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Confessions of a Monetary Primitivist
(December 15, 2001) The precious metals were once money itself, yet today many think of gold and silver as mere commodities. In their place, the unbacked “dollar” is considered a foundation sufficiently stable to support the world's economy, never mind that it is created out of thin air by the Fed, as free-floating and ephemeral as a ghost. A former twelve-year-old non-believer, now pushing 50, still doesn’t buy it.
Let’s go back in time, to the winter of 1964/65. I was twelve years old. Lyndon Baines Johnson was president, and major changes in the United States dollar were underway. The part of those changes that I could see shocked me - the US Mint would no longer be making our everyday coins out of silver.

By January of 1965 the Federal Reserve had begun to distribute the new copper-nickel clad coins (“Johnson sandwiches”) to replace our former coinage of 90% pure silver dimes, quarters, and half dollars. The new coins were carefully engineered to be of similar weight and exact size as the silver coins that had been churned out by the U.S. Mint for nearly 200 years. Franklin Roosevelt’s visage still graced the new dime, as it had since 1946. George Washington was on the quarter, as he had been since 1932. And the new portrait of the recently slain John F. Kennedy was retained on the half dollar.

But the new coins were just not the same. The new dimes and quarters were grey on the outside, with a core of copper visible on the edge. They no longer had the look, or the sound of silver. They were struck entirely of copper and nickel, base metals that traded for mere pennies per pound. From history I knew that only the very poorest countries, or states undergoing a revolution, or cities under siege, produced their major commercial coins out of base metals. Why was this happening to American money?

As a naïve twelve-year-old, I was quite sure that they couldn't get away with this. It was as if the government itself was making counterfeit coins. Did they think people were that stupid? Wasn’t our money only valuable because it had silver in it?

As a budding numismatist, I knew that gold coins had been withdrawn from circulation in 1933, and that US citizens could not convert their money into gold bullion or coins. But at least silver coins were still circulating. In my young mind, it was the measurable silver content that made the money in our country worth something.

At that time in the world at large, of course, the dollar really was as ‘good as gold.’ Although US citizens couldn’t convert their dollars due to the prohibition on gold ownership in the US, foreign central banks could always trade their dollars for gold at $35 per ounce. At about the time of the issuance of the new copper-nickel coins, some foreign countries, notably France, started to take the United States up on that promise.

In 1965 France converted some $300 million of its dollar holdings into gold, and began a monthly program of trading dollars for gold. At that time, France’s President Charles de Gaulle said:

“It is hard to imagine…any standard other than gold, yes, gold, whose nature does not alter, which may be formed equally well into ingots, bars, or coins, which has no nationality, and which has, eternally and universally, been regarded as the unalterable currency par excellence…”

Sure, it was easy to praise gold ‘over there’ across the pond – what about us? We couldn’t even own gold in the USA. All we had of any value was the circulating coin silver.

But taking silver out of our coins didn't seem to me to leave us with much. Honestly, I was surprised that stores actually took the new, obviously inferior coins as readily as they did the genuine silver ones.

After all, it was gold and silver that made the idea of money possible some 2500 years ago, and since then the precious metals had been the only mediums of exchange with any lasting value. But in 1965, the government shocked this twelve-year-old by removing the last vestige of precious metals from our currency.

Like everybody else, I followed Gresham’s Law by hoarding the silver coins, and spending the new copper-nickel coins. By 1970, there were virtually no silver coins left in circulation. The billions and billions of silver coins struck by the US mints from 1793 to 1964 were all gone. Only the copper-nickel coins circulated, as the silver coins had all been hoarded or melted for their silver content.

Gold continued to pour out of the US treasury, until finally in 1968 the $35 per ounce price was abandoned, and the Treasury no longer paid out gold at that long-fixed rate. Over the next few years, various slightly higher gold prices were attempted, but in 1972 the dollar was finally cut loose from its former gold backing. Inflation raged in the late 1960’s and throughout the 1970’s like never before in our country’s history. Silver and gold prices took off.

“The adoption of a currency not convertible to gold or other exportable gold is likely in practice to lead to over issue and so to destroy the measure of exchangeable value and cause a general rise in all prices and an adverse movement in the foreign exchanges.” - Report of the Cunliffe Committee, 1918.

By 1974 for the first time it took over two hundred of the free-floating "dollars" to buy an ounce of gold.

“The paper systems seem now to be coming to the end of their effective lives; the restoration of gold to a central position in the world money is the more valuable reform that could be undertaken. The historic evidence is that gold is greatly more efficient than paper in producing stable prices and stable and low interest rates. These are the optimum monetary conditions for economic development and social stability. Gold has in the past provided a guarantee for centuries against world inflation; it would do so again today.” - William R. Mogg, editor, London Times, 7/14/1978

It all happened just like I knew it would when I was twelve years old. I had a primitive and old fashioned idea that money was gold and silver. Today, I know that the end of the silver coin era was more a result of inflationary policies (the expense of the Vietnam war and growing social welfare programs) rather than the cause of inflation. But whichever event came first, the net result was the same: gold and silver were abandoned as monetary standards, and money lost most of its value through inflation.

Like de Gaulle said, gold “eternally and universally” has been currency, and we have yet to find a replacement of any permanence. Without gold, there is only fiat money, controlled in volume and value by the government. And a people having to live with fiat money are forever subject to the whims, purposes, and manipulations of both elected officials and appointed bureaucrats. More dangerous also are the unintended consequences that may grow out of seemingly benign and unrelated actions taken by those in government who don’t realize that a money with no gold discipline behind it is fragile, and their power over it, often haphazardly exercised, is absolute.

Having said all that about the “barbarous relic,” we’ll end this lazy column, constructed almost entirely of childhood reminisces and purloined quotes, with, what else but a couplet of quotes:

“Nobody could ever have conceived of a more absurd waste of human resources than to dig gold in distant corners of the earth for the sole purpose of transporting it and reburying it immediately afterwards in other deep holes, especially excavated to receive it and heavily guarded to protect it.” –Professor Triffin, Yale, quoted in Gold by Brian Kettle, 1982.

“There are three hundred leading economists in the world who are against gold. The problem is that these three hundred scholars are opposed by three billion people on earth who still believe in gold as much as ever.” – Janos Fekete, VP, Hungarian National Bank, 1972.

Happy Holidays and New Year to all! We’ll be back next year,

Richard Smith.


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