Gold: The Monetary Polaris by Nathan Lewis Copyright 2013 by Nathan Lewis. All rights reserved. No part of this book may be reproduced or transmitted in any form of by any means electronic or mechanical, including photocopying, printing, recording, or by any information storage and retrieval system, without permission in writing from Canyon Maple Publishing. Published by Canyon Maple Publishing PO Box 98 New Berlin, NY 13411 [email protected] newworldeconomics.com Fourth edition October 2019 If you think in terms of a year, plant a seed; if in terms of ten years, plant trees; if in terms of 100 years, teach the people. –Confucius [I]n all cases human society chooses for that basis-article we call "money" that which fluctuates least in price, is the most generally used or desired, is in the greatest, most general, and most constant demand, and has value in itself. "Money" is only a word meaning the article used as the basis-article for exchanging all other articles. An article is not first made valuable by law and then elected to be "money." The article first proves itself valuable and best suited for the purpose, and so becomes of itself and in itself the basis-article – money. It elects itself. ... [The precious] metals proved their superiority. These do not decay, do not change in value so rapidly ... [T]hese metals are less liable to fluctuate in value than any article previously used as "money." This is of vital importance, for the one essential quality that is needed in the article which we use as a basis for exchanging all other articles is fixity of value. The race has instinctively always sought for the one article in the world which most resembles the North Star among the other stars in the heavens, and used it as "money "– the article that changes least in value, as the North Star is the star which changes its position least in the heavens; and what the North Star is among stars the article people elect as "money" is among articles. All other articles revolve around it, as all other stars revolve around the North Star. We ... have now dropped all perishable articles and elected metals as our "money"; or, rather, metals have proved themselves better than anything else for the standard of value, "money." –Andrew Carnegie, "The A B C of Money," The North American Review, 1891 Introduction by Steve Forbes No subject intimidates people, including smart people, more than monetary policy. Sadly, and dangerously, we know less about this critical subject than we did a century ago. The result is subpar economic performances around the world that will have increasingly ugly political side effects. Getting money right is the most important thing in economics, and if anyone can dispel the anxiety and mystery surrounding this crucial subject it’s Nathan Lewis. He knows economics and money inside out. More importantly, he writes about the subject lucidly and insightfully in a soothing and reassuring way. Readers will come away from reading this, scratching their heads and saying, “My goodness, this really isn’t that complicated. I understand it now.” Most investors, for example, know the basic way exchange-traded funds work. Using that knowledge as a springboard, Lewis felicitously explains how a gold standard works. Notice that article “a.” One of the myths Lewis wonderfully demolishes is that there is a one-and-only gold standard. Actually, there are countless varieties, but the real ones all share a common characteristic: They use gold as a measuring rod to keep the value of money stable. Why? Because the yellow metal keeps its intrinsic value better than anything else on the planet. And that leads us to another myth Lewis debunks: that there must be 100% gold-backing for paper money. Theoretically (although Lewis doesn’t advocate this), you don’t need an ounce of the yellow metal to operate a gold standard; all you need is to refer to the price in the open market. While we’re on the subject of myths, Lewis performs here – just as he did in his previous masterpiece, Gold: The Once and Future Money – a vital historic service. With real facts and figures on industrial output and crop harvests he points out just what a mighty boom – and one without historic precedent – the U.S. underwent between 1879 (when we returned to the gold standard after suspending it during the Civil War) and the First World War. It’s amazing that ignorant historians and ideologically blinded economists still try to trash the economic performance of countries when they were on gold standards. Most economists today sound like intellectual luddites when discussing gold. Another service Lewis performs is setting forth the idea that you don’t need big economic summits of central bankers, global leaders and economic experts to create a gold-based monetary system. What is known as the classic gold standard, and which was in place during the decades immediately prior to World War I, came about in an evolutionary