflation.
A National storm is brewing over this issue. A return to an
honest monetary system is inevitable, the sooner the better.
Sincerely yours,

//. **• S^^fyp^y-ry^
Richard L. Solyom

A Major Constitutional Challenge
The Founding Fathers, when framing the Constitution, were fully aware
of the dangers of paper money. Hence, Article I, Section 10 reads:
••No State shall . . emit Bills of Credit; make any Thing but gold*and
silver Coin a Tender in Payment of Debts;" i n spite of this explicit
language, our government, since 1968, has been printing paper dollars
without gold or silver backing. The inevitable consequence is uncontrollable inflation.
Though the "money question" has been raised by innumerable tax resistors
and others, to date the government has always been able to sidetrack
the issue and avoid defending its position. Now, however, comes Richard
L. Solyom of Fort Lee; New Jersey, with a direct challenge to the value
of the paper dollar. He is demanding payment in gold and silver coin
from the State of Maryland as compensation for land taken from him by
the Maryland-National Capital Park & Planning Commission under eminent
domain laws. The outcome of his case may well decide whether or not
the Constitution is still the Supreme Law of the Land.
Solyom is prepared to accept whatever amount a jury may decide is
"just compensation" but claims that if he accepts paper money offered
by the Park Commission, it will place the State of Maryland in direct
violation of Art.I; Sec. 10 of U.S. Constitution. Therefore he must
refuse the paper money.
His landmark case will be heard in the Circuit Court for Montgomery
County Maryland, on November 30, 1981. It is expected that the Justice
Department will make every effort to sidetrack the issue once again
to avoid confronting this major Constitutional issue. Win or lose, the
case will be appealed and ultimately may land in the Supreme Court.
The language of the Constitution is explicit and it is difficult to
imagine a Supreme Court decision adverse to Solyom. A favorable decision by the Supreme Court will mean that Federal Reserve Notes can no
longer be used by the states to extinguish their debts. Such a decision will help guide the Federal government back to a specie backed
^ogress reports on the case can be obtained from:

R. L. Solyom,

Sound Dollar Committee, P. 0. Box 226; Fort Lee, N.J. '07024.

November 12, 1980

The gold standard is one of the most controversial topics
in the financial press today. On the one side, Professor Laffer
and Mr. Wanniski aver that fixing the price of gold is the only
sure and rapid way to end high interest rates; on the other side,
Professors Stein and Heller have denounced the idea as nothing short
of crackpot.
I would like to see a restored role for gold in our monetary
system -- provided the attempt to achieve this would not cause
some great economic catastrophe. I have always believed that the
free market is a process that leads to the discovery of values,
and it seems obvious to me that none of the disputants in this
gold controversy is really looking to a free market solution. The
advocates of gold have no brief for the competitive market in
foreign exchange, and the advocates of managed money have no brief
for the yellow metal as one among many competing currencies.
Discussions in various newspapers and newsmagazines have discusse
it strictly in terms of a fixed price for gold -- as if the 19th
century Bank of England model, which was invented by David Ricardo
to control the English central bank following the inflation of the
Napoleonic wars, were the only gold proposal under consideration by
Congress and the Gold Commission.
Milton Friedman has, quite correctly, scoffed at this kind of
gold price-fixing as a "pseudo gold standard." In a 1961 article
i« TI_ . *_ «-«. "A n<;pudo oold standard
m The Journal of Law $ Economics, he wrote.

A pseuao e u

Page Two

is in direct conflict with (classical) liberal principles, as is
suggested by the curious coalition of central bankers and central
planners that has formed in support of it." He was referring to
Bretton Woods, of course, which had set up the U.S. Federal Reserve
as the 20th-century imitation of the 19th-century Bank of England
in international finance. What Friedman said he would support is
a "real gold standard," in which gold would actually circulate
as money.
The principal legislative requirement to open up the gold
window for Americans, and permit a "real" gold standard to emerge
in the free market, would be to repeal capital gains taxation upon
the use of gold as money in the capital markets, and to authorize
courts to make awards in civil cases in units of gold bullion, by
weight. State and local sales taxes on gold coins would have to
be nullified, just to create a level playing field between gold
coins and U.S. currency. There is absolutely no need to get the
Federal Reserve System back into the gold storage business -- indeed,
they would probably make a mess of the whole gold market idea.
What would be the consequences of legalizing this "freedom of
choice" gold coinage for Americans? In the first place, the Fed's
monetary policy act would have to be cleaned up, because there
would no longer be a monopoly situation forcing Americans to swallow
whatever monetary policy the Federal Reserve selected. If you look

t the competitive foreign-exchange practices of Swiss bankers,

or the laissez faire monetary policy of Hong Kong, which has no
central bank, it is clear that competition in currency would work

ery well. In an article by Professor Roland Vaubel, "Free Currency

Competition," published in the Weitwirtschaftliches Archiv (University

Page Three

of Kiel) in 1977, he observes:
"H™ js AJ ^ currency competition could help to reduce
inflation? The profit-maximising rate of inflation (or
deflation) and its variance is the lower, the more inflationelastic the demand for real balances. Demand is more elastic,
the closer the substitutes that can be used in place of the
money concerned. The substitutes can be financial assets
or even commodities (barter), but, clearly the closest substitute that can be thought of is a competing money."
Without legislating a fixed price for gold -- and consequently
knocking out of business all those who enjoy trading the metal -the United States could legalize the use of gold as an alternative
form of money. The key, of course, is that the name of the new
monetary units would be "ounce" and "gram," not any artificially
invented term. The courts and the capital markets would be
authorized to recognize the units currently maintained by the
National Bureau of Standards.
One of the defects in the Laffer proposal is that,
as Laffer stated in the Wall Street Journal on October 13th, the
demand for dollars would shift dramatically if the dollar were
fixed to a certain weight of gold. What that tells me is that the
first fixed price would be "incorrect" a few days after it was
fixed, so it would have to be re-fixed at some short interval later.
Since the whole idea of fixing the price of gold is to restore
confidence, this "confidence game" would probably destroy the public's
trust in the whole idea of a fixed-price gold standard.
Moreover, the idea of occasionally re-fixing the price depends
upon the existence of organized gold exchanges, or commodity markets;
but the day after the price was fixed, the commodity markets would
cease to trade any gold. Could we reasonably expect the Comex or
the IMM to resurrect all of the machinery for trading gold contracts
whenever it suited the government to let the market higgle-and-jiggle

Page Four

for ninety days?
On the other hand, under the proposal for a free market price
(in terms of dollars) for gold coins, and the legal recognition
of these coins in courts, the financial futures markets would take
on an expanded role in hedging gold-price movements.
The real need that "the gold standard" is supposed to address
is the need for a unit of account for the long-term capital markets.
We know that we cannot have a capitalist society without long-term
capital markets, because the capital markets are the only way that
a free market society has available to it to plan for the future.
It has been the over-involvement by the government in the financial
markets that has led to today's inflation and high interest rates.
Proposals like those of Professor Mundell, which were published in
the Wall Street Journal on September 30th, are interesting, but
absolutely unfeasible -- since they would require international •
Yet, we already have an international agreement, the Systeme
International d'Unites, that would serve the capital markets very

The fact that obligations for deferred payment have traditionally

been denominated in dollars is not really important if we are looking
for a kind of currency reform that would bring down interest rates
from today's outrageous peaks -- and keep them in the range of
two percent for the next century.

If Congress would legalize the

use of gold bullion as a numeraire for debts (as distinguished from
merely permitting gold clauses, as we did in 1977), the free market
process of competition would sort out the fate of gold in our
monetary system.
The problem in politics, usually, is that issues are debated

'Page Five

and voted up or down as if they were "all or nothing" proposals.


idea of merely letting people have the freedom of choice to use gold
if they want to, and to permit a fair competition between gold and
U.S. currency, is a "marginalist" proposal. Nobody would have to
use gold if he or she did not want to. The Federal Reserve and
the Treasury could continue playing games with monetary policy,
and individual Americans would have the freedom to "opt out" of
their economic mistakes. Milton Friedman has pointed out that
the price of gold would pretty much stop fluctuating if we
did this, but it would be a free market, competitive result -- not
a result of government price-fixing -- and this is why I support it.

Ooldtown (Germontown). MD 2087 '
(3011 972-1341 (Eves)
Nov. 27, 1981
Mr. Ralph Korp
US. Dept. of the Treasury
Washington, D.C.
Dear Sir:
Attached are 20 copies of written testimony titled "The Automated Gold
Standard" to be included as part of the public record and prodeedings of
the U.S. Gold Commission. This concept was developed by Mr. Carl Ockert
and originally published as part of his book COMPASSION AND COMMON SENSE
(Box 273, Germantown, MD 20874).
The enclosed has been improved slightly over the original version in the
book by Mr. Ockert. I submit this for the public record because I feel
that it is a concept that should be thoroughly evaluated and seriously
considered by the Gold Comission members. If it is re-typed or type set
that would be preferable.


Harold E. Thomas

Paper money expansionism will not work. . . (but) highly sophisticated monetary
authorities go on for years accepting ever more worthless paper instead of demanding
gold... But the time has come at last when people, including even foreign central bankers,
no longer want to hold more and more and ever more worthless currencies... Confidence
in a currency can erode rapidly once it becomes inconvertible, for only convertibility
enables it to maintain its store of value function indefinitely. . . Without convertibili
history shows that a currency will ultimately become worthless and disappear.
John Exter, Former Vice President of the
Federal Reserve Bank of New York


• h J r t J T


by Carl E. Ockert

y '«>r'international trade is one

agree on terms knowing that when the payment is made
the m o n e y will be worth exactly the s a m 7 a ? U " . . T h e n
the contract was signed.
For m a n y years the British Pound Sterling met this
requirement and thus became the preferred cufreTy for
international transactions. W h e n Lhe P o u n S w a s
devalued, xhvgold convertible U S . D>lkr became t h e ™ of cl oice. But the constant printing of paper dollar

•Except for one added paragraph, this article la exactly aa It appear.
In the boo* "Ccapaseion and Coaaon Senae" *hlch la available from
MCI- Books. P.O. Box 273. Ceraantown MO
2J8?J». at $7.70 postpaid.

bills, far in excess of the gold reserve, led to the complete
devaluation of the dollar in 1972. N o w the world has no
gold convertible currency for international trade, and the
value of the various paper currencies varies constantly
and unpredictably.
S o m e have suggested that the U.S. should go back on
the gold standard by setting a n e w official price for gold
and promising to maintain that price indefinitely by
suitably internal taxation and deflationary policies. Certainly such promises could be made. But w h o would
believe us? In the past w e m a d e a similar promise to
redeem dollar bills with gold at $20.67 per oz. Then in 1934
w e changed it to $35 per oz. defrauding the owners of 4 1 %
of their holdings. Then in 1972, w e refused to redeem dollars for gold at any price.
History shows that no government can permanently
fix the price of anything, and this includes the price of
gold. T o be successful, a price fixer must have complete
control of either the supply or the demand. Theoretically,
it would seem that a national government would have this
required degree of control over the quantity of paper currency which it issues. Actually this control is an illusion,
since in practice the adverse effects of contracting the
money supply will endanger the existence of the government itself. This is the basic reason w h y governments
have abandoned the fixed price gold standard m o n e y
system. But if thefixedprice gold standard it not practical, what is?
The most important requirement for an acceptable international currency is predictability of value. If the
value can be predicted, sellers can k n o w the exact value
that will be received for the goods being furnished, even
though payment m a y be m a d e months after the signing of
the contract.
In order for a curre icy to have a predictable value, it
must be i m m u n e to mat ipulations and devaluations. This
means that its value mi st not depeid on future decisions



to be made by anyone, especially not by bankers and
politicians. S o m e other desirable qualities would be universal availability and acceptability, but these would
naturally follow if the currency did indeed have a reliable
predictability of value.
It would also be desirable for the currency to have
constancy of value. This would allow its use as a means
for storing value indefinitely. But this quality, however
desirable, is not really essential. For the purposes of
facilitating trade, it is enough to have a reliable predictability of value during the life of a contract. Actual constancy of value is not required.
The dollar could be adapted to meet these requirements if legislation were enacted that would m a k e the
dollar convertible to gold on a sliding price scale. At the
start, the official exchange price would be set at the then
current free market price. T h e law would specify a
predetermined sliding scale for the dollar price of gold
which would depend on the inventory of gold in the U.S.
Treasury. T h e sliding scale would be set such that
whenever the inventory of gold goes d o w n 1%, the price
goes up 2%. Similarly, w h e n the inventory of gold rises
1%, the price goes d o w n 2%. T h e law would also specify
that the price charged for gold sold by the Treasury will
be 2 % above the price paid for gold bought, for any given
level of gold inventory. All prices would be based on the
inventory that exists after the day's trading is completed.
B y setting the selling price a fixed percentage above
the purchase price, every time there is a price reversal the
Treasury would m a k e a profit on all the gold that was sold
and repurchased. This profit by the Treasury means a net
overall loss for speculators, and this would tend to discourage short term fluctuations in the dollar-gold exchange price level. However long term trends would be
automatically a c c o m m o d a t e d a n d the official price of gold
w o u l d faithfully reflect a n y persisting inflation or deflation €>C «.*»«S «lolta«-.



The reason for making the price vary twice as fast,
and in the opposite direction, as the inventory change is
to provide for an automatic stabilization effect. If demand
for our gold becomes very high, the price will go up
enough to discourage additional purchases before too
m u c h gold is lost from our inventory. Similarly if large
supplies are offered, the reduced price will discourage additional selling. The desired result is a relatively constant
inventory of gold, and a relatively constant or slowly
varying price. W e want to d a m p out all the short term
variations with long term changes occurring slowly and

Some tone wonders** if the price really needs to vary exactly
twice as fast as the Inventory. Why not linearly,or perhaps three
times as faat,etc? Actually the 3X option would probably work, but
the effect would be less predictability, sines the actual pries of
the gold would vary sore for the sane dally changes In Inventory.
On the other hand, a linear systea alght encourage speculation sines
a greater volume of gold could be bought or sold with a given range
of pries aoveaent. Perhaps the best answer Is that it Is strictly
a natter of Judgeaent, and certainly saall variations froa the
recommended relation would be of no consequence.

After a period of operation, the record of the trends in
the official price of gold would be available for analysis by
the public. Statistical analysis of the behavior of the
dollar-gold price curve would yield informed predictions
of future behavior as well as the expected accuracy of
such predictions. Using such analysis as a basis, traders
could reduce to a m i n i m u m the uncertainty expected in
the real value of future dollar receipts, a n d the result
w o u l d b e a significant reduction in the risks associated
with international trade a n d investment.




In addition to this benefit, there would also be the
benefit of having a convenient and impartial measurement of domestic inflation. If a future administration does
really try to control inflation, its success would be readily
demonstrated by aflatteningout of the dollar-gold exchange curve. O n the other hand, irresponsible administrations would have their failures held up for all to
In summary, there is a third choice besides the fixed
price gold standard and the freefloatingpaper money
systems. By linking the dollar to gold on a sliding scale,
w e can obtain the essential predictability of value that is
associated with th ?fixedprice gold standard, and also obtain the capabilit; for automatic accommodation to long
term changes in the free market price of gold. In a sense,
w e obtain the best advantages of each system while
avoiding the worst disadvantages of both.

