 Okay, welcome to the lecture this morning on our gold standards true and false. Usually, since World War II, and especially since the 1970s, every time we had a crisis of some sort, a monetary crisis, there have gone up from various people calls for return to the gold standard. Especially since the collapse of the Bretton Wood Standard, which was falsely believed to have been a gold standard. And lately, there are a number of what I would call neosupply ciders, people who thought that the Reagan era was great in terms of economic performance. So these people have gotten behind a bill that has been introduced at the House of Representatives. It was introduced last year. We'll talk a little bit about it. But it's a bill purportedly to reestablish the gold standard. But what I wanna show you today is that there are gold standards and there are gold standards. Some gold standards are false gold standards. Others are genuine. And so what I wanna do is to give you an idea of how to distinguish between different kinds of gold standards. We'll go through a true gold standard in history and then in historical gold standard that was a false gold standard. And then talk a little bit more about this bill which was introduced by Representative Ted Poe, a Republican. So if you've studied international economics, you've been told that a gold standard is a fixed exchange rate standard. And that in distinction to that, you have other types of flexible exchange rate standards. So the defining characteristic of a gold standard is supposed to be the fact that it's fixed exchange rates. That is that all the currencies on the gold standard are fixed, their exchanges are fixed in terms of the other foreign currencies and of gold. But I wanna show you that it's really an incorrect approach to looking at the international monetary system and the different types of monetary arrangements you could have under that system. Okay, so this is more of an Austrian-oriented approach to analyzing international monetary systems. So all the way on the left, if you can see there, we have the market-supplied commodity money. That is a distinguishing characteristic of the gold standard. It's supplied by the market. The supply of gold in circulation, or the supply of money in circulation, the money supply is determined ultimately by the production of gold in the economy and the amount of gold that exists at any moment. So we have the original money that arose on the market was always a commodity standard. We've had 100% gold standard for centuries. Gold, silver, going back even further, copper, brass, leather in Roman times. In the lecture on money, you should have been acquainted with these different types of commodity standards. But eventually, silver and gold arose as the best qualified metals or items to serve as money. Then we got a gold standard in which the government interfered to a greater or lesser extent, but it was still a genuine gold standard. That's the gold standard I will talk about today as a genuine gold standard. That's the classical gold standard. So as you go from left to right, you go from the best systems to the worst systems. What I'm gonna do is to talk about one of these bad systems, a false gold standard, one of which is the Bretton Woods system, which actually was formulated in 1944, that was put into operation in 1946. So we're celebrating, or not celebrating, but we're marking the 100th anniversary of the Bretton Woods system. So I will say some words about that. It's a false system. But the key here is that all the systems to the right are government monopolized fiat money. They're based on government monopolized fiat money. There's even the Keynesian ideal, which is fiat reserves created by a world central bank. That's what Keynes himself would have liked to have seen. And Keynesians every once in a while come back with this idea. So what's interesting is in the neoclassical treatment of different kinds of monetary systems, since this is a fixed exchange rate system, all the currencies are based on one world fiat currency. And this is a so-called fixed exchange rate system since all countries use gold. You have the best and the worst combined or put together under one category in the standard treatment where, as you can see, they're polar opposites according to Austrians, okay? Because here the production of money is completely controlled by market forces. Here it's completely controlled by a unified political body, okay? So let's talk about the classical gold standard, which I said had some government interference. According to the classical gold standard, or under the classical gold standard, the monetary unit is defined as a weight of gold, okay? Gold and nothing else serves as money, okay? Banknotes and deposits, to the extent that they exist, and they can certainly exist, under a 100% gold standard or even under a classical gold standard especially, they're instantaneously redeemable, or redeemable on demand for gold or silver. So when I say gold, I mean gold or silver or any other type of commodity that the market has chosen as money, okay? And so we'll talk about this in a moment, but in addition to those banknotes and deposits, under genuine gold standards, gold coin is actually in circulation as it was during the 19th century, the period of the classical gold standard. The deposits and banknotes because under the classical gold standard, individual banks, private banks could issue not only their own checking deposits, but also their own banknotes and we'll see that examples of that in a moment, okay? And also a central bank may or may not exist. It did not exist in the US, a central bank, under the classical gold standard until 1914, which was the beginning of the end for it, but it did exist in Great Britain and France, Great Britain since 1692 was when the Bank of England came into existence as a quasi central bank. So it may or may not exist, but it doesn't interfere with the market's supplying gold as the ultimate money, okay? So what is the monetary unit under the gold standard, okay? So let's take both the US and Great Britain. In the US, you had from 1834 to 1933, about 100 years, you had the legal or the dollar legally defined as one 20th of an ounce of gold, more precisely as 23.22 grains of gold. The British pound from time when they went back onto the gold standard after the Napoleonic Wars in 1821 until 1931 was legally defined as one quarter of an ounce of gold approximately, okay? Or 113 grains of