way. And the specifics of how each country operated it were different. Lewis suggests ways that a gold standard could be reintroduced and includes a fascinating discussion on bringing in a parallel currency, that is, for a while a country would have a gold- based money operating alongside its current fiat money. Lewis rightly gives the International Monetary Fund a bashing. Few institutions in history have been as guilty of economic malpractice as this one. As this book gains attention, as it surely will, a lot of “experts” will try to trip up Lewis with technicalities. Thankfully, he can play that game, too. He won’t be caught looking like a deer in the headlights if someone brings up stuff like “bullion points.” There are plenty of historic interpretations readers can take issue with, as well as with some of Lewis’ musings on how 21st century capitalism will evolve. But these are sideshows to the main event. Gold is indeed the monetary Polaris, and this book is the best one yet in explaining why. Steve Forbes June, 2013 Preface After the publication of Gold: The Once and Future Money, several people told me that their favorite part of the book was the section describing the technical details of how to operate a gold standard system. I thought this would be too arcane for most readers, and that they would skim it to get to the historical drama. Only a few serious economic students, I thought, would delve into these detailed discussions of operational mechanisms. Those serious economic students will be the ones to actually create, manage and operate the gold standard systems of the future, so that section was for them. Instead, a broad range of readers seemed to enjoy being taken into the inner workings of how monetary systems operate. They sensed that it is, actually, not as complicated as the economic high priesthood implies. Also, they sensed that the economic high priesthood doesn’t actually know what it is talking about; and now they could understand that this is indeed correct. I often say that a typical lay reader, with no background in economics, can, in the space of a year, learn how to do this better than the great majority of economic professionals, including those who have unfortunately been given the responsibility of managing our monetary affairs. This is no exaggeration or rhetorical flourish. It is the actual truth. This book consists mostly of an expanded discussion of monetary operating mechanisms, covering all the likely variations for any future gold standard systems. This serves a number of purposes. First, obviously you cannot have a gold standard system in the future if nobody knows how to do it. Second, the political process towards a new world monetary system is presently blocked by the strong sense that those who would be charged with the particularities of establishing and operating such a system (including many of today’s gold standard advocates) don’t actually know what they are doing. This impression is correct, and the likely result would be disaster rather than success. Lastly, most economic history by academics today is grotesquely malformed due to the fact that these academics have no real idea how the systems in place at the time worked. The result is much like what one would get if you asked a primitive tribesman of New Guinea to describe the workings of an airplane. When people – mostly those without formal training in economics – grasp how easy and robust this system actually is, and the results it has produced and can produce again, they see our present arrangement as the monstrosity that it is. This change of outlook can happen quite quickly. They never look back again. Nathan Lewis July, 2013 TABLE OF CONTENTS page Chapter 1: The Classicals and the Mercantilists 1 Chapter 2: How a Gold Standard System Works 27 Chapter 3: The United States' Experience with Gold 62 Standard Systems Chapter 4: Britain and Holland’s Experience with Gold 83 Standard Systems Chapter 5: The World’s Experience with Gold Standard 101 Systems Chapter 6: Example #1: The “Making Change” System 115 Chapter 7: Example #2: “Making Change” With Both Bond 144 and Bullion Assets Chapter 8: Example #3: “No Gold” Systems 155 Chapter 9: Example #4: Linking to a Gold-Based Reserve 166 Currency Chapter 10: Example #5: Hybrid Systems 174 Chapter 11: Example #6: Free Banking 186 Chapter 12: Example #7: End the Fed 195 Chapter 13: Transitioning to a Gold Standard System 204 Chapter 14: The Parallel Currency Option 214 Chapter 15: Dealing with Bank Insolvency 225 Chapter 16: Dealing with Sovereign Insolvency 245 Chapter 17: Twenty-First Century Capitalism 265 Notes 275 Index 277 Chapter 1: The Classicals and the Mercantilists Some men hold that any king or prince may, of his own authority, by right or prerogative, freely alter the money current in his realm, regulate it as he will, and take whatever gain or profit may result: but other men are of the contrary opinion.