To: Ralph Korp
From: Weston I. Van Buren
Department of the Treasury
4112 - D Green Ave.
15th and Pennsylvania Ave., N.W.
Los Alamitos, CA. 90720
Washington. D.C. 20220
November 18, 1981
(For submission to the United States Gold Commission at its December V, , 1-C1 i. .tin-)
Thank you very much for yeur invitation to submit written
testimony for consideration by the U. S. Gold Commission.
I have read the minutes of the second meeting of the Commission containing the comments by members of the Commission. None
©f them addressed the issue ©f CONSTITUTIONALITY regarding the
laws under which the present U.S. monetary system ©perates. A
brief look seems appropriate.
a) Article I., Section 8 of the Constitution of the United
States (ConUSA hereafter for brevity) says:
"The Congress shall have Power...To coin Money
(and to) regulate the Value thereof..."
b) ConUSA grants NO POWER WHATSOEVER for any branch of the
U.S. Government to PRINT money ©r to create money in any
manner whatsoever (electronically, by boekkeeping entry,
by creation of bank checking account balances in exchange
for promisory notes, by use of plastic credit cards)
other than COINING IT.
a) Although ConUSA did not specify in Article I, Section 8
the composition of the coins which the Congress was empowered to "coin", ConUSA did indeed imply in Article I,
Section 10 that such coins were to be composed exclusively
of gold or silver. ("No State shall...coin Money (or)
make any Thing but gold and silver Coin a Tender in Payment of Debts...")
b) It seems (t© this writer, at least) that if .ConUSA had
authorized the national government to create non-specie
money (a view widely held among Commission members in
1981), such non-specie money could not be used in the
several states as "Tender in Payment of Debts" because
of the prohibition in Article I, Section 10.
a) Article I, Section 10 implies that states may make legal
tender laws so long as such laws DO NOT "make any Thing
but gold and silver Coin a Tender in Payment ©f Debts."
b) CenUSA makes NO grant of power to the Congress to enact
any legal tender laws. The powers granted to the Congress by ConUSA are carefully enumerated in Article I,
Section 8, They do NOT include any mention of legal
tender. Therefore such powers are DENIED to the Congress.
(Bill of Rights: Article X: "The powers not delegated
io the United States by the Constitution, nor prohibited
by it to the States, are reserved to the States respectively, or to the people.")
c) I am aware ©f the decision of the United States Supreme
Court in the "Legal Tender Case" (Juilliard v. Greenman, N.Y. 1884, 4 S. Ct. 122, 110 U. S. 446, 28 Law. Ed.
204.) The Court said: "The several states are prohibited
from making anything but gold and silver coin a tender in
payment of debts, but no intention can be inferred from
this (underscoring by WIVB) to deny to Congress this
power." The denial of this power to the Congress is to
be found in Bill of Rights, Article X and by the absence
this, in
18th day
of such
grant on
of power
I, of
8 and1981
in all
other sections of ConUSA.
This court decision and its
Weston I. Van Buren
^ Judiciary
% ^ 8 has
^ been
a party California
to the debauchery of the U.S. monetary system.
at Los Alamitos,

Edited by

Ernest P. Welker

a mi llTiiT |



Published by
Great Barrington, Massachusetts

Enslavement by Inflating
Golden Opportunity


Primitive Markets
Gold as a Medium of Exchange
Commercial Banking
Intermarket Trading
Savings Deposits
England's Early Experience
America's Early Experience


The Gold Standard
Demonetization of the Dollar
Why Gold Will Win


"Inflation," Money, and Prices
The U.S. Monetary System
Creating Inflationary Purchasing Media
Inflating as a Policy Goal
The Postwar to the Present


Price Stability as the Goal
Money and Credit: Use and Abuse


Problems of Traditional Investments
Worse Things to Come?
Long-Term Stability, Short-Term Volatility
Failure of the Greatest Bear Raid in History
Recession and the Price of Gold
Is Paper Preferable?


Vol. XXI No. 9 September 1981

Economic Education Bulletin (ISSN 0424-2769) (USPS 167060) is published once a month
at Great Barrington, Massachusetts, by American Institute for Economic Research, a scientific and
educational organization with no stockholders, chartered under Chapter 180 of the General Laws
of Massachusetts. Second class postage paid at Great Barrington, Massachusetts. Printed in the
United States of America. Subscription: $10 per year.

P E R H A P S your idea of slavery includes the
picture of m e n chained to the rowing
benches of medieval galleys or of humans
bought and sold like dogs, horses, and cattle.
These, indeed, represent types of slavery.
Consider for a m o m e n t , however, the fundamental aspect or purpose of slavery, and other
types of slavery quickly become apparent. The fundamental economic aspect of the master-slave relationship is that the master forceably acquires
control over whatever the slave produces in excess
of that portion of the slave's product needed to
sustain him and to reproduce his kind.
In this light, the socialist scheme of making citizens subservient to those controlling the State, as
was established in Russia and extended elsewhere,
simply is another form of slavery. The same is true
for societies based on classes of people in which
some individuals are given the hereditary right to
exclude from their vast estates any persons w h o
would not pay extortionate rents or taxes, because
the general population then has the choice of
starving or paying (slavery).
Another type of slavery n o w is being imposed in
the United States and m u c h of the rest of the
"free" world. This n e w form of slavery is achieved
quietly and efficiently by the subtle process of inflating.
W e have estimated the extent to which the surplus product of Americans has been taken from
them by those responsible for inflating. Since the
Great Depression ended about 4 0 years ago, more
than $3 trillion of the savings of Americans has
been embezzled by inflating.
This estimate is shown in Table 1. Column 2 of
that table shows the annual amounts saved in the
eight principal types of fixed-dollar savings and investments held by the millions of Americans.* T h e
amounts in Column 2 are expressed in then-current
dollars. However, dollars invested in previous years
had greater purchasing power than do current dollars because inflating has raised general prices and
has depreciated the value of dollars. T h e relative
purchasing power of the dollar for the years involved is shown in C o l u m n 3. C o l u m n 4 shows the
amount of current dollars required to equal the

purchasing power of savings shown in Column 2.
The excess of Column 4 over Column 2 is shown in
Column 5 and is the amount of savings expressed
in the purchasing power of current dollars taken by
the beneficiaries of inflating.
As the reader can see, more than $3 trillion has
been embezzled from Americans w h o have saved in
traditional, fixed-dollar forms of investment since
1939. During that period, Americans thought they
were adding about $7 trillion (expressed in today's
dollars) to their wealth, but in fact one-half of that
hard-earned surplus product no longer is theirs. It
has been taken from them — as surely as masters have
taken the surplus product of slaves for centuries.


Table 1
(Billions of Dollars)


Loss of
Purchasing Expressed in Real Wealth
in Today's
Power of
Today 'i
86 7

Year Then-Current






*The eight forms are savings and time deposits; investments in life insurance, private pensions, and annuities;
trust funds; U.S. Government bonds; bonds of states and
municipalities; bonds of corporations; currency and checkable balances; and mortgages.

* At end.
December 1939 dollar after
t Midveairfigurescompared with the

1939; December 1980 = 16.2.


The n e w type of slavery m a y not survive as long
as have earlier types; however, there is no present
reason to believe that the life cycle of the inflatingembezzling-enslaving syndrome must be less than
several decades. In France, the process has been
continued since 1914 with no indication of an
early end. O n the other hand, not until the current
experience has the world been without a reliable
monetary and accounting unit. It is at this time —
with millions of currency-denominated contracts,
implied and written, based on the expectation of
performance — that the complex social order most
requires such a unit.
Ending the inflating-embezzling-enslaving process
any time soon seems nearly impossible. Western
civilization has become "locked in" to clearly discernible retrogression. Instead of individuals seeking to improve their well-being through hard work,
thrift, and sound investment, they increasingly
have made forceful demands for huge pay increases,
extensive use of debt for immediate satisfaction,
and wild commitments to rampant speculation.
These changes signal the replacement of cooperative
efforts a m o n g various groups of society with the
adversary relationships characteristic of today's
special-interest groups, of funds directed from real
investment to paper investment, and from sustainable long-term economic expansion to inflationary
b o o m s and busts with long-term stagnation.
The appearance of the aforementioned conditions in the United States during recent years baffles most analysts. It should not. Similar symptoms
of social breakdown have appeared wherever prolonged or rapid inflating has undermined the mone-

tary unit of account and has enslaved those w h o
continued formerly sound traditional practices of
working and saving.
Today's economic problems were predictable;
w e predicted them repeatedly during the past
nearly 5 decades. W e n o w predict that these
harmful trends will continue to worsen as long as
policies promoting inflating are followed.
W e have no "crystal ball" that enables us to
foretell these things; the revealing relationships are
in the historical record for all to see w h o will take
the time to look. That these problems have not occurred in the United States before is not attributable to any special immunity of our economy but
rather to the U.S. monetary system formerly based
on a gold-redeemable currency — a system n o w

W e invite your attention to Chart 1 and Chart 2,
for they reveal more clearly than could a few
words w h y gold for centuries has been the road to
economic freedom for individuals and the implacable enemy of would-be monetary masters.
These charts show the purchasing power (exchange value) of gold and the U.S. dollar (Chart 1)
and of gold and the British pound (Chart 2) in
terms of other commodities for hundreds of years.
For m a n y of those years, the U.S. dollar and the
British pound were, in fact, specified amounts of
gold; consequently, the exchange values of gold
and of the currencies in terms oi other things fluctuated together during those periods. But even before this century began, w h e n there was a diver-

Chart 1
PURCHASING P O W E R OF G O L D A N D OF T H E D O L L A R , 1792-1981






^f HJ


V /v*\J





I V/ '
/ !

^ ^ 7 !e^<v











Note: O n April 2, 1792, Congress established the dollar (then legally equivalent to 24.75 grains of pure gold) as the Nation's monetary
unit. The changes in purchasing power shown in the chart were calculated from annual averages of the wholesale price index (source: U.S.
Department of Labor) and the annual averages of the exchange ratio of dollars for gold.


Chart 2



1 1

,. y-'v./UN




M !











J, lOUU-I!;





i — '





vlJ ! ^^


T~— ! —



|\ |""'" 1





*No data are available for the wholesale price index in Great Britain for the 1939-46 period. Source: Through 1976 from The Golden
Constant by Roy W. Jastram. From 1977, our estimates based on procedure described in main source. Data through June for 1981.

gence between the two because of temporary abandonment of the gold standard or of adjustments in
the gold content of the currency, gold maintained
its exchange value better than did either of the currencies.
Since the 1930's, there simply has been "no
contest." F r o m the time in the mid-1930's that
inflate-for-prosperity policies were adopted until
the late 1960's, the exchange value of gold
decreased in parallel with that of the dollar and
the pound (to a lesser degree), but that was
because monetary officials struggled to their
utmost to keep the exchange value of gold
depressed so that their corrupting of the currencies would not b e c o m e apparent.
The long-term exchange relationship between
gold and other things could not be suppressed indefinitely. In the late 1940's and again during the
1960's, the British pound was devalued. The U.S.
dollar effectively was devalued in terms of gold in
1968 w h e n the "two-tier" gold market was established - one tier for private transactions at market
determined prices and one tier for official transactions at the "price" of $35 per ounce. Even that artificial arrangement could not be m a d e to work,
and in August 1971, then-President Nixon ended
all gold redeemability of the dollar. Shortly thereafter the exchange value of gold shot up to the upper region of its historical range both in the United
States and Britain.
Neither the dollar nor the pound experienced a

similar increase in its exchange value. T o the contrary, since 1971 the purchasing power of these
paper currencies and all others has decreased markedly, to values well below the former lows of the
historical ranges. This is a n e w situation in the
United States; therefore, Americans in general have
not yet recognized it and are not prepared to cope
with it.
Ignorance of the useful role of gold is the ally of
the masters of inflating — the leading politicians
and their collaborators, the central bankers and
other leading bankers. This unholy alliance someh o w must maintain public acceptance of their
paper currencies and credit in order to continue
the inflating-embezzling-enslaving process and to
keep themselves in power. Essential to the credibility of paper is the continuing denigration of
gold, for once the relationships reflected in Charts
1 and 2 are widely known, public confidence in
paper currencies will collapse.
The remainder of this booklet describes the fundamental monetary role of gold, the means by
which the United States has come to its current
plight, the outlook for a correction of the situation, and the role of gold as a protector of real
wealth during times such as these. W e hope that
this bulletin will push back for some Americans the
curtain of ignorance hiding the inflating-embezzling-enslaving process and thereby to deny to the
would-be masters the surplus product (the savings)
of an increasing number of free Americans.

first thought, one might believe that
money-credit matters are too complicated
for all but a few exceptional individuals to
understand. However, commercial banking is the
outcome of an evolutionary process that is simple
w h e n viewed one step at a time as it must have occurred but that is not so readily understood w h e n
one looks only at the result to date. S o m e words
f>ertaining to banking have been in c o m m o n use so
ong that m a n y people do not k n o w their original
and more technical referents.
In the following paragraphs, the evolution of
commercial banking is described step by step. N o
attempt is m a d e to date each successive step in the
evolutionary process, although some dates are
given. M a n y of the original dates for successive
steps are lost in the haze of man's unwritten history; and some of the successive steps have recurred in recent decades and m a y be expected to
recur again wherever formerly well-developed
money-credit processes have been destroyed.

to offer in exchange. T h e processor of wheat delivered wheat to the warehouse and took in exchange a claim check or warehouse receipt for his
wheat. Similarly, the processors of skins and gold
took warehouse receipts from the merchants specializing in skins and gold, respectively.
Those w h o thus had obtained claim checks on
wheat, skins, and gold then exchanged the claim
checks a m o n g themselves until they had claims on
the things they wanted. W h e n each had claim
checks for whatever he wanted, he went to the appropriate merchant's warehouse and obtained
wheat, or skins, or gold in exchange for the respective claim checks.
The earlier claim checks for wheat presumably

W e begin with a primitive society where exchanges were simple barter. The grower of wheat
exchanged it directly for skins obtained by the tribal hunters, for meat obtained both by the hunters
and by those w h o had cattle, and for gold obtained
in crude form by some members of the tribe from
alluvial deposits. W h y gold was generally desired,
other than for the fact that it was used for ornaments and because it could be exchanged again for
other things desired, need not concern us at this
A s the tribe increased in number and the exchanges to be made increased greatly, a time came
w h e n the bartering was concentrated, for the most
part, at a convenient meeting place. Today w e
should call that meeting place a market or shopping center.
O f course, m a n y other things than those mentioned were exchanged in the markets, but the
principles w e are seeking to understand can be illustrated by discussing only a few. W e choose to
focus attention on wheat, beaver skins, and gold.
A s trading increased, the time came when some
individuals became specialists in marketing. O n e
chose to deal in wheat, another in beaver skins, and
another in gold. Once these specialists had established themselves, m a n y of those bringing in things
to barter discovered a process more convenient
than carrying on their backs the things they wished

Similar warehouse receipts or claim checks were
written by the merchants handling skins and gold.
In some instances the claim checks were not redeemable by the bearer unless the claim check had
been endorsed or signed over to him by the original
depositor of the wheat, but these details need not
concern us.