gold, okay? The French franc was defined as one hundredth of an ounce of gold and so on, okay? So there weren't three distinct monies in the US, France, and Great Britain during that time. There's only one money, it was gold, okay? Dollars, pounds, francs were just names for different weights of gold, just like nickels, quarters, dimes are names for different fractions of a dollar, okay? So gold is not a fixed exchange rate system, okay? Because look, it's simply the law of arithmetic. If the dollar pound exchange rate for a hundred years was $4.86 plus or minus 1%, and the reason why was because 113 grains of gold, which was the definition of the pound, contained five times the amount of gold approximately as the dollar did, which was defined as 23.22 ounces. So you had to give $5 for one pound precisely because those quantities represented the same amount of gold. In the same way, we don't say there's fixed exchange rates between nickels and quarters in the US monetary system today, a nickel is defined as the 20th of a dollar, a quarter is defined as one quarter of a dollar, therefore five nickels exchange, they don't exchange, they're equal to a quarter, okay? That's an arithmetical equality. It's not a fixed exchange rate. So bottom line is that there weren't different quantities of gold, there weren't different currencies under the gold standard, they were all the same currency, that is gold. So here are $20 pieces and $5 pieces from 1921, 1906, respectively, okay? And here are British sovereigns, okay? So it didn't matter whether you actually had dollars in Great Britain or you carried sovereigns into the United States, as long as the seller who was accepting your gold was convinced or was confident that it wasn't counterfeit, they would be accepted, okay? You didn't have to change money to go from one country to the next, you could just carry gold, what was important to the seller was what? The weight of gold that he or she was receiving in exchange for the goods that they sold you. So bank notes and government issued notes that existed as I said on the gold standard, but they were not money proper, they were substitutes for money, they substituted in exchange for money that was held in the bank vaults or in the government treasury, okay? They were part of the money supply but only because they represented a certain quantity of gold. And in fact, you can see that on these notes which were privately issued notes. In 1903, this is a claim for $20. Notice what it says here. It's from a private bank, the Farmers and Merchants National Bank of Los Angeles. It says, we'll pay to the bearer on demand $20. Does it say that that's $20? That's not $20, that's a claim to $20. $20 is one ounce of gold, okay? So it's a claim for money. It isn't money per se. And just the same thing here. The First National Bank of Fort Myers in Florida will pay to the bearer on demand $5. Doesn't say this is $5. Simply a claim, okay? Just like the claim to your laundry or the claim to a suit that you've dropped off to be dry cleaned is not the suit itself, okay? It has the exact same value as the suit. You can sell it to someone else who has already seen your suit maybe and allow him to pick it up if you could sign it over to him, all right? It's simply the claim. Now, the value of that note was precisely $5 to the extent that people had confidence that it was an immediately redeemable claim to gold. Once they lost confidence, the value of that note would either go to zero if the bank collapsed or it would go to a discount if there was a probability that the bank wouldn't pay off. It would only circulate at $3 or $4.50, okay? So here's some of the principles of operation, okay? So as I pointed out, no fixed exchange rate, just one money under the gold standard, okay? Which is supposedly the Keynesian dream. Well, it was right in front of them or right behind them, okay? That's what we had in the 19th century. We had one world money. Though in the Far East they used silver more than gold. So in redeeming $20 for one ounce of gold, the central bank or the government is not selling gold for dollars because the monetarist economists led by Milton Friedman always claim that the gold standard is a price-fixing scheme. That the government sells dollars for gold at a fixed price or sells gold for dollars at a fixed price to fix the price at $20 per ounce. That's not the case. They're simply fulfilling their contract. They've received some of your property, the bank, and in exchange you receive a claim to that which they are contractually obligated to honor as soon as you appear, okay? You're the bearer of that claim and then they'll give you the gold. So that's not a price-fixing scheme. It's absurd to call it that, okay? You're not fixing the price of gold. The long run, the money supply is strictly limited by gold mining, even on the classical gold standard, okay? The old days it was called golden handcuffs that the government had its hands in handcuffs in a sense that they couldn't expand the money supply beyond the amount of gold that was flowing into the country because if they did so it would cause inflation and it would cause a loss of gold reserves and a loss of confidence as these gold reserves flowed out of the country in the banks and in the government treasury, okay? And finally, prices tended to fall over time under the gold standard because the annual or per annum production of gold was very small compared to the amount of gold in existence and compared to the rate of growth in a vibrant capitalist economy of the amount of goods and services in the economy. So the amount of goods and services increased yearly at a more rapid rate than the amount of money in the economy which meant that you had a fall in prices. This supposedly greatly feared and dreaded deflation, okay? But deflation was the natural outcome of a gold standard operating in a capitalist economy. So as you had more and more saving and investment which went into producing more and better capital goods as you had better technology, improvements in technology that were incorporated into these capital goods, you had greater and greater rates of growth of goods, okay? So notice that there was a gentle price deflation throughout the 19th century and especially from 1880 after the US went back on the gold standard after the Civil War until 1896 when new processes for extracting gold from low grade ore came into being there was an increase in the amount of gold produced from 1896 