This certifies that John D o e has placed in
m y warehouse 35 bushels of wheat, which I
promise to deliver to the bearer of this claim
check on demand.
Arthur Smith, Wheat Merchant

As the market increased in size and activity, m e n
found to an increasing extent that gold or claim
checks on gold were a convenient medium of exchange. O n more and more occasions those w h o
had gold or claim checks on gold found that they
could obtain what they wanted with the least difficulty in persuading others to accept what they had
to offer. Each seller saw for himself h o w readily he
could buy other things he might want with the
gold and h o w conveniently he could hold gold until he might wish to buy other things.
The properties of gold no doubt were significant
in making gold a preferred m e d i u m of exchange.
Gold is both readily and highly divisible, so that
amounts of gold can be set aside to represent virtually any exchange value. Gold is nearly indestructible; it does not rot or rust. Thus, it can be stored
in any environment for however long one would
care to store it. Gold is relatively scarce and therefore has a high exchange value per unit, which
means that small quantities equal the exchange

value of large quantities of m a n y other things.
Gold has a comparatively stable exchange value certainly in the long run, but even in the short run
compared with the exchange values of other things
because of the major investment required to add to
gold production capacity.
A s a result of these characteristics, gold and
claims on gold increasingly were used in effecting
exchanges, and m e n developed the habit of estimating the exchange value of other things in
amounts of gold. Thus, prices, instead of being
thought of and talked about in such ways as, "two
bushels of wheat equal in exchange value one beaver skin," came to be thought of and talked about
in such ways as, "one bushel of wheat equals one
thirty-fifth of an ounce of gold, and one beaver
skin equals two thirty-fifths of an ounce of gold
(also the exchange value of two bushels of
At about this stage in the development of banking, the gold merchants, or goldsmiths as they were
called, saw the possibility of greatly simplifying the
marketing and exchange processes. A goldsmith
suggested to a wheat merchant that more growers
of wheat would bring their wheat to his warehouse
if the wheat merchant would give them in exchange claim checks on gold instead of claim
checks on wheat. W h e n the merchant replied that
he had neither gold nor claim checks on gold to offer the wheat growers, the goldsmith explained
that the wheat merchant could borrow from the
gold merchant claim checks on gold until such time
as the wheat merchant might sell the wheat.
The wheat merchant decided to experiment as
suggested. W h e n the next wheat grower arrived
with a load of wheat, the merchant offered him a
choice between claim checks on wheat and claim
checks on gold. W h e n the wheat grower said he
preferred claim checks on gold, the merchant
stepped next door and gave the goldsmith his note
promising to repay a loan of claim checks on gold
at a future date. Whereupon the goldsmith gave the
merchant claim checks on gold, which were delivered to the wheat grower in exchange for the
wheat he had delivered. The wheat merchant's
promissory note might have read like this:
This is to certify that I have received and
n o w offer for sale in m y warehouse 100 bushels of wheat for which this note is a claim
check. I promise to return to the goldsmith
100 claim checks for one thirty-fifth of an
ounce of gold each w h e n the wheat is sold.
If I fail to return all the claim checks within
30 days, the goldsmith m a y claim the wheat
not yet sold.
Arthur Smith, Wheat Merchant

Each of the 100 claim checks on gold issued by
the goldsmith read like this:
I promise to pay to the bearer on demand
one thirty-fifth of an ounce of gold.
William James, Goldsmith
Shortly thereafter, the goldsmith made an interesting discovery. At first he had issued claim
checks on gold totaling no more than the gold in
his possession. His discovery was that few people
w h o obtained his claim checks ever demanded
gold. Most of them used the claim checks on gold
as purchasing media to buy other things, and the
sellers returned the claim checks thus obtained to
the goldsmith as agreed in order to repay their borrowings. Occasionally, some individual demanded
gold, but even that gold usually returned to the
goldsmith within a short time, for safekeeping if
for no other reason.

The m u c h greater convenience to all concerned
provided by the claim checks, especially those on
gold, facilitated great increases in trade. Traders
simply could trade m u c h more easily. Soon the
goldsmith was being urged to issue claim checks on
gold for greater amounts than the gold he had. By
that time, he knew from experience that few w h o
had claim checks would want gold if other things
were available for purchase in the markets. Consequently, the goldsmith reasoned thus:
1. W h e n I received gold from those w h o deposited it with m e , I gave them claim checks. If I
n o w issue more claim checks on the same gold, I
a. First, make sure that these additional claim
checks do not exceed but in effect represent the
gold-exchange value (price measured in gold) of
other things being offered in the markets; otherwise, the people w h o have m y claim checks on gold
m a y buy all of the other things for sale in the markets and still have enough claim checks left to dem a n d more gold than I have.
b. Second, in order that there be no mistake,
arrange that m y loans of additional claim checks
on gold are secured by bills of lading that prove
things are offered in the markets or by promissory
notes of borrowers w h o assure m e that they are offering in the markets additional things at least
equal in gold-exchange value to the claim checks I
lend them.
c. Third, I must make sure that the merchants repay their loans promptly by returning to
m e the claim checks on gold that they receive
w h e n they sell wheat, skins, etc. Thus I shall be
sure that there are not more claim checks outstanding than the total gold-exchange value of things left

in the marketplace including m y gold. Obviously, I
must lend m y claim checks only for short periods
and must insist that a merchant promptly repay m e
whenever he sells the wheat or other thing that,
either actually or in effect, serves as security for his
promissory notes (and is represented by the claim
checks he borrowed from m e ) . Only if some manufacturer or merchant were placing in the market
additional items after the first were sold would I
renew a loan instead of requiring it to be repaid.
2. The goldsmith might also have reasoned:
S o m e people m a y think that I have issued too
m u c h purchasing media, more claim checks on gold
than I can redeem. But if the claim checks on gold
used to demand gold from m e exceed the gold I actually have, there would be a relative shortage of
claim checks available for buying other things in
the markets; prices (the gold-exchange values) of
m a n y things would fall, and people w h o had withdrawn gold temporarily would be induced to spend
it for the things available at bargain prices in the
markets. The sellers then would repay their borrowings from m e by depositing gold as well as
claim checks on gold, and m y gold holdings (reserves) would be restored. In a short time, there
would be no claim checks on gold outstanding, or
at least no more than I could readily redeem with
gold if necessary.
3. Clearly, I must be careful not to overestimate
the gold-exchange values (prices) of the things being offered on the markets, and I must be sure to
issue claims on gold only to represent the total
gold-exchange value of things offered on the markets plus m y gold. Because m y gold always is available to anyone w h o demands it by presenting claim
checks, m y gold also is on the markets. But I must
be careful to make sure that the total of outstanding claim checks that I have issued never exceeds
the gold-exchange value of all things offered in the
markets including my gold.
Once the goldsmith initiated operations as just
described, sound commercial banking was underway.
In a market area not far from the first primitive
market area described, the cost of producing wheat
was less because the valley land was richer. O n the
other hand, beaver skins were available in larger
quantity with less effort in the first market area because of the m a n y hillside waterways where beaver
could be trapped. In the second market area the
exchange value of wheat for gold decreased (the
price of wheat declined), and in the first market
area the price of beaver skins was lower than it was
in the second market.
Even in the days of simple barter, exchange

values of wheat and skins in the two markets had
differed. But with regular use of gold or claims on
gold as purchasing media, the difference in exchange ratios (price difference) became more apparent and the advantages of regular trade between
the two areas became obvious. Thus inter-area
commerce increased to the mutual advantage of all
At first the goldsmiths wondered whether or not
the supply of gold would be adequate for the increasing number of exchanges and growing volume
of commercial banking for which m a n y more claim
checks on gold were needed. But as the goldsmiths
became better known, more gold was brought to
them for safekeeping. In addition, producers took
advantage of new inventions stimulated by the general advance of a trading civilization. Crude pumps
were developed to provide water for hydraulic
washing of gravel, the new wheeled carts lessened
costs of hauling supplies, etc., and other costs of
producing gold were similarly lessened. Thus gold
production was stimulated.
In addition to their lending to merchants, which
was still continued, the goldsmiths began creating
and lending claim checks on gold to traders shipping from one market to another and to processors
of wheat and skins, such as the millers and furriers.
For a time the goldsmiths were careful to apply the
basic principle of commercial banking, i.e., that
each new issue of claim checks on gold created for
a borrower should, in effect, represent either additional gold received by the goldsmiths or other
things being offered in the markets.
In time some of the people employed by manufacturers, merchants, and traders found that their
wages and salaries would buy more than their immediate needs for consumption. Consequently,
they began to save and invest part of their incomes.
At first, they invested directly in new houses to
rent and in other productive things, but later some
of them realized that the goldsmiths were in a position to make such investments, safeguard the documents concerned in their vaults, and exercise continuing supervision. By mutual arrangement the
goldsmiths then undertook to receive such savings
and invest them. A saver would bring part of his
salary each month in the form of claim checks on
gold to the goldsmith. A record of this deposit was
made by the latter; this record was k n o w n as a
savings account or time deposit.
O f course, the purchasing media in the form of
claim checks received by the goldsmiths from
savers were already in existence. Those claim
checks had been created and issued originally by
the goldsmiths as commercial loans were made, and

some individuals w h o had received the claim
checks from the merchants and other borrowers
chose not to buy some of the things in the market
but to deposit some of their claim checks at the
goldsmith's. Consequently, things that those claim
checks represented still were for sale in the markets, and those claim checks, although the same in
all outward appearance as other claim checks,
could be loaned or invested by the goldsmiths in
other than commercial loans. A s far as those claim
checks were concerned, the goldsmiths could safely
disregard the commercial-loan principle, because
those claim checks had been issued in the first
place to represent things being offered and still
available in the markets. O f course, the goldsmiths
promptly invested or loaned those claim checks,
and anyone w h o borrowed them from the goldsmiths could find things of equivalent value already
in the markets for him to buy.
H o w did the goldsmiths not become confused
by making two types of loans with similar claim
checks? The goldsmiths kept an exact record of
the savings deposited with them; consequently,
they always k n e w precisely h o w m u c h they could
invest in bonds, mortgages, or other loans that
did not involve simultaneous offerings of things
in the markets.
Thus far, the possibility of departure from the
basic principle of sound commercial banking has
not been described in detail. At least a summary
description is necessary.
During a period of peace and general prosperity
when markets were functioning well and the goldsmiths were actively conducting their usual business of both commercial lending and investing
savings entrusted to them, an unusual event occurred. A would-be borrower w h o had nothing to
offer on the market desired one of the n e w chariots then becoming fashionable. H e asked his goldsmith friend for a loan, but was at first told, "I a m
sorry to disappoint you, but m y records show that
all the savings deposited with m e already have been
invested. A s you can understand, a loan to you for
the purpose you have indicated would not be a
commercial loan because you would not be simultaneously offering anything on the market from
which the proceeds of sale would repay the loan.
Therefore, I should not create and issue n e w claim
checks on gold in order to lend them to you. Until
I receive more savings, I should not lend to you for
such a purpose." (Savings are brought to the goldsmiths in the form of claim checks that the owners
do not wish to spend but are willing to have others
spend if they will repay later.)
The would-be borrower, a long-established cus-

tomer of the goldsmith's, had his reply ready: "I
realize that what I a m asking is unusual, but what
harm can result? If you fear for the safety of the
loan, I can give you a chattel mortgage on the chariot I buy; it will serve as security for the loan. If I
fail to repay when the note falls due, you can repossess the chariot and reoffer it on the market
yourself. Moreover, I a m willing to pay a high rate
of interest. Y o u will be well protected and can
profit by the arrangement."
N o w the goldsmith in this instance, although by
no means stupid, was not well-informed on the
principles of sound commercial banking. H e had
fallen into the habit of thinking more about the security for his loans than of their purpose. Finally,
he had had no experience with and could not foresee the consequences of departing from the basic
principle of sound commercial banking. H e therefore issued some additional claim checks on gold
and loaned them to the persistent borrower. Thus
was inflating begun.
As soon as the borrower had the claim checks in
his hands he rushed to the market and bought one
of the few chariots then available. Within the next
several days, other individuals w h o in the usual
course of events would have purchased chariots
likewise sought to buy. The chariot merchant realized that demand for his products was exceeding
the supply; his haggling over prices altered in tone
with the result that chariots soon commanded
higher prices.
The chariot merchant then dispatched a letter
by mounted messenger to the manufacturer of
chariots ordering an additional number for early
delivery. The manufacturer was so pleased with
the increasing evidence that his products were
finding favor in the seemingly more affluent
society that he decided to push ahead with plans
long under consideration for expansion of his
manufacturing facilities. H e went to the
goldsmith and proposed to borrow on a large
scale by giving either his note or bond (another
form of promissory note) in which the goldsmith
could invest savings at his disposal.
The goldsmith's reply was, "I can see h o w advantageous your early expansion seems to be; but,
unfortunately, I have already invested all the
savings at m y disposal. In fact, m y noncommercial,
investment-type assets (holdings of bonds, mortgage notes, etc.) already exceed the savings heretofore deposited with m e plus m y capital funds. Y o u
will have to wait until additional savings are
brought to m e for investment."
But the chariot manufacturer was eager to proceed; consequently he urged, "Your loan will be
well secured. Within a year at most, I shall be
producing additional chariots from the new plant,

and in 8 or 10 years your loan can be repaid in
full. Surely, what I a m proposing is a sound
Thus the goldsmith was finally persuaded to create more claim checks on gold and lend them to
the chariot manufacturer. The latter then started
bidding for labor and construction materials in order to construct his new plant. O f course, the new
purchasing media thus made available to purchase
things in the markets brought the total of purchasing media in use to an excess of the gold-exchange
value of things then being offered in the markets
for sale. Inevitably, competitive bidding forced
prices and wages up. In this community a period of
b o o m prosperity began. All makers of things found
demand in the marketplace suddenly increased; all
tried to increase their plants; and all bid for scarce
materials and labor at higher and higher prices. The
goldsmiths were urged to make more and more
noncommercial loans at higher and higher rates of
interest, and the more they disregarded the "oldfogey" principles of sound commercial banking,
the more their new-found "wisdom" seemed justified by the turn of events.
At least, such were the effects at first. Then subtle changes in past procedures began to appear.
Merchants in this market area discovered that they
could buy at lower prices in other market areas.
First wheat, then skins, and finally even chariots
were being brought in from adjacent market areas
in large quantities. The local merchants of course
had to pay for the things thus brought in, and they
gave the claim checks on gold issued by the local
Then the goldsmiths made an important discovery. Formerly, few of the claim checks they issued
were presented as demands for gold. Most claim
checks had returned to the goldsmiths as merchants repaid loans and then were re-issued for new
commercial loans. Almost no one in the local market had seemed to want gold. However, the goldsmiths in other markets (Communities B, C, etc.)
had no use for the claim checks issued by goldsmiths in the market where prices (exchange values
of other things for gold) had increased so greatly;
consequently, the claim checks were presented as
demand claims for the gold held by goldsmiths in
Community A.
At first, the goldsmiths in Community A were
not concerned about the outflow of gold from
their vaults. Occasionally in the past, claim checks
had been presented for their gold, and they had encountered no difficulty in satisfying the desires of
those w h o , for one reason or another, wished to
hold gold. In this instance, however, the demand
for the goldsmiths' gold persisted. Soon the gold
left in their vaults was far below the amounts that

they formerly had considered reasonable in relation to claim checks outstanding.
At this stage, the goldsmiths in Community A
became alarmed. Unless some w a y could be found
to alleviate their situation, they soon would be
bankrupt. First, they turned to the borrowers w h o
were building new factories or w h o had bought
new chariots and urged them to repay their borrowings. But the manufacturers told the goldsmiths, "Surely, you remember that w e have
bought bricks and mortar with the claim checks
you loaned to us. Someone else has those claim
checks now, and w e shall not be able to repay for a
few more years." A n d those w h o had borrowed to
buy chariots said, " W e simply cannot repay the
claim checks w e borrowed until our future earnings
are received in the months ahead."
Finally, in desperation, the goldsmiths turned to
the merchants and said, " W e cannot lend you more
claim checks to buy more goods; w e must have repayment of our outstanding loans to you that soon
will be due." Then the rush to liquidate began.
Merchants marked d o w n prices in order to persuade more shoppers to buy with claim checks that
could be used to repay loans. Merchants canceled
orders for things from manufacturers in order to
avoid becoming obligated for incoming goods.
Manufacturers reduced production, and the number of unemployed in Community A greatly increased.
As prices generally fell, prices of secondhand
chariots declined rapidly. Soon some of the goldsmiths in Community A realized that their loans secured by chariots were "frozen" because the borrowers were unemployed and the chariots involved
were worth m u c h less than the unpaid loans. These
goldsmiths repossessed chariots and sold them at
auctions, but the proceeds of such sales were insufficient to cover the unpaid loans. S o m e of the goldsmiths then realized that their o w n capital, and
more, had been lost; they too were bankrupt and
were forced to close their doors to the dismay of
m a n y savings depositors and of others w h o still
held the claim checks on gold issued by those particular goldsmiths.
As it happened, one national economy where
the goldsmiths functioned most effectively was
England of the 19th century. In the early 1800's
the English goldsmiths, w h o by then were called
bankers, developed a modification of the claimcheck procedures described above. English merchants found that handling claim checks was awkward and that a simpler procedure was to have the

banker hold the claim checks and permit the borrowing merchant to transfer them from his account
to others in whatever amounts he wished by written orders directing such transfers.
W h e n merchants or others brought gold or claim
checks on gold to the bank, the English banker
wrote a credit on his books, which he called the depositor's "checking account." A depositor w h o
held title to such a demand deposit or checking account then could write checks (written instructions
to the bankers) transferring any portion or all of
the gold thus represented to others.
In applying the commercial banking principle, a
banker accepted borrowers' promissory notes, but
instead of creating claim checks on gold for the
borrowers to use, he authorized the borrowers to
write checks not only for the amounts already in
their checking accounts but also for the additional
amount of the loan. The excess checking account
purchasing media thus authorized were called
"overdrafts." A n English commercial banker thus
had a record showing him continuously the total of
overdrafts on accounts in his bank. As the total of
overdrafts increased, he began to be more cautious
about making loans. Moreover, the bookkeeping
record of overdrafts was a continuous reminder to
him that his loans resulting in overdrafts should be
short-term, strictly commercial loans based on
goods being offered in the markets.
Somewhat complicating the situation was the
fact that m a n y exchanges in the markets still involved the use of claim checks on gold instead of
checks drawn on checking accounts. The claim
checks on gold issued by a bank finally were given
the name "banknotes," because they were the
bank's promises to pay gold on demand.
Although the basic principles of sound commercial banking were being applied with increasing
success in England in the early 1800's, these
principles were not so widely understood in
the United States. Hundreds of banks were started
in the various States of the Union by individuals
who knew nothing of banking beyond the fact that
they wanted to participate in that mysteriously
profitable business. These amateur goldsmiths were
easily induced to provide claim checks on gold
(their banknotes) to borrowers w h o wanted to
speculate in land, then in the railroads, sometimes
in almost anything. Moreover, unlike the English
bankers w h o differentiated between overdrafts and
the original deposits of gold and claim checks on
gold by their customers, the American bankers
used the name, "demand deposits," for both.
When they accepted a borrower's promissory note
and created claims on gold for him, they either

issued new claim checks called banknotes, or added
the amount to his previously existing checking account, as the borrower desired. Except for technical legal requirements as to banknotes (which
need not concern us although important to students of money and banking), the American
bankers lacked the constant reminder to be cautious and to adhere to sound commercial banking
that the English bankers had in their records of
The inevitable result of such banking was a long
series of minor booms and recessions, with occasional great booms (whenever all or most of the
bankers became especially optimistic) followed by
severe depressions. Efforts were made by both the
Federal and the State governments to remedy the
situation. Almost every conceivable remedy apparently was tried, even the adoption of sound commercial banking for a brief period.
One of the first methods chosen for improving
the functioning of the commercial banks was to
limit the amount of claim checks on gold that they
could legally issue in relation to their actual holdings of gold. Thus were initiated the legal reserve
requirements that have become characteristic of
American banking.
The reason for adopting such a crude rule-ofthumb procedure is not difficult to understand.
Evidently, the hundreds of banks that failed (many
thousands as the decades passed) had overexpanded; therefore, w h y not limit the creation of claim
checks (whether banknotes or checking accounts)
to a smaller multiple of a bank's gold? This procedure did work, in a manner of speaking; at least, it
tended to prevent every major b o o m from getting
as completely out of control as had the tulip speculation in Holland, or John Law's Mississippi Bubble
inflating in France, or the French inflating of the
assignats, or the Rhode Island paper-money inflating, or the Continental currency inflating of the
late 1700's.
Another means by which better banking was
sought was the chartering of "national banks,"
which began in 1863. By establishing certain safeguards, such as requiring deposits of Government
bonds to secure note issues, the credit "rope" with
which the Nation's bankers periodically "hanged"
themselves and nearly everyone else was somewhat
At long last, after a particularly disastrous experience with an inflationary b o o m and panic resulting from ignoring the principles of sound commercial banking, a Monetary Commission was formed.
In the course of an investigation extending over 5
years early in the 1900's, the Commission discovered the principles that had been applied in England
for nearly a century.

Following the recommendations of the M o n e tary Commission, the Federal Reserve System was
established in 1914. It consisted of 12 Federal Reserve banks and thousands of m e m b e r banks. Although the resulting money-credit arrangements included m a n y "hangovers" from earlier procedures,
the n e w system at least recognized and attempted

to apply the principles of sound commercial banking. In the 3 years from 1914 until the United
States entered World War I, the bankers of the Nation came as near as they ever have to an understanding and application of those principles. The
evolution of U.S. banking practices since then is
covered in Chapter IV.


A L T H O U G H knowledge of man's first use of
gold is lost in antiquity, w e k n o w that long
ago primitive peoples made ornaments of
gold, and the display of gold possessions for personal adornment and in other ways early became a
mark of social status. Magnificent gold vessels
found in the Middle East were made about 3500
B.C., and the skilled craftsmanship evident in these
objects suggests that gold then had been in use for
several hundred years, at least.
Ever since these early times gold has been one
of man's most prized possessions. Monarchs
waged wars in the hope of plundering treasures of
gold from their conquered rivals; kings and
princes sent expeditions to u n k n o w n portions of
the earth in search of new sources of gold; pirates
and privateers willingly risked their lives to obtain
the yellow metal; and thousands of people have
joined the "gold rush" to any place on earth that
held either an actual or rumored prospect for
finding gold. During most of the Middle Ages the
practice of alchemy flourished primarily because
the alchemists hoped s o m e h o w to find a means
for converting less precious metals or other
elements into gold.
Because of its scarcity, permanent beauty, and
ready workability, gold is one of the most treasured raw materials used by artisans and craftsmen.
Perhaps less readily understood are the reasons
w h y gold has long been and probably will continue
to be an important monetary commodity.
Probably the most impelling reason for using
gold as a m e d i u m of exchange is that for centuries
m e n have been willing to accept gold in exchange
for other possessions or for the products of their
labor. This universal and age-old willingness of individuals and nations to accept gold in payment for
goods sold or services rendered is based, of course,
on the fact that the recipient has confidence in
gold as a permanently valuable end exchangeable
commodity, the value of which is recognized in
any area of the world. Gold has the unique distinction of never having become unwanted as a medi-

u m of exchange during the m a n y centuries of recorded history.
Contrary to the history of gold is the history of
paper currencies, which is filled with instances of
paper currencies having become worthless and disappearing from the face of the earth. In the 18th
century, France had two such experiences — the
Mississippi Bubble early in that century and the assignat late in the 1700's. Within the United States,
both the Continental currency of the Revolution
and the Confederate currency of the Civil War became worthless. O f course, the German Reichsmark episode of the early 1920's is probably the
most often cited example of a paper currency rapidly being rejected by the public.
Although w e can study these currency collapses
with cool indifference at this point in time, one
must remember that w h e n a monetary system begins to break d o w n or in fact does crumble, human
beings experience m u c h suffering as economic activity slows substantially or approaches a cessation.
A well-functioning monetary system is essential for
efficient and robust economic activity — especially
is this so in modern, industrial economies. Insofar
as the monetary unit performs poorly, economic
activity will be hampered and the well-being of the
public will lag.
In spite of the manifold better performance of
gold as a monetary unit through the centuries,
monetary officials in the United States and elsewhere advocate the complete elimination of gold
from the monetary systems of the world. They assert, as did other proponents of paper monetary
units, that the use of gold as the monetary unit is a
custom that has been outmoded by changing conditions. But the use of gold as the monetary unit is
not based on fantasy or folklore, as are some customs. The long-continued use of gold for monetary
purposes is based on m u c h experience.
Because gold is scarce and because its extraction
from natural deposits requires m u c h effort in relation to the amount of gold produced, gold has a
high exchange value. Moreover, the large accumula-


I T I " ? ^ _ a g h , ° f f i c i a l m ° - ^ y stocks of
the world (over one billion ounces) are m a n y times
annual production (recently about 4 0 million
ounces annually); consequently, even quite large
variations in production cause relatively smfll
changes m the accumulated monetary stocks of
gold during short periods. This tends to stabilize a
money-credit system based on gold. Gold cannot
readily be counterfeited, and it is almost impervious to deterioration. Quite simply, there appears
to be no substance better suited for use as a monetary unit.
There are m a n y reasons w h y the use of gold in
the monetary systems of the "free" nations of
the world probably will become increasingly
important during the foreseeable future. Distrust
of "fiat" paper m o n e y cannot be prevented by
even the most powerful dictator. T h e more a
government abuses its money-credit system and
impairs the buying power of its currency through
inflating, the greater will be the demand for
"hard m o n e y " (gold), the value of which cannot
be altered by the whims of politicians or the
money managers.
A world supply of gold, the universal purchasing
medium that is acceptable to everyone almost
everywhere, greatly facilitates the conduct of international trade. Furthermore, possession of a reserve of such international m o n e y has proven to be
especially desirable for a nation during periods of
emergency. A reserve of monetary gold is as valuable as a reserve of essential raw materials because
gold can be used to buy goods, even indirectly
from a nation's enemies.
In addition to its usefulness as an international
medium of exchange, the use of gold as the basic
unit in a nation's money-credit system helps to
limit the extent to which the supply of purchasing
media might be excessively expanded by the banking system or by government action. But even if officials circumvent the limiting aspects of gold, as-

tute members of the public can protect themselves
by exchanging the paper for gold while they have
that opportunity.
Gold also introduces an element of steady expansion into the monetary system of which it is a
part. In comparison with the annual rates of increase for world production of other natural resources, the annual rate of increase in world gold
production has been remarkably steady. (See Chart
3.) During the past century, gold production has
increased at an average rate of about 2.1 percent
per year (compounded annually), and deviations
from this average rate have been confined within a
relatively narrow ranee since 1900. Moreover,
changes in the rate ot increase or decrease have
been gradual, extremes usually having been separated by periods of a decade or more.
W e are firmly convinced that a greater rather
than a lesser reliance on gold in the monetary system of the United States and other free-world nations would foster more sound economic growth
than a monetary system regulated only by government fiat. Inflating has proven to be an inevitable
accompaniment of officially managed paper m o n e y
systems, and history clearly demonstrates that inflating long continued leads to economic stagnation and financial ruin.
A monetary system is based on the gold standard when it has these characteristics:
1. The standard monetary unit is a fixed
amount of gold.
2. All domestic currency and coin are freely
exchangeable at their face value for gold, and whoever obtains gold is free to use it in any w a y he
3. There is no limit on the amount of gold
that m a y be brought to the mint for coinage.
4. Gold is full legal tender for payment of all

Chart 3
Millions of Fine Ounces



3 11111111111111111111111111 • 11111111111 • 1111 • • 1111111111111 I 111
t»11 • 1111111 • 111 •• t• 111111111111111111111111
Note: Includes estimates of production in the Soviet Union by Consolidated Gold Fields, Ltd.