to 1914. But prior to that, we had inflation of 30% during those 16 years, okay? Prices fell by 30%. That meant that without doing anything without getting a raise, you gained 30% in income, okay? And the value of your dollar was 30% greater. But at the same time that deflation that didn't cause depression, it didn't cause people to be thrown out of work, didn't cause an increase in unemployment because notice real GDP went up by 85% or 5% per year, okay? Why? Because this is when the US was rapidly transforming itself into a major industrial economy. So with the improvement in technology, with the tremendous increase in saving and investment after World War II, after the Civil War, excuse me, we had a tremendous growth in the amount of goods and services produced that outstripped the growth and the money supply during that period. And so costs fell. The cost of different things fell. And it didn't cause these industries to go out of business. Just as, for example, in 1980, a personal computer made it cost $20,000. Prices have fallen by 35% per year between 1980 and 2000. And while in 1980, there were a half a million personal computers shipped, there were 11 million units in 2000 shipped. So as prices fell and costs fell, the industry didn't shrivel up because of deflation, okay? What happened was that it flourished because of the innovations and the fall in the cost of production. Here's the price level from 1800 to 1900. So notice in 1800, it's right here at 150. By 1900, it's fallen 50%. So there was a downward trend in prices. Now notice the increases. When do you think those happened? Well, that increase in the price index occurred during the era of the first bank of the United States, the first quasi central bank that we had which printed paper money like crazy. The second increase occurred during the Civil War when we had gone off the gold standard, okay? And then after we returned to the gold standard, we began to get, again, the decline in prices, okay? Now prices rose a little bit from 1900 to 1914 and people actually called it an inflation, but it was less than 1% per year that prices rose. And that was, as I said, because it became more technologically feasible to extract gold from very low grade ore that used to be just thrown away when it was taken out of the mine, okay? Okay, one of the key aspects of the gold standard is something called the price-species flow mechanism. Species simply refers to the special metals, gold and silver, the precious metals, excuse me, gold and silver. Professor Herbner, if you were in his free trade and its enemies lecture, talked about the price-species flow mechanism, but I'll explain it. And it's what kept inflation in check under the gold standard. It was very effective. It was actually first discovered by an 18th century philosophy economist, which I think I mentioned in my first lecture. His name was David Hume. And that was Hume discovered it, but then it was refined and elaborated and probably the best statement of it was given in 1937 in a book by F.A. Hayek in Austrian. But in any case, what did it do? Maintained equilibrium, B.O.P. always stands for balance of payments in the balance of payments. It made sure that there weren't huge surpluses or huge deficits that went on for years and years, okay? It distributed gold throughout the gold standard area according to the relative demands for money. The U.S. was a bigger economy, for example then let's say France or Italy. Well then the U.S. would get more of the gold in the world because it had more goods that had to be bought and sold. It also operates interreginally between states and the U.S. For example, we know that the rust belt parts of the Midwest have shrunk tremendously, take Detroit. It's lost tremendous industry, jobs and so on. It doesn't need as much money to transact its business. So without any fanfare, the amount of dollars circulating in the Detroit area has shrunk. And some of these dollars have gone to an area where there's a greater demand for money. Let's say the Silicon Valley, okay? Does anyone know what the balance of payments of Detroit is or was? No, because fortunately the government, we shouldn't care, first of all, balance of payments don't matter. The government doesn't collect statistics on interstate trade, trade between the states within the country. So we're fortunate, but states all have surpluses and deficits in their balance of payments all the time. No one knows what they are, no one cares. It doesn't matter. The market in that area, in the dollar area, keeps the balance between the various states as they grow or decline. Whereas some states grow more than others, money will be shifted to those states that have an increase in the demand for money, okay? And that's the way the gold standard operated on an international level, okay? No one was really worried about the balance of payments. It never became a problem until governments began interfering after World War I, after 1914, okay? So it limited the increase of the money supply and inflation, that is the price PCFOR mechanism, okay? By the central bank and the banking system. So let's look at what it is. Let's say the US banks increase the money supply, okay? And what happens? Well, notice it causes the sideways arrow indicates causation, causes prices, P sub US to go up in the US, above or more than prices in the world. So now suddenly prices are higher in the US than they are in the rest of the world. What's the natural effect of that? Well, X for exports, US exports are gonna become more expensive and they're gonna fall. And on the other hand, US citizens are gonna buy fewer domestic products and buy more foreign products. So imports are gonna go up. We're suddenly going to have the dreaded balance of payments, okay? So balance of payments is now gonna be negative. It's gonna be less than zero, meaning more money is spent abroad than is being spent on our products. So the next step is that you'll get a deficit, okay? Which is another way of saying that the balance of payments is negative. And once that happens, gold will begin to flow out of the country because foreigners who have these excess dollars, they don't use dollars in their economy, okay? Under the gold standard, they want gold. So when those dollars get turned into their banks, their banks are gonna demand gold from the US. What's going to happen? Gold is gonna begin to flow out of the US. As gold flows out of the US, the banks are gonna have to reduce the money