ii 11 ii n u n I

5. There is no restriction on the importation
or exportation of gold.
The most important features of the gold standard, whether redemption is in gold coin or gold
bullion, are the fixed amount of gold in the monetary unit and the freedom with which gold and currency are interchangeable at the Treasury or central bank. Fixity in the amount of gold in the
monetary unit makes gold and the currency representing it an efficient medium of exchange and a
relatively stable measure and store of value. The
free interchangeability of gold and currency by citizens and foreigners alike provides an automatic
mechanism that tends to restrain unsound monetary and fiscal practices.
The essential aspect of this mechanism is the obligation of the authorities of a nation on the gold
standard to redeem with gold any of its currency
that m a y be presented for redemption. The propensities of over-optimistic commercial bankers to
issue excess, or inflationary, purchasing media, and
of monetary and government authorities to follow
policies that foster this process, have been amply
demonstrated during recent decades, particularly
in the United States. W h e n currency is redeemable
in gold, however, the process cannot continue very
long before gold begins to flow out of banks and
the Treasury. The outflow begins w h e n some citizens become alarmed about the future goldexchange value of currency and demand gold, or
w h e n foreigners w h o have accumulated excess purchasing media present them for gold. A n outflow
of gold reduces the reserves of banks and restrains
or reverses creation of excess purchasing media; it
also warns bankers and monetary and government
authorities that their practices and policies have
been unsound and must be altered to stop the outflow of gold.
Unfortunately for the citizens of the United
States, the practices of U.S. officials for m a n y decades have been to ignore such warnings and to disregard the Nation's promise to redeem paper dollars with gold.
In the early years of the present century, the
gold standard was firmly established. Gold was the
basic or standard money, and units of gold specified by fineness and weight were the accounting
units. A dollar, by statutory definition, was onetwentieth of an ounce of gold in an alloy ninetenths fine. Other leading currency units were specified similarly but were different weights. The exchange ratios between them were established by
their relative contents of pure gold.
Disregarding unimportant variations, the procedures followed were these:
1. Gold brought to the banking system was
exchanged for the coins into which it was minted

or for paper currency representing the gold. In
other words, gold bullion was sold to the banking
system for an equal value of coins or of paper currency (gold certificates).
2. The banking system routinely offered gold
in exchange for the paper currency. Consequently,
anyone w h o held paper currency or w h o had bank
deposits denominated in dollars could demand gold
from the banks; that is, anyone could buy gold at
his bank by offering paper currency or part of his
deposit in exchange.
3. Thus the banking system was in effect a
continuing market where gold was always acceptable in exchange for currency or demand deposits
and was always offered in exchange for them.
During the great inflating (creation of excess
purchasing media, i.e., d e m a n d deposits and
currency) that accompanied and immediately
followed World War I, gold appeared to be in short
supply. The m o n e y managers of those days sought
to "economize" gold by double counting it in the
banks of m u c h of the industrial world. For example, gold held in the Bank of England was
counted once as available for the reserves of banks
in England and was counted again as the reserve for
banks of other countries that held pound notes as
their reserves. This double counting, technically
named the gold-exchange standard, Facilitated the
worldwide inflating of the 1920's. The resulting
great economic distortions were liquidated in the
panic and depression of the 1930's.
S o m e observers hoped that the lessons to be
learned from the aftermath of that inflating during
the 1920's would be heeded and that a return to
the unpolluted gold standard would occur. However, m a n y leaders in politics and banking attributed to gold what in fact were the follies of men.
First, the dollar and other currencies were devalued
(their gold contents were reduced), then deliberate
inflating was undertaken in the belief that perpetual inflating would assure perpetual prosperity.
As had occurred before w h e n large numbers of
persons accepted a great delusion, one m a n provided the basic notion. This time it was Lord
Keynes of England whose "perpetual motion"
scheme of promising everlasting prosperity by Federal deficit spending proved to be irresistible, both
to the politicians and academic economists. President Roosevelt applied it first at Keynes' suggestion, but academic economists soon became ardent
disciples of this m a n , w h o seemed the very reincarnation of John L a w to nonbelievers in perpetual
motion. Within a decade the Keynesian notions became the ruling d o g m a in most of the universities
of Western civilization.
During World War II and subsequently, the ideas
of Lord Keynes were embodied in "full employ-

ment legislation and in new institutions, especially that great "engine of inflation," the International Monetary Fund. Inflating has continued
tor more than 3 decades.
O n e after another, aspects of the gold standard
were terminated. Finally, in 1971 the United
States refused to honor any commitments to redeem its paper promises in gold. It was denounced
as a "barbarous relic" unsuited for use as money.
The avowed policy of all major nations was to remove gold from the monetary systems of the
world. The transition from gold to irredeemable
paper purportedly was to be completed.

its citizens would join the speculative rush to gold
when the prohibition against holding it was ended
in December 1974, the United States authorized
Treasury sales of officially held gold. Later, by
agreement with other nations, the I M F began a
monthly program of gold auctions apparently intended to discourage theflightfrom paper. These
efforts to drive down the price of gold and thus
give paper currencies the appearance of greater acceptability were markedly successful at first, as the
data in Chart 4 reveal. From the highs of late 1974,
the price of gold trended rapidly downward to just
above $100 per ounce in August 1976.
Thereafter, depreciating paper resumed its
downward path in exchange for gold, that is, the
dollar price of gold trended upward. The paper dollar became a pariah. More and more members of
the public attempted to rid themselves of dollars
by using them to buy gold or other paper currencies - those of countries whose policies were not
as inflationary as U.S. policies. Major foreign central banks endeavored to keep the paper dollar afloat b
Y buying larger and larger quantities of them

From a market price of S43 per ounce on the
last business day prior to President Nixon's August
15, 1971 "closing of the gold window," the price
of gold rose rapidly, if irregularly, to nearly $200
per ounce in late 1974. B y then theflightfrom inconvertible paper currency to gold reflected in the
increase in the price of gold had become alarming
to official money managers. Obviously fearing that

Chart 4
(Final Friday Fixing)






1. December 3, Treasury announcement of first gold sale.



10. November 1, Treasury announcement of increase in monthly
auctions to 1,500,000 ounces beginning in December.
11. April 18, Treasury announcement of reduction in monthly
auctions to 750,000 ounces beginning in May.
12. M a y 14, I M F announcement of slight reduction of monthlyauctions to 444,000 ounces beginning in June.
13. October 16, Treasury announcement of discontinuance of its
regularly scheduled gold auctions, to be replaced with "surprise
sales" of varied amounts at varied intervals.
14. January 15, Treasury announcement that as long as the dollar
"does well" on foreign-exchange markets, there wou'd be no
need to support the dollar by selling gold to dampe. speculation.
15. M a y 7, the I M F completes its 4-year monthly gold-sale program of 25,000,000 ounces.

2. January 6, first Treasury gold auction.
3. June 30, second Treasury gold auction.
4. September 2, IMF announcement of proposal to sell gold.
5. January 6, IMF Interim Committee supports September 2.
1975 proposal.
6. June 2, first IMF gold auction.
7. April 19, Treasury announcement of resumption of gold sales
of 300,000 ounces per month.
8. May 23, first of resumed Treasury gold sales.
9. August 22, Treasury announcement of increase in monthly
auctions to 750,000 ounces beginning in November.


and adding them to their official reserves. The dollar was being demonetized, if one considers the essential functions of money.
What are those functions? O n e is that m o n e y
must serve widely as a m e d i u m of exchange, that
is, as a c o m m o n means of purchasing things and
settling debts. This would seem to be a simple
enough role, but w h e n analyzed in some detail, this
role surely is not simple or unimportant.
Whenever one purchases goods by exchanging
dollars for those goods, in effect he is trading a
part of what he has m a d e available to others for
a part of what all others have m a d e available to
him. That person had been given dollars (in the
form of wages, rent, interest, or profit) for his
part in the production of goods or the performance of services. H e then exchanges those goods
or services for other goods or services. M o n e y
facilitates the exchanges — more efficiently w h e n
it is more reliable.
That m a n y Americans think in those terms w h e n
making a purchase with currency or a check is
highly improbable. The exchange of dollars for
goods has been so routine that probably few give
the activity a second thought. Although m a n y
complain that more dollars n o w are required to
purchase the same amount of goods, few people
complain of the receipt of more dollars for their
part in production. Moreover, few recognize that
those pieces of paper (currency or checks) have
virtually no intrinsic value; the world could be
flooded with them and yet all would starve if
h u m a n effort were not extended for processing
food. At best, m o n e y facilitates exchanges; at
worst, it hinders them and the economic progress
associated with specialization and the division of
Serving as a m e d i u m of exchange is only one of
three functions that a unit must perform if it is to
be useful as "money." It also must be a standard of
exchange-value and a store of exchange-value.
However, if any one of these three functions is not
performed, a unit will not long serve as money.
Thus far inflating has had little effect on the
functioning of the fiat dollar as a m e d i u m of exchange. However, since gold ownership again became legal for Americans on December 31, 1974, a
few organizations have been established that provide a means of using gold easily as a m e d i u m of
exchange. S o m e noted monetary economists have
proposed that private enterprises begin issuing their
o w n currency to compete with the faltering paper
dollar, and in 1981, a bill was introduced in the
U.S. House of Representatives that would restore
U.S. gold coins and permit private banking in gold
units. A few business transactions have been widely reported because precious metals (gold and sil-

ver) were the specified m e d i u m of exchange. This
is limited evidence, but it is some of the increasing
evidence that the use of the fiat dollar as a medium
of exchange is eroding.
Although the most visible function of m o n e y is
that of a m e d i u m of exchange, the functions of
serving as a standard of value and a store of value
are equally important. If either one or both of
these functions are not served, a unit cannot serve
long as a m e d i u m of exchange. That the U.S. dollar
once was highly reliable as both a standard of value
and store or value cannot be denied, but that was
w h e n holders of dollars could have them redeemed
for a specified amount of pure gold.
But n o w the dollar is failing as a standard of
value, or as a long-term accounting unit. Many
measures of economic activity quoted in paper dollars no longer are useful in the absence of "adjustments" for generally higher prices, or for depreciated currency values. There is no such thing as an
"adjusted dollar," and all such price adjustments
are poor substitutes for a sound accounting unit.
Business profits are widely overstated because historically determined depreciation charges are inadequate in terms of current replacement costs.
Likewise for inventory accounting and charges for
goods sold. A s a result, businesses are taxed on
ephemeral profits, rates of return to owners decline, investment sags, and economic stagnation
sets in. All this because paper serves poorly as a
standard of value.
A s a store of value, paper dollars also are functioning ineffectively. W e mentioned earlier in this
bulletin that since 1940 Americans have lost more
than $3 trillion in today's dollars from depreciation of paper currency. W h e n general prices rise 9
percent per year, paper currency depreciates to:
one-half its purchasing power in just 8 years.1
W h e n the paper dollar is thought of in the afore-c
mentioned terms, it becomes clear that talk about*
demonetizing gold by untying it from the papei^
dollar is nonsense. The paper dollar is being de~
monetized, because it is performing less and les;
well the functions that a unit must perform to be.
Perhaps officials fail to recognize these relation!
ships, but the public by its actions reveals tha:
some persons do. Enough persons have noticec
what is happening to have put extreme downward
pressure on the foreign-exchange value of the pape;
dollar during the 1970's.
In effect, the 1970's sales constituted a partisv
restoration of the gold standard. The authorities,
claimed that the gold sales were consistent with th^
long-range policy of removing gold from tig
monetary system. Perhaps some of the mone^
managers themselves were deluded by such

description of what would occur. However, the
fact is that gold was being used to redeem some of
the surplus dollars that are flooding the world; the
despised "barbarous relic" was being used as a life
preserver for a sinking paper dollar. In a contest for
monetary supremacy between gold and the paper
dollar, gold will win - domestically and internationally.

T h e decision of the United States Government
to start monthly gold sales from the American gold
stock will inevitably strengthen the position of
gold and weaken the dollar, once the market has
had some experience of these sales.
All past experience of sales from a stockpile is
that the initial effect is to reduce the price of the
commodity offered, but that the gradual liquidation of the stockpile itself soon begins to strengthen the price again. If the process is completed, the
result is that the stockpile is gone and the price is
This has been the general experience of the
United States in disposing of stockpiles of scarce
commodities and it has been the experience of the
sales of gold from the I M F . There is no reason to
suppose that this experience will not be repeated.
In any case the Americans would not be selling if
they did not need the m o n e y , and the fact that
they need the m o n e y cannot help to strengthen the
American policy towards gold is contradictory
and is therefore bound to be self-defeating. T h e
United States Government wants to maintain the
dollar as a stronger form of international m o n e y
than gold, but they still want a soft dollar for domestic reasons. T o achieve their objective of
knocking out gold, the United States have taken
every step except the one which could have had
any effect, which would have been to strengthen
the dollar.
The world has seen American repudiation of
gold convertibility, sales of gold and the announcement that gold is no longer m o n e y , an announcement dubiously endorsed by other m e m b e r s of the
International Monetary Fund.
None of these measures are related to the problem; they have not stopped, except for intervals,
dollars being sold and gold being bought. T h e problem arises not because of gold but because of the
* This section was written by William Rees-Mogg, editor of
The Times of London. It was first printed in the April 21,
1978 issue of that paper under the title, "Gold and the
Fighting Retreat of the U.S. Dollar," and w e first included
it in our 1979 edition of this Bulletin. W e have retained it
in this edition for its sound arguments and because it
proved to be prophetic.

dollar. It is not wicked of gold to be strong, but
sad for the dollar to be so weak. The dollar is
weaker than gold because the American authorities
issue larger numbers of dollars than the amount of
n e w mined gold which is available to be added to
private or public reserve funds. So long as the over
issue of the dollar continues it is quite unavoidable
that the dollar should fall in its purchasing power
of all commodities and in particular of gold itself.
That fall will not be consistent, or without interruption, but it will occur.
The American authorities pay gold a reluctant
tribute by showing their animosity towards it. This
tribute is quite justified. The world has always
needed an international currency and there are at
present only three forms that an international currency could take, the dollar, some type of I M F international unit, or gold.
The existing international currency is the dollar,
which forms 80 per cent or thereabouts of the currency reserves of countries outside the United
States, and is said to account for an equally large
proportion of international trade w h e n that is not
denominated in the currency of the buying or selling nation.
W h e n the United States was the only fully developed world industrial power in the early postwar period, the dollar formed a smaller proportion
of total world reserves and a m u c h more acceptable one. A s the United States share in the
world economy has fallen, which merely reflects
the normal and healthy development of other
economies, the importance of the dollar as a reserve currency has not fallen but grown.
The large American trade deficit in recent years
has caused the dollar reserves to grow still further,
and they have risen by the alarming figure of
around 50 per cent in the last 18 months. There
are too m a n y dollars in the world already, but the
United States is still running a large Budget deficit,
a very large trade deficit and a medium rate of
growth of monetary aggregates.
British experience shows that it is only possible
to maintain confidence in a reserve currency w h e n
the balance of payments on current account is favourable, or at least supportable. The capital position and the current position are very closely linked; w h e n the current position deteriorates the capital position becomes very difficult.
People want to get out of a suspect currency;
the bigger the currency the heavier the sales and
the harder to arrange a support operation. The
scale of support the dollar can require is shown by
the $5,000m speni by Japan to support the dollar
against the yen in the month of March alone - one
country, one month.

This means that a reserve currency has to be
managed in a very conservative w a y if it is to continue to be acceptable. If the American dollar was
managed on the same basis as the Swiss franc, then
other nations would continue to be more than happy to hold dollars and would on the whole m a k e a
capital profit out of doing so. Every central bank
holding dollars is n o w sitting on a loss.
The very economists in Washington w h o want
to destroy gold in order to maintain the reserve
predominance of the dollar also believe that at
least mildly, inflationary policies are necessary to
support the growth of the domestic economy of
the United States. They m a y well be wrong on
both counts; they are certainly wrong to suppose
that the dollar will again become an acceptable
reserve currency if the policy on the domestic
United States m o n e y supply continues to be
more expansive than those ot the best alternative
World currency changes usually work themselves
out over relatively long periods. The trends
towards the weaker dollar and the strengthening of
gold were already apparent by the early 1960's,
and one must therefore be cautious about any estimate of the timing of future developments that
one might make. Yet the broad pattern of coming
events seems very clear.
W e are n o w near the end of the period of dollar
predominance. Given the pressures of American
domestic politics, and the lack of understanding in
Washington of the relationship between domestic
monetary policies and international monetary
movements, it is virtually inevitable that the dollar
should cease to be acceptable as a reserve currency
on the present scale.
T o o m a n y nations have lost too m u c h m o n e y
too quickly as a result of holding their reserves in
dollars. The basic American economy remains impressively strong, but nowadays there are other
strong economies, particularly that of Japan.
The basic reason for the dollar's trouble is that
a democratic electorate wants high expansion and
low taxes. A s Ricardo observed: "Neither a state
nor a bank ever have had the unrestricted power
of issuing paper m o n e y without abusing that
power." There never will be a shortage of politicians willing to spend where they have not taxed,
nor nowadays is there any shortage of economists
wishing to advise them of the wisdom of supporting trade and employment by issuing more
money. N o m o n e y whose issue is controlled by a
politician is ever better than the needs of the
next election will allow. O f course citizens have
to live with their o w n politicians, but nations do
not have to trust the politicians of other nations
by holding their foreign currencies.

The next phase will be an attempt to create an
international currency which will still be based on
the issuing power of government but at second
hand. That would involve an international agreement to fund dollar balances into a currency run
by the International Monetary Fund.
Theoretically, the extension of the system of
SDR's could provide the world with the international currency it needs. It is, however, a mistake
to think that the pressure of international politics
is necessarily less than the pressure of domestic
politics or that the motives will be substantially
different. T o obtain the consent of governments or
to obtain the consent of electors requires the same
assurance that there will be "something in it for
them." That something in the case of a currency always involves over-issue.
Undoubtedly, the issue of either type of paper
currency, whether dollars or SDR's to be used for
reserve purposes, will be greater than the net addition to the gold stock arising from n e w mining less
n e w jewelry and industrial use. Gold will be the
harder currency of the two.
At present, partly because they are acting under
considerable political pressures from the United
States, most governments include large quantities
of dollars in their reserves, although in real terms
those dollars have been an unsound investment.
That has left gold to perform the reserve function
for a relatively small number of shrewder governments and for individuals.
N o w that it can be seen that the weakness of the
dollar is likely to continue, even though there will
be cyclical periods of improvement, the advantage
of gold over the dollar as a store of value will bec o m e even more obvious, and the benefits to gold
holders against dollar holders will continue to be
Gresham's law states that bad m o n e y drives out
good. O f m o n e y as a circulating m e d i u m that is
true. A m a n w h o has a good coin and a bad coin
will pay with the bad coin and keep the good one.
The corollary is of course that as a store of value
good m o n e y drives out bad. Apart from the Swiss,
there are no central banking authorities responsible
for a major currency, perhaps not even the Germans, w h o have a sufficient determination to make
their o w n currency good.
Gold is therefore for two reasons the preferred
store of value; the net addition to its quantity is
lower than that of competing currencies; an increase in the supply of gold depends on the mining
industry and not on the printing industry. Gold is
the better m o n e y in the present and offers the
better security for the future. If Wasnington
challenges gold to a knockout fight, there is only
one possible victor.

T H E interest of Americans in monetary matters - beyond the personal interest o/wantm g to accumulate more - is a relatively n e w
Dhenomenon. Within the lifetimes of most adult
Americans, general economic concern has focused
more on unemployment and the plight of the poor
than on the soundness of the dollar. This was understandable because the Great Depression, with its
many business and banking failures and a 25 percent unemployment rate, m a d e a deep impression
on the thinking of Americans. T h e problem with
prices then was that they were too low, not too
high; the dollar was too strong, not too weak. After World W a r II the American dollar was in a position of unchallenged supremacy. "Sound as a dollar" was a phrase that signified utmost confidence
in that to which it was applied.
T o the American public the latter 1950's and
early 1960's were good years. However, those of us
studying monetary matters could see problems
arising: international balance of payments deficits
became chronic; the Nation's monetary stock of
gold decreased from about 700 million ounces in
1950 to about 500 million in 1960 — signaling a
growing foreign disenchantment with the dollar;
the Federal budget remained in a deficit during
business expansion as well as contraction; inflating,
which had been pursued as a policy goal since
1934, was creating the types of distortions it always and everywhere had fostered.
In fiscal 1968, the Federal deficit soared to a
then unheard of $28 billion. Interest rates shot up,
and prices rose frighteningly in the late 1960's. A
recession in 1970 did not halt the price rise; huge
support for the dollar was required to maintain official exchange rates in early 1971; and finally President Nixon in August 1971 "closed the gold wind o w " and imposed the first peacetime wage-price
controls in the history of the Nation. Those controls fostered uncountable distortions, a m o n g them
shortages of various materials and supplies. Then
came O P E C ; fuel shortages; the price and wage explosion of 1973 and 1974; the sharp recession of
1974-75; the recovery of business activity thereafter; international dollar crises from time to time;
continuing huge budget deficits; and sometimes
alarmingly rapid price increases punctuated by
brief periods of more moderate price increases.
These days the news media daily report aU sorts
of economic data: monetary aggregates, interest
rates, foreign exchange developments, the price of
gold, stock prices, G N P , industrial production, the

status of agriculture, energy consumption and
supplies, and of course price developments — or
"inflation." Recent opinion polls reveal that the
public views "inflation" as the number one national problem, and well it might in view of the
rapid rate at which wealth is being embezzled as
the dollar rots before the eyes of everyone. B y
now, only those with their heads in the sand have
not realized the threat that inflation poses to their
financial survival. As more become alert to and
informed about the ravages of inflation, perhaps
actions will be taken to avoid the inevitable ultimate consequences of prolonged and rapid inflating, the collapse of the social structure.
In this chapter w e describe h o w the United
States has come to its current, sorry inflationary
W e begin by designating what w e mean by certain words, for w e fear that widespread misuse of
words, such as "inflation," is responsible for m a n y
utterly false notions about the inflationary problem and therefore about possible cures for it. Surely the popular news media are grossly guilty of
vague word usage in their reports on inflationary
developments and thereby contribute to the misunderstanding about this topic of great interest.
Perhaps the most c o m m o n misapplication of a
word is the use of "inflation" to refer to a rise in
the general level of prices. That simply is wrong, if
historical use of the word "inflation" is the guide
for right and wrong. Webster's dictionary says that
inflation is "an increase in the volume of money
and credit relative to available goods resulting in a
substantial and continuing rise in the general price
level."* Note that the rise in the price level is not
inflation; Webster's says the excess creation of
"money and credit" is. The widespread misuse of
the word "inflation" has made it necessary to
avoid that word if w e are to minimize the chances
of failure to communicate; therefore, w e have
abandoned the term "inflation," and instead w e
use "inflatm^."
But w e have gone a step further in designating
what w e m e a n by inflating. As noted above,
Webster refers to the excess creation of "money
and credit." However, the words "money and credit" are used to name, or designate, various things.
* Webster's New Collegiate Dictionary, G.&C. Merriam
Company, Springfield, Massachusetts, 1981.


There literally are a number of "moneys," M l , M 2 ,
M 3 , and so forth. A s for credit, anyone's debt is
counterbalanced by someone else's credit. Whose
"credit" should be included in Webster's use
of that word and whose should be excluded is not
clear. For this reason w e have abandoned " m o n e y "
and "credit" from our designation of inflating.
In their place w e use the words "purchasing
media." That is our label for those things generally used in final payment of purchases and
debts. A m o n g such things nowadays are currency
(including coin), demand deposits (checking
accounts), and to an increasing extent, other
checkable instruments, including those drawn on
financial institutions other than commercial
banks. Credit cards, savings accounts, open lines
of credit, and so forth are not purchasing media,
as w e designate it, because their use does not
constitute final payment.
With this understanding of terms, w e n o w assert
that inflating is the creation of purchasing media in
excess of the amount needed to represent the exchange value at the current price level of goods
offered in the market. That is a working designation of "inflating." In the vernacular of the
times, one would say that "inflation" occurs w h e n
there is too m u c h m o n e y chasing too few goods.
Let us illustrate h o w too m u c h purchasing media
chasing too few goods causes a rise in the general
level of prices, which, remember, is a symptom of
inflating, not inflating itself. Consider an auction
market at which the autioneer offersfiveitems and
the amount available and used for bidding is $10.
Were all items auctioned, the average price per item
would be $2. Alternatively, assume that the
amount available and used for bidding is $20. U n der the same conditions, the average price would
be $4, that is, the general level of prices would
double. Note that the focus is on the general level
of prices, not on relative prices, that is, the prices
of the individual items offered. This differentiation
is important, as w e shall see w h e n w e return to our
illustration later.
Although the notion that inflating occurs w h e n
there is too m u c h purchasing media chasing too
few goods is one that most economists accept as
accurate, other explanations also are c o m m o n . O n e
of these used to explain the price explosion of
1973-74 is that OPEC's quadrupling ot crude oil
prices and its effects on other energy prices pushed
all prices up. Could this assertion be accurate?
Returning to our illustration, w e assume that the
original auction offiveitems for $10, with an average price of $2 reflected actual prices of $2 for
each item. N o w O P E C says that item A must receive a bid of $6. Maintaining the condition that all
items must be auctioned would leave $4 to clear

the auction market of the four remaining items; let
us say each sold for $1. Relative prices would have
changed drastically, but the average price still
would be $2 per item — there would be no rise in
the general level of prices.
But what if the auctioneer held that, although
item A had to receive a bid of at least $6, he also
could not accept less than $2 for each of the four
remaining items? With a total of $10 available and
used for bidding, these conditions would mean that
only item A and two of the other four items would
be sold by the auctioneer. T w o items would be unsold and would remain in the auctioneer's inventory. The average price would be $2.80 ($14-j-5
items); general prices had increased. But wait! The
auctioneer finds himself with two items he does
not want to keep. H e faces a dilemma: either he accepts less than $2 per item for the four items or he
holds two extra items, neither of which he wants
to do.
If possible, he would arrange to have more
m o n e y m a d e available and put into use for bidding,
say $4 more could be brought into the bidding.
Under those circumstances, he could sell all five
items at a total of $14, and prices would remain at
an average of $2.80. However, if $4 more could
not be brought into the bidding and he could not
carry in inventory the extra two items (because he
could not afford to keep funds tied up in inventory), he would be forced to accept less than $2
per each of the four items — even if it meant a loss.
T o sell the four items other than item A , he woulc
have to accept an average of $1 per item, and the
average price of allfiveitems would drop back tc
$2. Thus, the higher general price level of $2.81
could not be sustained unless the extra purchasing
media were created to validate the otherwise tem;
porary rise.
A n understanding of this relationship betweei
purchasing media and prices exposes not only th
fallacy of blaming O P E C for the 1973-74 price ex
plosion but also m a n y other similar explanations o(
generally rising prices, that is, explanations tha,
"point the finger" at special groups or special cor;
ditions. A m o n g those are monopolistic businesses
big labor unions, adverse weather conditions, anv
so forth. In each instance, those special situationcould affect only relative prices in the long run :
n e w purchasing media were not created to validat
the asked-for higher prices plus to clear the ma x
kets for other things, including the market fc:
W e conclude that "inflation," or rising prices,
purely ^monetary phenomenon; it is the result
inflating — the creation of excess purchasii
media. Other alleged "causes" of "inflation" mu
be viewed as secondary causes, that is, they w<

m a y promote the creation of the excess purchasing
media but they do not directly create "inflation."
Recognition of these secondary causes is, of
course, important, but a clear understanding of the
ultimate nature of inflating is essential for the development of solutions to the problem rather than
panaceas for the symptoms of the problem, such as
wage-price controls, "voluntary" or mandatory.
Anyone able to recognize which is which — solution or panacea — will be at a great advantage.
Before w e describe h o w inflationary purchasing
media are created, a brief survey of the development of the U.S. banking system during this century is in order.
By the final quarter of the 19th century, monetary practices had evolved to the point that there
was widespread — though not unanimous — recognition that the best monetary unit was gold. National currencies were units of gold of specified
weight and fineness. The dollar, the pound, the
franc, and so forth were units of gold, and exchange rates among them simply reflected the different weights and fineness of gold represented by
the currencies. In the United States, the dollar was
made fully redeemable in gold in 1879.
Economic growth proceeded apace during the
final quarter of the 19th century, although there
were three sharp recessions during that period.
Each of those was accompanied by m o n e y panics,
that is, a scarcity of currency and bank credit.
There was no official central bank of the Nation
then, and smaller banks would maintain deposits
with larger banks as their reserves, the larger
banks with the still larger banks, and so forth,
until N e w York City banks held the reserves of
most of the Nation's m a n y banks. The N e w York
City banks would make call loans with the funds
thus deposited, that is, the borrower would be
obliged to pay the loan as soon as the bank
asked. Invariably some big banks became overextended. Then w h e n any unusual demand for
funds arose at small banks, often in connection
with agricultural needs, a chain of calls by smaller
banks on their reserves at larger banks occurred.
Eventually the N e w York City banks were forced
to call loans, and their borrowers would be
forced to sell goods at any price in attempts to
pay the loans. This would precipitate a collapse
of prices and a business recession.
After the three money panics during the latter
19th century and two more during the first decade
of the 20th century, and amid a good deal of controversy, a central bank was established in 1913 in
the United States. It was called the Federal Reserve
System (Fed), and Fed officials were charged with

the responsibility of establishing and following
sound monetary policy.
As originally constituted, the Fed was severely
restricted in its ability to inflate; yet it could provide or contract currency and credit as necessary
for legitimate business purposes. Federal Reserve
notes, which were to become the principal paper
currency of the Nation, were made redeemable in
gold on demand. The Federal Reserve banks were
required to maintain reserves in gold of not less
than 40 percent of the amount of their notes in circulation and 35 percent of their deposit liabilities
to their member commercial banks.
Furthermore, the other 60 percent of such notes
were to be secured by the pledge of ". . . notes,
drafts, bills of exchange arising out of actual commercial transactions . . ." that were rediscounted
by those banks. Such notes, drafts, and bills of exchange were short-term self-liquidating promissory
notes reflecting the movement of things produced
to the markets for sale. W h e n held by the central
bank, these instruments represented a claim on
outstanding purchasing media. Repayment of the
loans represented by such instruments involved the
removal from circulation of an equal amount of
purchasing media that the borrowers had acquired
as things were sold. By this arrangement, dynamic
balance between the dollar-value of gold and other
products offered in the markets on the one hand
and the amount of purchasing media available to
bid for gold and other products on the other hand
could be fostered.
The gold provisions both enhanced the domestic
and international acceptability of the purchasing
medium and established an upper limit to the
amount of Federal Reserve notes that could be issued, given the stock of gold held by the central
bank. Within that upper limit, the provision requiring 100-percent backing by gold or rediscounted
trade paper provided a means by which the volume
of paper currency could expand and contract in accordance with the legitimate needs of business and
Purchasing media comprised checking accounts
in commercial banks as well as paper currency.
However, with checking accounts redeemable in
currency and currency redeemable in gold, total
purchasing media reflected the limitations of the
aforementioned provisions of the original Federal
Reserve Act.
However, two major restrictions against inflating
were abandoned during the 1930's. First, the GlassSteagall Act of February 1932 permitted Federal
Reserve banks to use as security for their notes in
circulation, U.S. Government securities in addition
to rediscounted commercial paper. Inasmuch as the
Fed from its inception was permitted to lend to

m e m b e r banks o n the collateral of Government securities (not to be confused with the Fed using
such securities as collateral for Federal Reserve
notes, or currency), the Glass-Steagall Act was important not for what it enabled Fed officials to d o
but for the change in attitude that gave rise to the
Act. That change was acceptance of the notion
that the monetary authorities should be free to
create whatever amount of reserves they deemed
appropriate and should not be restricted to creating reserves only for the legitimate needs of business as reflected in bona fide commercial loans discounted by banks.
The foundation of that notion was the view that
the depression was worsened by the progressive
contraction of credit as Federal Reserve banks did
not buy Government bonds to offset the reserve
losses connected with the drying up of business
loans available for rediscounting. In turn this was
based on the theory that the depression was an aberrational event, not a corrective event of prior excesses. In a way, the arguments offered in support
of Glass-Steagall were harbingers of Keynes' arguments in support of the theory of deficit spending.
Although the Fed's authority to monetize Government debt offered opportunities for monetary
and Government officials to debauch the Nation's
currency, all holders of such currency and owners
of checking account balances still retained an ultimate veto power of official actions by being able
to d e m a n d gold for currency. This veto power was
not to be held for long.
Soon after taking office, President Franklin D.
Roosevelt issued a Presidential proclamation that
prohibited private ownership of gold in the United
States. This act m a d e the U.S. dollar a paper currency domestically. (It remained redeemable in
gold by foreign official institutions until August
15, 1971.) W h e n President Roosevelt ended domestic gold redeemability of the dollar, he removed
the ultimate checkrein the public had on monetary
David Ricardo, the early 19th century English
economist, gave recognition to this role of gold in
these words, "The only legitimate security which
the public can possess against the indiscretion of
the Bank is to oblige them to pay their notes on
demand in specie."
After these actions, Fed officials were permitted
to monetize unlimited amounts of Government
debt without having to fear that Americans might
use the purchasing media created thereby to dem a n d gold and force an end to these policies. Turning back to Chart 1, note that the early 1930's
marked the beginning of the relentless slide in the
purchasing power of the dollar. The monetary panics and recoveries that had occurred earlier served

to restore the purchasing power of the dollar, but
that has not been the situation since the early