supply or stop increasing it, okay? As they do that, as the US money supply falls, then you're gonna get US prices again falling, okay? And they're gonna go back below world prices or at least the rate at which they're rising and eventually they'll be equal to world prices. In which case, you're gonna get US exports picking up again, imports going down because now it is cheaper to buy in your country, many goods, and then you'll get a balance of payments surplus and the gold will flow back in. That was automatic. You'd have to worry about that happening, okay? The only problem was if the banks continue to increase the US money supply, it would continue to cause prices in the US to rise more rapidly and it would cause gold to flow out, okay? So that's the price-species flow mechanism. So it is true under the classical gold standard because we didn't have 100% gold backing of the money substitutes of the notes and deposits. The banks could temporarily increase the money supply and that would cause temporary inflationary boom, deficits, and eventually when the banks were forced by the outflow of gold or in Britain's case, the central bank or the bank of England was forced by the outflow of gold to stop increasing the money supply or continue to lose gold, at that point then, there would be a recession, okay? But these booms and busts were very minor compared to what occurred after 1914 after we left the gold standard, okay? Okay, so here's the money pyramid under the classical gold standard. Note that, let's say the country has $2 billion in gold. Let's say the central bank has $2 billion in gold. And the central bank decides to keep a reserve ratio of 40%. They're only gonna back up their notes by 40%, okay? So for every, let's say, dollar of gold, there's gonna be two and a half dollars of notes, okay? So that means if they have $2 billion in gold, that's gonna allow them to issue $5 billion in their notes. Now, the commercial banks, they use the central bank notes under the classical gold standard to back up their commercial bank notes and deposits, okay? So if they keep 20% reserves, that means if there's $5 billion of central bank notes in their vaults, well, then they can issue $25 billion in checking account money and in their own private notes. So you have this pyramid and it can become dangerous, right? Because if everyone who had that $25 billion who was holding that $25 billion came to demand their money back, what would happen? The banks would have to then go to the central bank with their reserve, with their central bank notes and demand gold, but there's only $2 billion, ultimately backing up $25 billion. So that was a problem with the classical gold standard. And that's why the central bank and the private banks are very, very careful about increasing the money supply, okay? Because once they began to lose gold to foreign countries, then American citizens became nervous and they would begin to go to their banks and pull gold out. That's called an internal drain, okay? The external drain is the balance of payments deficit and at that point, other people would become nervous because they would see more gold leaving the vault and it could be a bank run and that did occur under the gold standard. But it was a good thing because it taught them a lesson and it caused them to be more prudent and responsible. Okay, now let's see, what if they increase, you can see here, if they lower the reserve ratio of the central bank and issue another, they don't have any more gold but they issue another $1 billion of notes. Well then that will get into the system here, that extra billion. The banks can now issue $5 billion more. That increases the money supply in the US, okay? And let's say we have the Fed at this point. That increases the money supply in the US to $30 billion and what does that do? Prices go up, we have the whole price-peasy flow mechanism. We begin to, our prices look higher or are higher than the world prices and we begin to lose gold to the rest of the world because of a balance of payments deficit. So you get an expansion, an unhealthy expansion of this pyramid of money and it could tip over. Okay, if it gets too big at top, at the top because people begin to worry. So let's say you have a $1 billion deficit. Well, central bank loses $1 billion of gold and they begin to worry and people begin to worry and that's when they stop increasing the money supply or they actually begin to deflate the money supply, okay? So even though the classical gold system standard was not a perfect monetary system, it had mechanisms that restrained inflation by the central banks or by the banking system itself. So the end came in, began in 1914, it ended by 1933 in the United States and what's interesting to note is some people say the classical gold standard was unstable and collapsed in the 1930s. No, it didn't collapse. It was, as Mises pointed out, it was destroyed by deliberate government policies in which they tried to loosen these golden handcuffs so that it could inflate to pay for wars or to pay to get us out of depressions and so on. So during World War I, gold reserves, so there was a first step was taken, they were centralized in the Fed. The banks were no longer permitted to hold their own reserves. They would have to, instead of the reserves, they would hold the Federal Reserve notes as backup, okay? Though people demanded gold, they would then turn those reserves in to the central bank, to the Fed and get the gold. A heavy tax was placed on the private issue of banknotes, 10%, so that only a few banks would issue notes so there wasn't much competition in private issue of notes. By the mid-1920s, the private issue of banknotes was eliminated, it's declared illegal, okay? And in 1917, we prohibited the export of gold, which is a way of interfering with the price-species flow mechanism. But that only occurred for about one year during World War I. And then also, to pay for World War I, the Fed cut reserve requirements in half. So before, banks had to hold about 20% of their notes and checking deposits in the form of gold. It was cut to about 10%. What happened? The money supply doubled between 1913 and 1919. We had a huge inflation, post-war inflation. And then we had a crash. It was a very deep crash, but it didn't last long because the government didn't interfere. It was called at the time the Depression of 1920, 21, okay? But at least the government did not attempt to cure the depression, okay? So the cure