W e n o w turn to the question, " H o w are inflationary purchasing media created?" T h e answer is
that w h e n commercial banks and Federal Reserve
banks create n e w purchasing media not to represent things being brought to the markets but to
permit things to be bought in the markets, the purchasing media are inflationary. They are inflationary because they m a k e available an excess of purchasing media for buying, at current prices, the
goods being offered — too m u c h " m o n e y " chasing
too few goods.
W e shall change our illustration in an effort to
clarify those relationships. Consider that the Nation's markets are as baggage check rooms. All
things produced are brought to the baggage
rooms, which are the wholesale and retail markets. Then the things are bought (claimed) by
those w h o have purchasing media (baggage claim
checks) to offer in exchange. T h e purchasing
media (claim checks) are withdrawn when the
things are purchased (baggage claimed). P U P
chasing media are reissued to producers to repre:
sent n e w things w h e n those things are brought tc
the markets. T h e process continues indefinitely a:
things are brought to the markets and purchasing
media are issued, and bought in the markets anc
purchasing media are canceled.
Inasmuch as nothing can be bought (claimed.
that first has not been produced and offered in th
markets (checked into the baggage room), pui.
chasing media (baggage claim checks) are needed
and should be issued only to represent the thing
offered in the markets (baggage available to b
claimed). W h e n more purchasing media (clair
checks) are created than are needed to represer^
the exchange value at a current price level of thin£
offered in the markets, inflating occurs.
Not all newly created purchasing media are infl^
tionary. O n e particular w a y by which commerci
banks create purchasing media is by accepting tr
promissory notes (IOUs) of businesses in exchan^
for credits to the checking accounts of those bu<j.
nesses. W h e n the notes thus issued and the ne;
purchasing media thus created are delated to tlj
business bringing an equivalent value of goods
the markets, balance is maintained between pi>
chasing media available and things to buy. Sug
newly created purchasing media are noninflaticg
ary. Likewise, if the commercial bank were to bc.|
row from the Federal Reserve bank on the basis ^
such a business note, the purchasing media resufy

ing from the Fed's loan to the commercial bank
also would be noninflationary.
But let us say a commercial bank (or Federal Reserve bank) buys a Government bond by crediting
the checking account of the private bondholder (or
his bank, in the case of the Fed's purchase). Assuming that the bank had no saved purchasing media deposited with it to make the purchase, the
purchasing media would be inflationary, inasmuch
as it would make more purchasing media available
for buying but without connection to more goods
being available for purchasing — too m u c h "money" chasing too few goods. Inflating also would occur if newly created purchasing media were issued
in connection with installment loans to consumers,
or mortgage loans to h o m e or commercial property
buyers, or loans to businesses to buy equipment,
and so forth. In each instance, the newly created
purchasing media would add to demand without
there being a related addition to supply - more
claim checks than baggage.

Shortly after Fed officials were unshackled from
the commitment of supporting their liabilities with
rediscounted bona fide commercial loans and of redeeming their Federal Reserve notes in gold, a
modern economic medicine m a n by the name of
John Maynard Keynes concocted an economic
theory that justified inflating. The theory suggested that if the Government would spend more
than it received in tax revenues and then finance
the deficit by having its bonds monetized by the
Chart 5
Billions ™ ™ T B A T . F I D G E T SURPLUS O R DEFICIT

Deficit for 1981 estimated after first 10 months.


Chart 6


Note: Data for 1981 are the averages for the first 7 months.

banking system, the Government could supplement
the ostensible "inadequate" private demand (deemed responsible for the depressed economic conditions) so that sales, output, employment and general economic activity would be stimulated.
Keynes' depression panacea was "sold" to President Roosevelt in 1934. By the end of that decade
his theory was firmly established in leading universities as the new economic medicine. Alert politicians quickly embraced the plan, for they were
keen enough to see that this theory provided them
with the academic stamp of approval to spend the
public's funds to buy their o w n re-election.
The first experiment with inflating as a policy
goal was only partially successful. Business activity
picked up (it already had begun to) during 1935
and 1936 but turned sharply down in 1937 and decreased into 1938. World War II came, and inflating was vigorously pursued as a policy. The econo m y was "straight out" for the war effort, and
w h e n the war ended, many feared a major depression would occur. At that time A I E R predicted
that there would be no major recession because dem a n d would be bolstered by huge amounts of purchasing media created during the war and hoarded
by a public unable to buy consumer items and
lacking the incentive to invest at the extremely low
rates of interest then being paid.
Unwarranted depression fears w o n out and Congress passed the Employment Act of 1946, which
committed the Government to pursue policies to
promote m a x i m u m employment, production and
purchasing power." The policy envisioned ot

deflator. The latter is the broadest measure of ger
eral prices in the United States. Note the tendenc
for the three to accelerate as the deficits have ir
creased — not in perfect harmony (since inflatin
can occur by the monetization of private as well apublic debt, and deficits can be financed withou
inflating occurring) but close enough to have a po;
itive correlation. By n o w most Americans kno\'
h o w costly generally rising prices are to those wit
fixed-dollar claims — like pensioners and plair,
everyday Americans w h o have funds in savings ac
Chart 7 reveals interest rate trends from 194through 1981. They, too, trace the upward path c
the other series. O f course, as interest rates ii
crease, bond prices fall, and millions of bon<"
holders w h o paid dollars long ago to buy the bone
on the faith that the dollars later paid back t_
them would have equal purchasing power ha*
been deceived and swindled — not by the bor*
issuer but by the monetary authorities.
The foregoing charts suggest only some of tl
deleterious effects of inflating. Others are: unwarranted business optimism that builds unsustainab3
b o o m conditions followed by the inevitable bu"
ness collapse; large purchases abroad, which are i:
fleeted in chronic balance of payments deficits ai
a decreasing foreign-exchange value of the dolk
excess speculation that often centers on one or tv objects (for example real estate, or comm£
stocks, or commodities), driving their prices up, g
tracting further misdirected funds, and ending in
price collapse that wipes out m a n y unsophisticat
participants in the speculation; increased Government spending (and the concomitant concentrati
of control in the hands of the political aristocrat
as the easy path of financing deficits through
flating misguides the public into voting for can

Chart 7



Aaa Garporate Bonds
** *r
Shor -Term I usiness Loans
1 1 1 1 1 1 1 1 1 1 1 1M M








1 1 1 Mil

course was Keynes' prescription for Government
deficits and inflating.
Chart 5 starkly reveals h o w diligently the
profligate politicians have applied the policy of
deficit spending. (Deficits are shown above the
zero line.) Notice h o w large the deficits have
been during the business expansion that began in
March 1975. Remember, deficit spending by the
Government theoretically is supposed to occur
only during recessions.
Chart 6 shows the percent change from a year
earlier in the M - 1 B m o n e y supply (a near substitute
for purchasing media) and in two price indexes —
the Consumer Price Index (CPI) and the G N P price

Chart 8
G R O S S N A T I O N A L P R O D U C T (1958 Prices)






"l 11 11 111



l 1 l l ll l IM lI N I M I



II II II 1 1 1 i




I i I i I I I i

1 1 1 II 1 1 -1.1
1 1 1 1 1 1 ILL




Uhart 9



||I I 1I 1 l l M I M 1I I I I 1I I I I h











dates promising more Government giveaways; the
excess accumulation of debt, as borrowing is encouraged by seemingly lucrative business and
speculative opportunities; and long-term constriction of the economy, as savings are misdirected
from productive activities to speculative activities
and hoarding. All of these are results of inflating,
which is w h y the use of the n a m e "inflation" to
refer only to generally rising prices is highly misleading.
But even these are not the worst consequences,
as Rees-Mogg, editor of The Times of London,
points out: "Inflation has always had the same
monetarv causes and the same social consequences.

There is n o inflation which has not started with an
increase in the m o n e y supply; there is no inflation
which has not ended with a corruption of society,
proportionate only to the degree of the inflation itself. It corrupts and weakens every social institution; it makes every m e m b e r of society feel himself
to be the victim of every other m e m b e r of society;
it sets class against class. It makes governments
weak and unsure of themselves; it has in recent history destroyed more lawfully constituted governments than any other force except war itself."
These are the dire results reaped and risked by
following a policy of inflating. A n d for what
benefit? T h e argument offered in support of
deficits and inflating is that economic growth can
be accelerated thereby, with the benefit of lower
unemployment. Are these benefits evident in
Chart 8 shows the long-term trend of "real"
(price-adjusted) Gross National Product. The vertical scale is a log scale, so that a straight line trend
reflects a constant percentage change in the series.
Quite clearly, Government deficits and inflating
have not significantly increased the rate of economic growth. A s for deficits having reduced
unemployment, w e let Chart 9 speak for itself.
Thus, the United States has been brought to an
inflationary state of affairs that 2 or 3 decades ago
was thought to prevail only in "banana republics"
or in war times. This is the result of a conscious
policy to inflate and a monetary system without
the guide of gold-based currency. However, if all
that needs to be done to end these problems is to
stop the creation of excess purchasing media, w h y
has that not been done to date and can it be expected to be done in the near future?


was no circulated agenda; there was no staff for
them; nothing. S o m e persons in attendance reported they understood that senior administration officials intended merely to go "through
the motions" with the Commission in order to
appease the hard-money block of conservative
As feared, Under Secretary Sprinkel recommended that the meetings be closed to the public,
and Congressman Henry Reuss insisted that the
October 7, 1981 deadline for the Commission's
report be kept. Mr. Lehrman objected, saying that
at least a year would be necessary for the Commission to do its work. Sprinkel supported Reuss. T o
his credit, Dr. Paul McCracken, no friend of gold,
threatened to resign if the Commission were going
to issue a sham report. It was generally agreed
to seek Congressional extension of the deadline.*
At that point the minutes of the meeting and

D U R I N G recent months extensive attention
has been given to the issue of restoring some
link between gold and the dollar. A number
of factors seem to account for this great current
interest. Chief among them is the n o w undeniable
fact that the national and international monetary systems are in a state of disarray and are
creating enormous general economic problems.
Another factor is that the public has not yet responded to the passage of President Reagan's
spending and taxing programs with exhilaration.
S o m e supplysiders attribute this disappointing
reaction to continuing high interest rates, reflecting
public doubt that inflationary monetary policies
are going to be w o u n d d o w n in fact — not only in
official rhetoric. S o m e supplysiders n o w emphasize
that the essential monetary counterpart to President Reagan's fiscal policy is the implementation
of some variety of a gold standard. This, they
insist, will immediately provide credibility to a
professed monetary policy of reduced inflating,
will instantaneously lower inflationary expectations, and will quickly reduce nominal interest
rates by eliminating their inflation-premium
component. Restore a "gold standard" now, they
say. They need the stimulative effects of the
supply side program soon so that Republicans are
not swept out of office come next year's Congressional elections.
At the very time that the above political focus
on gold has arisen, developments involving the U.S.
Gold Commission also attracted attention to gold.
Provided for in a law authorizing funding for the
International Monetary Fund signed by thenPresident Carter on October 7, 1980, this Commission was given 1 year to study and m a k e recommendations concerning the role of gold in the
domestic and international monetary systems. T h e
Gold Commission members were not appointed
until the spring of this year. (See Table 2 for a list
of its members.) The membership was heavily
weighted with persons whose predispositions were
against a monetary role for gold.
O n July 9th, 7 days before the Commission's
first meeting, AIER's Director of Research attended a meeting in Washington, D.C. called by Congressman R o n Paul and Mr. Lewis Lehrman, the
only two strongly pro-gold Commission members.
They were seeking suggestions for approaching
their task from the twenty-odd persons assembled: they had no idea of what they would encounter at the Commission's first meeting; there

* A t its September 18, 1981 meeting, the Commission
agreed to ask Congress for an extension, but could not
agree on March 31 or June 3 0 , 1982.

Table 2

Apparent Predisposition
Private Individuals
Arthur J. Costamagna, lawyer
Pro-commodity backing.
Herbert J. Coyne, brokerage
firm executive
Lewis E. Lehrman, business
Strongly pro-gold.
Paul W. McCracken, ecoFormerly strongly antinomies professor
gold but now less so.
Emmett J. Rice
J. Charles Partee
Henry C. Wallich

Federal Reserve Board Governors
Strongly anti-gold.