is like trying to cure a heroin addict, let's say, by giving him more heroin, okay, because as he starts to, because what recession is, is going cold turkey, okay? Inflation is like a drug that you become addicted to. In order to stop, in order to be healthy, you have to stop it and you have to stop it immediately. But if you stop it immediately, you get signs of a recession, okay? Or a depression like in 2021. And there's a lot of pain. But if you try to stop the pain by giving the guy more heroin, it just postpones the pain. It doesn't cure the victim. Okay, so there are other things that led to the destruction of the classical gold standard. The Fed expanded reserves during 1920s. It wanted to help Britain, which had very high price level after World War I. It wanted to help Britain to return to the gold standard. So remember, if Britain's prices, which were 10% higher than the rest of the world, it has very high prices. It can sell its coal and other products. It's a price-species-flow mechanism. So Britain's losing gold to the United States and elsewhere. How do you prevent Britain from losing gold? You inflate yourself so you push your prices up as high as Britain's prices so that they get a balance of payments that is balanced, okay? So we were trying to help Britain, and in doing that, we set off inflationary booms in our stock market, in real estate markets, which ultimately led to the Great Depression, okay? We wound up with a great crash and then the Great Depression set in. And by 1930, we had many banks failing between 1931 and 1933. And on May 1st, 1933, FDR issued an executive order. It wasn't even an act of Congress that ended the gold standard, okay? You were also prohibited from owning gold. The American citizens could no longer own gold. And gold was devalued. That means a dollar was, I'm sorry, the dollar was devalued. Which means that a dollar was no longer defined as one-twentieth of an ounce of gold. It was now shrunk to one-thirty-fifth of an ounce of gold, okay? So here's the order. And it says, honor before May 1st, 1933, all gold, coin, gold, billion, bars, and gold certificates now owned by them, now owned by them to a federal reserve bank, branch or agency, or to any member bank of the federal reserve system. And at the bottom it says criminal penalties for violation of executive order, $10,000 fine or 10 years imprisonment or both as provided section nine of this ridiculous monstrous despotic order, okay? So that's how the gold standard was destroyed by raw government power, okay? So the 1930s was a period of monetary chaos. All countries had their own fiat currencies at this point that had all gone off the gold standard. Britain went off in 31, US 33. The Latin Union, which was France, Switzerland, a number of other countries went off in 30. They tried to hold out heroically, but they went off in 1936. So what happened was when it was clear that the Allies were gonna win the war, they began to be planning for a new world monetary system because of all these currency wars during the 1930s between different countries. Each country tried to devalue their money more to make their goods cheaper. But of course then other countries wouldn't sit still. They would print their money like crazy to make its value go down, to make their goods cheaper, okay, on foreign markets. So the Bretton Wood system was what came out of these deliberations, which began in 1943, okay? And was put together in 1944 as a plan. The main architects were the US and British governments. And there was a lot of tension between the two, but the American government came out victorious. The US government wanted the dollar to be the dominant currency in the post-war world, okay? So, oh, let me go back. Harry Dexter White was the US financial expert that represented the US government at Bretton Woods and John Maynard Keynes. The father of macroeconomics and of modern depressions and financial crises was the British representative. That's Bretton Woods, okay? They didn't just go to a regular little convention center. I mean, these guys, they all were living it up in this posh setting in the White Mountains in New Hampshire. It's still standing. I visited it last year. It still operates. It's a beautiful hotel. There's the Monster Keynes. And there is the communist Harry Dexter White, which we'll see that he was, it turns out. The Soviet spy. After the Venona files were released by the Soviet government in 1980s, it turned out that in fact, he was suspected to be a Soviet spy, and it turned out he was. So, he testified and defended his record to the House Un-American Activities Committee. But historians now agree that he passed secret information of the Soviet Union during World War II. He died three or six days after his testimony. I'll refrain from saying something uncharitable about that. Ben Stiles written a good book on this. It came out in 2013 or 2012. Says that White acted out of idealism, not as a member of the Communist Party. Now, he never did join the American Communist Party. Not simply because he believed that the Soviet Union was a vital US ally, but because he also believed passionately in the success of the bold Soviet experiment with socialism. So, whenever you have a lot of murder and bloodshed and killing by government, it's called, well, it's a bold experiment, right? They never say it's good or successful, it's bold. They took a bold step, okay? So, I wouldn't have put it that way if I was Stiles. But as he points out, White was not a Communist Party member because he would not take orders from Moscow. He'd take their money for the secret he sold them, but he wouldn't take orders, okay? He worked on his own terms, okay? And everyone said he wasn't really a bright guy, but he was a hard worker, and he sort of knew the nuts and bolts of the monetary system, you have to give him that credit. So, how did the system operate, or what was it? Here were the key characteristics. The US dollar was denominated or was given the role of the key currency, okay? It was the only currency under the Bretton Wood system that was directly convertible into gold at the devalued rate of $35 per ounce, okay? But you and I or our parents and grandparents and great grandparents couldn't get gold for their dollars. They couldn't convert their dollars into gold, okay? The only people that could convert or agencies that could convert dollars into gold were foreign official institutions, central banks and governments, okay? US citizens could not convert their dollars into gold and still were not even permitted to own gold under penalty of law. US citizens were not permitted to own gold until 1976, okay? If you were a licensed jeweler or licensed dentist, you could get gold only for those purposes of, you know, related to your work, okay? If you were found taking the gold, selling it to someone else, then you would be prosecuted. You couldn't even, I found out, you couldn't even own gold in Canada. In other words, you couldn't own and hold gold outside the US, okay? Now, what about the other currencies like the pound and the German mark and so on, okay? They were not the key currencies and they were backed by dollars. So they held dollars instead of gold, okay, to back up their currencies. Now, that is a very pernicious system, as we'll say, okay? It's a system that's self-contradictory and that will lead to its own collapse. If the dollar is treated as good as gold, then people, if the US government has deficits, foreign countries will never send the dollars back for gold if they believe that the dollar is as good as gold and they did for a while, but after a while they'd lost confidence, fortunately. So under the principles of operation were as follows. Foreign currencies were expanded and pyramided on top of dollars and ultimately the US gold stock. So in other words, if the US had balance of payments deficits, people, the exporters in foreign countries who sold us stuff took these dollars, they didn't want the dollars, they went to their central banks and they demanded their own currencies. So let's say you were a French exporter, you earned dollars, you went to the central bank, you turned in the dollars, where did the central bank get the francs to pay you? Created it out of thin air. So US inflation was exported to foreign countries. They gave us real goods, we gave them paper dollars, okay, and I'll show you this in a little bit more detail. So the balance of payments mechanism didn't work under the Bretton Woods system and that was the key. Here, if the US now increased the money supply, the US price would go up above world prices, our exports would go down, we get a lot of imports from foreign countries, we'd have a balance of payments deficit, but guess what, here's the key, gold wouldn't flow out of the country, dollars would. And when these dollars flowed to other countries, their central banks bought them and they bought them by printing their own money. So we caused world inflation. This system caused world inflation. And the US had strong reasons to be inflationary, okay? And by the way, here's the pyramid. Now you have gold at the Fed. The Fed notes and deposits, bank deposit, banks deposit their reserves at the Fed and the Fed issued notes, which we all carry in our wallets. Those backed up the commercial bank deposits, but now what was backing up foreign currencies? What was backing up foreign currencies were bank deposits in US banks, okay? Which when they got, they usually sold for US government securities. So now you had a huge and very unstable pyramid that was all based on the US gold stock. So one French economist pointed out that the US could run deficits without tiers, that is without any bad consequences. So we ran from 1958 onward, we ran continual balance of payments deficits because we were just giving them our paper. We were printing our paper, giving them our paper and they were giving us real goods and services. We were getting cheap foreign imports. As long as the foreign governments and central banks were willing to accept and hold our dollars, we didn't have to worry about deficits. And Jacques Rouef was the French economist who used that term and he was also an advisor to the president of France, Charles de Gaulle, who did not like the fact that the US dollar was dominant and that the US dominated the Western world, so-called. So what happened? US prices continued to go up so that one gold ounce could buy foreign currencies that purchased more goods than the $35 did, which what you could get for the dollars. So what happened is people began to sell gold. Now, Europeans were allowed to own gold. They would be, I'm sorry, they began to sell their dollars. So they would sell their dollars for gold in London and Zurich and that would push the price of gold up to $38 to $40. But the US had to keep the price of gold to $35. So it would have to send gold out of the country to foreign governments that would then sell gold in these markets to keep the price to $35. So we began to hemorrhage gold, okay? So it paid to buy foreign currencies and used them to buy gold. Let me explain why, it's something called arbitrage. If you had $35, you would go to these foreign free gold markets, buy an ounce of gold, you would get, let's say, 70 German marks because the exchange rate was two marks to $1. But since there was no inflation in Germany, you could buy more goods in Germany with 70 Dutch marks than you could buy in the US with $35. So guess what? You would take the 70 German marks, you'd buy all these goods in Germany, you'd export them to the US where you could get $40 for them. So you turn $35 into $40, okay? Because US prices were higher, all right? So the US had to continually sell gold because everyone was trying to get, was selling dollars to get gold, these free markets. Eventually, we had the Vietnam War beginning, President Johnson promised that we would have guns and butter that even though we had to pay all this money toward defense for fighting in Vietnam, we would not be taxed, they would not raise taxes to pay for the war, okay? So we would have butter, too. Guns and butter was the motto of the Johnson administration. So what happened? We forced, in a way, the dominance of the dollar caused Europeans to pay for our war. US living standards didn't go down during the war, which they usually do during wars. Why? Because we were just paying dollars that were going out through our balance of payments, we were buying more imports than we were selling to them. So we'd get real goods and services, consumer prices wouldn't rise as much, and they would get dollars that were decreasing in value, okay? Eventually, they got fed up, okay? Especially France and Germany. Germany was an occupied country, it was still US troops, so Germany couldn't do too much about it, but they wanted to now turn their dollars back in, they wanted gold themselves. France pulled that in NATO because the US blackmailed France and Germany and