Administration Officials
Donald T. Regan,
Relies on Under Secretary
Secretary of Treasury and
Beryl Sprinkel, w h o is
Chairman of Commission
strongly anti-gold.
Jerry L. Jordan, President's
Council of Economic Advisers
Murray L. Weidenbaum,
President's Council
of Economic Advisers

Christopher J. Dodd (D-CT)
Roger W. Jepsen (R-IA)
N o predisposition.
Stephen L. Neal (D-NC)
Ron Paul (R-TX)
Strongly pro-gold.
Henry S. Reuss (D-WI)
Harrison H. Schmitt (R-NM)
N o predisposition.
Chalmers P. Wylie (R-OH)

Anna Schwartz, economist


Executive Director
Strongly anti-gold.

the meetings themselves were to remain unavailable
and closed, as suggested by Beryl Sprinkel without
a vote by the Commission members. That was not
acceptable to The Wall Street Journal, which in an
editorial published in April 1981 was the first
national newspaper to call for serious study of the
monetary role of gold. T h e Journal editors (as did
writers for other newspapers) gave national attention to the attempt to hide the Gold Commission's
deliberations. More than that, the Journal and its
parent, D o w Jones and C o m p a n y , filed suit to get
the minutes of the July 16th meeting and to have
future meetings open to the public. In early
September the Commission, in a telephone poll,
voted to open the meetings beginning with that on
September 18th. T h e opening of the Commission
meetings should help keep the public's attention

$°n . m o r d e r t o S a i n credibility for an antiniflationary policy. Indeed, it is ironic and perhaps
significant that the advocates of an immediate
return to some type of gold system as a "quick
fix" in order to lower inflationary expectations
have m u c h in c o m m o n with the advocates of
wage-price or credit controls: sweeping problems
"under the rug" in order to win the next election.
That is the pernicious approach President Nixon
took in August 1971 w h e n he repudiated the gold
dollar and instituted the first peacetime general
wage-price controls in the history of this country.
Even some apolitical advocates of gold seem to
be acting in desperation. In their view, widespread
deep discontent with today's monetary mess offers
a rare opportunity to restore gold's monetary role,
and if this opportunity is not seized, another
chance might not be forthcoming for decades - if
ever. Others are desperate for any alternative to the
present paper-money system: "Anything has
to be better than what w e have."
A setting of desperation is not conducive to
sound study and deliberation on this topic of
greatest import. That the Gold Commission probably will have considerably more time to accomplish its task than first was feared is reason to be
somewhat hopeful. But when you consider that the
question of a gold monetary unit versus official
monetary discretion has been debated for 200
years, a deadline of early or mid-1982 is not
sufficient for the magnitude of the job to be done.
The level of debate carried on thus far surely does
not do justice to the issue. For there to be a
reasonable chance that a sound monetary course
will be taken in the future, a number of subtle but
fundamental aspects of the monetary problem
must be investigated. Here are some of these.

on gold.
N o w that gold again is being taken seriously, one
might think restoration of a sound money-credit
system is within grasp. W e doubt it. One's hopes
should not get too high. Perhaps the greatest
disservice economists have performed historically is
to create unwarranted confidence in their particular theories and thereby to foster unachievable
economic expectations by the public. What is the
root cause of today's economic plight if it is not
the unfounded — indeed, historically refuted —
idea that government manipulation of m o n e y and
other economic activities can assure sustainable
prosperity for all?
Around the industrialized free world, two
generations have been miseducated to believe that
government can cure all economic ills, which
makes it virtually impossible for an elected government to retain office through the short-term
painful period of withdrawal from the addiction to inflating in order to reap the long-term
benefits of a noninflationary situation. T h e economic argument underpinning this folly, Keynesianism, was embraced by most academics and
politicians during the desperate times of the Great
Depression. It met the urgent, short-run political
needs of the time.
Is somewhat the same thing happening n o w ?
Politically connected supplysiders are desperate. If
interest rates do not fall soon, their promise of a
nearly painless cut in the budget deficit achievable
by holding spending more or less constant and
gaining revenue from an expanded national income
boosted by politically desirable marginal tax rate
cuts will be proven empty. C o m e November 1982,
many of the present Republican "ins" could
become the "outs," as disillusioned voters turn
back to the promises of the Democratic spenders
and central controllers. Hence, some "in" supplysiders n o w are stressing the need for a dollar tied to

M u c h of the argument about money — gold
m o n e y or paper m o n e y — centers on the goal of
price stability. That is not the appropriate ultimate
goal of a monetary system. A sound monetary
system is one that provides a corrective tendency
from inflating and deflating before either becomes
so severe that it threatens economic and social
chaos.t One consequence of such a system will be
little change in the purchasing power of the monetary unit in the long run (more or less stability in
general prices). Price stability in the short run is
not a realistic possibility. Price changes of individual items are essential for the continuous
reallocation of a nation's resources to a pattern
t Remember, by inflating/deflating we refer to the creation
of excess/insufficient purchasing media to represent the
sustainable exchange value (prices) of goods offered in


more nearly consistent with the dynamic conditions of a growing economy — n e w products,
n e w productive processes, n e w final demand
Economic adjustment does not occur instantaneously. In some instances it occurs over m a n y
years. A s an example, consider the massive adjustments necessitated by the higher energy prices
initiated by O P E C in 1973. Time was required for
those adjustments: redesign and retooling of motor
vehicle manufacturing facilities; retrofitting and
redesigning buildings for energy conservation;
development, production and installation of n e w
energy controls; design and production of energysaving electric motors; engineering and construction of increased capacity for and actual production of more oil drilling rigs, etc. M a n y price
changes had to occur to induce the appropriate
supply and demand adjustments. Even in the
absence of monetary excesses, price indexes would
have had to rise for a time, until prices of the
obsolete products and processes would fall after
those products gathered dust on the shelves for
lack of buyers at the former prices.
F e w students of monetary matters would
suggest that such price-level changes were the fault
of the monetary unit. Yet, some proposals for a
n e w variety of gold standard would change the
gold content of the monetary unit w h e n general
prices moved by some stated percentage over some
specified period. They advocate a variable gold
standard, an absurdity and a contradiction even in
That some price-level changes m a y be necessary
for the economy's health undermines the argument
of gold opponents w h o , although they acknowledge that the 19th century gold standard promoted
* This applies to, a m o n g others, Arthur Laffer's plan, "The
Reinstatement of the Dollar: T h e Blueprint," discussed in
our October 1980 Economic Education Bulletin, "Plans T o
Revive The Gold Standard." Available for $1.

long-term purchasing power stability of the currency, criticize it for its failure to prevent fairly
large general price changes over short spans. W e
shall consider the late 19th century cyclical volatility later, after a point about the comparative
importance of long-term currency stability and
short-term instability.
In a modern industrial economy, with its extensive volume of highly specialized long-term capital
investment, long-term currency reliability is
desperately needed. Evaluation of long-term capital
projects entails a great deal of uncertainty — business risk — in the best of monetary conditions. But
w h e n the high risk of a greatly changing, rapidly
depreciating currency unit is added to the situation, sound evaluation of long-term investment
opportunities becomes nearly impossible. Every
project with a maturity (or payback period) of
more than a few years becomes a gamble. Hence,
the acceptable time horizon for investments
shrinks to the near term. Therefore, although the
total rate of saving and investment in an economy
might not change, productivity — the source
of real income gains — suffers w h e n the otherwise
higher yielding long-term project is cancelled in
favor of the shorter-term lower-yield project
because of the high currency risk.
For this reason, long-term currency reliability —
as even critics admit was provided by the gold
standard — might foster more rapid average longterm growth in spite of considerable volatility in
the short run. Such was the case for industrial
output in the final quarter of the 19th century. In
spite of substantial cyclical changes and a downward trend of wholesale prices then (see Chart 10),
U.S. industrial output increased at its most rapid
average rate over that long a span in the history of
this country. It would seem essential that the Gold
Commission gains an understanding of the tradeoff consequences between long-term currency
reliability and short-term currency volatility before

Chart 10

100 r

20 L
Shaded periods indicate times when Americans could not convert U.S. currency into gold.




reaching a conclusion about the preferred choice of
a monetary unit.
«-iuu,c or.

incipient "boom," overestimated the price that the
business borrower would get for the product the
banker's loan financed. W h e n the product could be
sold only at a "distress" price, the debtor could
not pay the bank, and the bank could not pay on
its demand obligation. W h e n a number of banks
encountered this problem about the same time,
banking panics occurred. The earlier misjudgments on credit extensions thus were corrected, as
were the allocations of real resources involved.
B y early in this century, bankers learned from
trial and error that some types of loans provided
better assurance of repayment on schedule than
other types. Thev were called "self-liquidating"
loans. These were loans to finance the marketing of
a product, the near-term expected sale of which
would provide the funds for repayment. This
practice was also called the "commercial loan
theory" of banking, or the "real bills" doctrine.
Three aspects of those practices are especially
pertinent to today's new interest in gold as the
monetary unit. One, the banking "panics" of the
late 1800's, did indeed involve harsh adjustment,
but they also provided early adjustment to developing distortions. The cost of trying to eliminate them has been to create the more severe and
difficult-to-overcome monetary and economic
problems of today. These problems are so severe
that most observers admit they have potential for
creating an economic collapse and social chaos.
The earlier banking panics were early corrections
of abuses, something all can wish had occurred
earlier in the current episode of excessive money.
The second significant point is that a monetary
unit of gold provided the public with a means to
protect itself from the effects of developing
excesses, and thus to check those excesses. In
today's system of fiat dollars, there is the acknowledged question if the Federal Reserve can find the
fortitude to pursue unstintingly its stated objective
of slowly reducing the growth of the monetary
base. But just at the time that Fed officials are
giving a slight indication they will "stay the
course" in this instance, the effort m a y be moot.
B y means of innovative payments practices, the
amount by which purchasing media actually in use
can exceed the monetary base m a y have become
virtually limitless. With the developing trend
toward huge financial conglomerates, private
financiers (bankers) can aggressively extend paper
dollar credits ad infinitum, secure in the knowledge
that their credits will be offset by claims on
other similar institutions, or if by chance an
imbalance develops for one of them, regulatory
officials will have to bail them out by providing
more official paper dollar credit. Without the
requirement that issuers of demand obligations pay

Returning to a consideration of the fact that
there was indeed substantial short-term price and
economic volatility during the best years of the
gold standard, the question arises, W a s the volatility related to the use or abuse of the monetary
unit? Our view is that gold convertibility was not
the initiating factor in fostering m o v e m e n t of the
economy away from sustainable trends; rather,
gold convertibility was a force for correcting
inflationary distortions originating elsewhere and
constituting an abuse of sound banking practice.
F e w students of m o n e y , w e suspect, would
disagree with the propostion that a credit-based
economy contains the seeds for cycles regardless
of the kind of monetary unit. Let us explain. As
soon as someone has available a product to sell,
there is the potential for credit. If he exchanges
that product for the I O U of the purchaser, credit
has been extended, but n e w purchasing media
(money) was not created in the process. If the
seller of the product takes the I O U of the purchaser to the seller's supplier and obtains therewith another product, another transaction has
occurred without n e w purchasing media being
created. It is probable that, by such practices,
optimism about future economic conditions can
be generated, with a desire of producers to
process more output and sell it.
As a practical matter, such passing on of private
IOUs could not go far for lack of knowledge about
the quality of the individual debtor's I O U . Here is
where banks came in. The seller w h o received an
IOU of a purchaser could take the I O U to a banker
and, for a fee (interest charge), the bank would
substitute its widely acceptable I O U for the
unacceptable I O U of the purchaser. In the process,
the bank created m o n e y (its demand liabilities
were generally used in final payment). O f course,
when the monetary unit was gold, the currencydenominated demand liability of the bank could be
presented by its holder for gold at any time.
The bank thus had to keep an adequate stock of
gold on hand. Adequacy, however, depended on
the quality of the debts held by the bank. If the
debts had too long a maturity, such that eventual
holders of the bank's demand liabilities (individuals
or other banks through w h o m checks were being
cleared) presented them for collection before the
bank received payment on the IOUs the bank held,
the bank would be unable to meet its obligations.
it also would fail if the banker misjudged the
ability of the debtor to pay. That often occurred
when bankers, caught up in the exuberance of an


with something they cannot create (like gold),
the potential expansion of purchasing media is
limited only by the eventual refusal of the public
to accept fiat currency, and that would be a flight
from currency. It would seem preferable to have a
monetary system that checked abuses far before
that consequence became a distinct possibility.
This brings us to our third and final point.
Simply declaring that the monetary unit is a weight
of gold is not sufficient to provide a sound, sustainable monetary system. A constellation of m o n e y
and banking practices must accompany an attempt
to restore gold as the monetary unit. Deposit
insurance must be repealed, so that depositors will
have to exercise personal responsibility to monitor
the practices of their bankers. Banks must not be
saved from failing, so that bankers will have to
adopt sound lending practices or go out of business
through bankruptcy. Bankers will have to re-learn
the lost art of sound commercial banking. T h e
American people will have to learn to accept
short-term economic hardship to gain long-term
economic advancement, protection of personal
freedom, and the realistic hope of preserving that
for future generations.
The foregoing necessary conditions are impressive in their complexity. A n d they obviously have
little chance of being implemented any time

soon. For this reason, w e abandoned some time
ago the expectation that a sound gold-based
monetary system could be re-imposed from the
top d o w n , that is, by design and adoption by
monetary and political officials. B y de-monopolizing Government's control of the monetary unit
and by permitting market experimentation with
various monetary units, w e should expect that
the more useful monetary units and sound
banking practices would be adopted.* A bill,
"The Free Market Gold Coinage A c t " (H.R.
3789), was introduced into the U.S. House of
Representatives by Congressmen Daniel Crane and
R o n Paul in 1981. It provides m u c h of what w e
believe is necessary for fostering a free-market
development of gold m o n e y and banking. It
would not require that Congress adopt a gold
standard or abandon the paper dollar. Its design
is to put the issue to the test of the market by
providing a fair field on which gold and officially
controlled fiat m o n e y can compete. In our
opinion, that action would offer the Nation
the best hope of avoiding calamity and setting a
course toward sustainable economic progress.
* See Research Reports September 24, 1979, "How To
Cope With a Flight from the Currency" and September 1,
1980, "Making Sense Out of the Dollar." Both available

for SI.

M O R E inflating will only create more problems. Already the amount of inflationary
purchasing media outstanding is so large
that, w h e n focused on one or two things, it can be
highly disruptive. Consider what has happened to
the foreign-exchange value of the dollar. For a
number of months during 1978 some foreign
central banks were purchasing dollars at the rate of
$10 billion per month, and still the value of the
dollar in terms of their currencies (mainly the
Swiss franc, German mark, and Japanese yen) fell
markedly. In 1980 and 1981, trends were reversed
with the exchange value of the dollar rising rapidly,
even in terms of the "strong" currencies. T h e
foreign-exchange market temporarily quiets from
time to time, but with tens of billions of dollars
readily available to be sold for this currency or
that, the foreign currency value of the dollar most
assuredly again will m a k e headlines.
Inflating of the past 3 or 4 decades has left the
dollar an unacceptable, useless, accounting unit.
Thus, w h e n one reads corporate financial state-

ments one cannot be at all confident that the corporation's situation is as represented. Adjustments
have to be made forfictitiousprofits arising from
inadequate depreciation and inventory charges. Future pension obligations seldom — if ever — are
adequately revealed in such statements.
Moreover, while the potential investor and business manager thus operate partially "in the dark,"
businessmen also face an increasingly burdensome
and capricious bureaucracy. T h e larger Government becomes, the more important to business
decision-making is accurately guessing the next political act: Will Congress pass a higher investment
tax credit or not? Should the company invest in
equipment n o w or wait? Will the Government
force increased use of coal or again reverse its decision on this? Might international trade restrictions materially alter import and export business?
Should prices be raised n o w , before wage-price
controls are imposed — in spite of repeated official
denial of such controls? Every day, little by little,
political know-how (should w e say connections?)

supplants business expertise. Who a businessm a n k n o w s becomes more important than what he
knows. In this business setting, h o w can there be
anything but volatility, instability, guesswork,
increased risk, and gambling?
Inasmuch as investors are reduced to gambling
on the future, a prevalent attitude has developed
that one should "invest" where there are opportunities f