said, you know, okay, we'll give you your gold back for your dollars, but the problem is, of course, then we won't be able to afford to keep our nuclear defense against the Russians. So we blackmailed them, and so France thumbed their noses at us, they dropped out of NATO, they built up their own nuclear defense force, and they demanded gold, and the US gave them the gold, and the French didn't just send freighters to get their gold, they sent a warship. They didn't trust that there wouldn't be some sort of an accident on the way back with that gold, and so they got the gold out, and that was Jacques Rouef was a friend of Mises advising Charles de Gaulle, the president, who was behind all of that, which was a great thing to embarrass the US like that. Yeah, so for that period when France was out of NATO, it was because the US blackmailed them, basically. And here's what happened to the gold stock. We had more than half the gold in the world, this is at $35 per ounce. There was $25 billion in the US gold stock. The rest of the world had a dollar liabilities of only $12 billion. So at that point, foreigners were convinced that, look, there's more than enough gold to pay off all dollars that we're holding, so the dollars is as good as gold. And since US citizens couldn't demand gold, well, then all that gold was more than enough to cover the foreign liabilities. And then because of what I explained to you, we began to get a fall in the gold stock, okay? By 1967, there was $12 billion in our gold stock and $50 billion of foreign liabilities. That's when they started getting very nervous and demanding their gold back. In 68, we were down to 10, and by 71, there were $9 billion in the gold stock, and there was a run on the dollar, okay? The foreign governments were demanding gold so that they could keep the price of gold down, and it was said that we had about two weeks left of gold. It would have all run out. And there was $80 billion of foreign liabilities. By 1968, they stopped worrying about what was happening in the free gold markets. They allowed the price to go up. The US demanded that only central banks buy and sell gold to one another at the fake price of $35, even though in the free gold markets, it was selling for 38 or sometimes it went up to 40. And finally, Richard Milhouse Nixon. You gotta know there's something wrong with the guy with Mil Namek Milhouse. Close the gold window, okay? So he said, I have directed secretary, you gotta find this video online. It's online, he looks ridiculous. I've directed secretary Connolly to suspend temporarily. Yeah, that means forever. The convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of the monetary stability and the best interest of the United States. Well, that's of course what he was saying. So the US reneged on a solemn pledge that it made in 1944 when it formulated this Bretton Wood system. So it reneged on its own system, okay? We then went back to a system for about 13 months. I was called the Smithsonian system. It was a monetary system where there was no gold involved but there was still fixed exchange rates. Nixon called it the greatest monetary agreement in world history. It collapsed 13 months later, okay? All right, so now here we are today. We've had the financial crisis, the great recession. We've had a very slow recovery and people are starting to look around for alternative monetary arrangements, quantitative easing, forward guidance of interest rates, all this nonsense that the Fed has been spouting since 2008, none of this stuff has worked. So understandably there are some people who don't want the restoration of a gold standard. So there's a recent proposal that wants the Fed to target the price of gold, okay? And it's the basis of this bill. The Dollar Bill Act of 2013, introduced by Representative Ted Poe of Texas, okay? It's a totally phony gold standard, as I'll show you. Worse than Bretton Woods. Okay, so the Fed would fix the price of gold within a narrow band, within plus or minus 2% of the target price. How would you get the target price? Well, you have the Board of Governors designated some target week 90 days from, between 90 days, 120 days from now. And of course, this is conceived in secrecy, so you know there's a problem here. Using a random process, some random process on a computer, the Board would designate a special week and a target moment, and they wouldn't publicly disclose it. At that moment, what they would do was they would find what the price of gold is on the commodities exchange standard, commodities exchange market. And at that moment, it would fix the price of gold. That would be the price of gold in terms of dollars Fed would have to maintain that price, okay? Plus or minus 2%. They would do it by open market operations, buying and selling government bonds, okay? And it would be barred, they would not be allowed to use indirect methods. They couldn't target the Fed funds rate like they do now. Well, I mean, so what? I mean, they're still using able to use open market operations. Gold would play no role really in all of this, okay? The dollar would still be pure fiat money controlled by the Fed. The monetary base would still be what it is today, meaning the monetary base is what the Fed directly controls. It would be the amount of Fed notes held by the public that you and I have in our wallets and purses, the amount of reserves that banks have in their banks in their vaults and ATM machines, plus the reserves held by the banks on deposit at the Fed. That's exactly what the monetary base is today. So it doesn't change it. It doesn't make all the ultimate money. It's still these fake reserves or reserves that can be printed out of thin air, okay? Just with one stroke, one keystroke, okay? And that exists in cyberspace. The Fed would still control the monetary base, okay? So suppose it was established at $1,300 per ounce. The Fed would be legally compelled to conduct open market sales, okay? When the monetary, when the price of gold rose above 2% over 1,300. That's $1,326. So in other words, if the price of gold went to that limit, the Fed would then have to sell bonds and reduce the amount of money in the economy, okay? To keep it in that limit. On the other hand, if it went below $1,274, means they, to avoid deflation, they would have to then buy bonds and print new money, okay? Okay, where is gold in all of this? Okay, it's just this price of gold that they fixed. Okay, so the main problem is it's a gold standard in name only. In fact, the supporters call it the goldless gold standard. They think it's a great thing. There will be no gold dollar coins, gold dollars coined in circulation, okay? The Fed would not be required to maintain convertibility between dollars and gold or to hold any gold reserves at all. At least under Bretton Woods, they were forced to hold gold reserves and they had to convert them at least for foreign governments. That would be gone now. So this pose act would leave the fiat dollar fully intact and the supply of dollars would still be subject to the Fed, okay? And of course, if you went into a recession or if you had an emergency in the Middle East and you had to intervene, what would they do? They would suspend that. I mean, it's just a matter of saying, well, now the price of gold can go to 1,400 so we can flake more, okay? They wouldn't say that, but they would change the price of gold. It's a simple stroke of the pen. Sustainable Fed Monopoly, okay? What I want to get to before I end is the supporters. The supporters are very famous supply ciders. Steve Forbes has written a book that's just come out on this type of a gold standard. There's an economic journalist named Lewis Woodhill and then Nathan Lewis has written two books on the gold standard. I think he calls it gold, the monetary Polaris. This one book that's very interesting and shows what they really want. They all of them recognize that fiat currency would be, the dollar would be a fiat currency and it would be controlled by the Fed, okay? But here's some of the interesting things they say. They still believe that the gold standard, even in history, was an invention of government, that it didn't arise or evolve on the market, okay? So Forbes himself says, well, there's countless varieties of gold standards. Yes, Steve, but there's only one real gold standard. And he says the common characteristic is the following. And listen, he says, theoretically, you don't need an ounce of yellow metal to operate a gold standard. So you don't need any gold to operate a gold standard. All you need is to refer to the price in the open market, okay? Who ever heard of such a thing? Why call it a gold standard then, okay? Nathan Lewis, who wrote two books on this, he says that all of these systems, even 100% gold standard was an invention of government. That's just bad history, okay? It's not true. He calls it the no-gold gold standard, that's his favorite term, in which the money manager does not buy or sell gold, but instead targets the gold price by buying or selling bonds. And he even says they can even buy fine art. It doesn't matter what they buy or sell, as long as they're producing dollars when the price of gold is falling. And the big thing is they say, well, gold is completely fixed in value. It has an intrinsically fixed value. What does that even mean, okay? So Lewis says a gold standard can be used as a measuring rod to keep the value of money stable. And he says it keeps its intrinsic value better than anything on the planet. Well, we know as Austrians, all value is subjective. The reason why people value gold is for using it directly or because it provides them with a good money, okay? There's no good has an intrinsic value. And they don't define it. Woodhill says something like the same. The most fundamental thing about a unit of measurement is that it be constant. Gold is not money and it should not be money. However, we can and should use gold to define the value of the dollar. So what he's saying is that gold isn't money. It's some kind of a measuring rod and you'll see something weird here. When Forbes says he compares gold to a foot, the value of gold to a foot that has 12 inches that doesn't change or a pound that has 16 ounces that doesn't restrict your weight. So those things are completely fixed. And he's claiming the value of gold is the same. That's totally ridiculous, okay? Gold goes up and down in value. And see the key is they want the room to have inflation. So he says the virtue of a properly constructed gold standard is that it's both stable and flexible. It's stable in value and flexible in meeting the market place's natural need for money. So he's worried if the economy is growing rapidly as it did under the gold standard, he doesn't want prices to fall. He's afraid it's gonna lead to a depression. So he says such a gold-based system would allow for rapid expansion of the money supply. Rapid expansion of the money supply. So their motto is we want sound money and plenty of it. Okay, it was totally self-contradiction. And then Lewis takes it to its logical and ridiculous conclusion. He says, you know, if gold is intrinsically constant in value, then we can find out what's happening to people's real incomes by stadium in terms of gold. And so what he does is this. He starts in 1955, goes to 2010. Notice what he does. This is the median male full-time income in gold ounces. So he's telling us that people were richer in 1965 or so than they are in 2010. And even in 55, they're richer than they were in 2010. Because their income can buy more gold ounces. Did he ever think of the fact that gold was worth, the price of gold was $35 here? And it got up to $1800 and now is it $1300 or so? Okay, so the value of gold is changing. And so he uses it to make the following claim. So here's the real income in gold ounces. It went from 125 ounces per year to 250 in 1970. So people were getting richer, and the income was going up. And suddenly it collapsed. That's when gold prices went up the first time. To 25 ounces. Went up to 150. And then when the gold price rose, it collapsed again. So according to Lewis, real income in 2010 was only 14% of what it was in 1970 and 28% of what it was in 2001. So he's telling us that we're maybe only one fifth as rich as, less than one fifth as rich as we were. Our incomes, our economies, one fifth the size because the gold prices have changed. Okay, so that's just nutty. That's not the way to defend a gold standard, okay? So summing up, it's not a gold standard. Doesn't restrain the Fed from increasing the money supply. In fact, it gives it a window to increase the money supply. Okay, when the gold price falls, okay? Imagine when the gold price going from 1800 to 1300 as it did, he would have tremendous increase in the money supply to push it back up to what it was a few years ago, $1800. And it would collapse even more quickly than the Bretton Woods system collapsed, okay? And thank you for your attention.