real vs false money - how our monetary system works and fails

7/28/2019 Real vs False Money - How Our Monetary System Works And Fails

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SPECIALREPORTPREPAREDBYGLOBALGOLDSWITZERLANDRealversusFalseMoney

Author:ClaudioGrass,ManagingDirectorGlobalGoldSwitzerland.Keywords: Monetary History, Gold Standard, Fiat Money, Free Money, Austrian Economics, Debt

Crisis,Inflation,CurrencyDevaluation,CentralBanks, PhysicalGold,PaperGold.

Content:Thispaperdiscussestheveryconceptofmoney:whatisit,wheredoesitcomefrom,how

does it lose value.Besides, thepaper answers thequestionwhicheconomic risks are inherent in

todaysmonetarysystem.

Tableofcontents:Introduction page1

Theoriginoftodaysbankingsystem page3

Milestonesinmonetaryhistory page5

Theimpactonourlives page10

Howtoprotectoneself page11

Introduction

Thosewhodonotrememberthepastarecondemnedtorepeatit. GeorgeSantayanaFiatcurrencies inconnectionwithourbanking systemhavenumerousdisadvantages.The

systemispronetobankruns,leadstoanunstableeconomyandconstantinflation;toname

justafew.Theaimofthisarticle istoexplainhowourcurrentmonetarysystemworks.To

begin,wewillexplainhowmoneyandthebankingsystemcameintoexistence.Wewillthen

dive into important milestones of monetary history. At the end of this article, we will

illustratehow individualsaverscanprotect themselves from these shortfallsby relyingon

realinsteadoffakemoney.

Now letus startby lookingat thequestionofhowmoneycame intoexistenceandwhat

stagesit

went

through

in

its

development.

Historically,

anything

aperson

needed

he

created

himself.Peoplewereselfsufficient.Economicinteractionwasmoreorlessunnecessary.

Between9000and1000B.C.,cattlewereusedassuchamediumofexchange.Itwaseasily

transportable;andprovidednotonlymeatwhenslaughtered,butalsoadailyreturninthe

formofmilk.Thisformofmoneywaspracticalbutstillhadthedisadvantagethatitwasnt

easilydivisible.Furthermore,when thenomad lifestylewasslowlygivenup,andpeople

started to settle down in cities etc., holding this form of money became increasingly

complicated.

Overtime,

people

realized

that

some

people

are

better

performing

specific

duties

than

others:Sotheydecidedtodividelabor.Everyonewasassignedaspecifictask(Onewhathe

wasbestat).Thisincreasedeconomicoutput,andingeneralterms,everyonebecamebetter


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off. This transition of how work was performed in an economy made trade between

individualsanecessity;thereforebarterbecamecommonplace.

Barter worked generally well: The shoemaker, for example, could concentrate on making

shoes

and

rely

on

trade

with

the

baker

or

butcher

to

put

food

on

his

familys

table.

Barter,

however, also had disadvantages. To elaborate lets continue with the example of our

shoemaker. After trading with the butcher the previous day, the shoemaker goes to the

butcheragain.Hewants to tradeanewpairof shoes for somemoremeat.Thebutcher,

however,doesntrequireshoesonadailybasis; today instead,herequiresanewknifeto

cuthismeat.Theconsequencesofsuchascenarioresultwiththeshoemakerhavingtofirst

trade inhisshoe foraknife,thengotothebutchertotrade it forsomemeat.Asyoucan

image,barterrequiresa longchainoftransactionsbeforeonegetswhatonereallywants.

Anotherproblemwithbarteristhemissingdivisibilityofsomegoods.Letsassumethatthe

exchangerateofahousetoashoeis1:1,000;theshoemakercannotbuy1/1,000ofhouse

andthepersonsellingahousedoesnotreallyhaveusefor1,000pairsofshoes.

These disadvantages of barter led the market participants to search for a medium of

exchangethatwouldbeacceptedbyallparticipants,andwasthereforehighlyliquid.

Theimageaboveshowsthetimelineofdominantinternationalcurrencies,althoughpapercurrencieshave

existedbefore it isarelativelynewoccurrencethat ithasbecomethedominantformofmoneythroughout

theworld.

Thesedisadvantages

brought

on

anew

era

of

money;

namely

the

coins

minted

out

of

preciousmetals.TheancientLydianswerethefirstimplementingamisshapennuggetcalled

Electron, a naturally occurring goldsilver alloy, as their medium of exchange

approximately700yearsBCE.FollowedbytheancientGreekswhowerethefirsttostartoff

withgoldcoins(TheDrachma).Whenoneanalysesdifferentcivilizations inhistory, likethe

Greeks, Romans and the history of city states in Italy (Florence, Venice, Genua etc.)it is

evident that the blossoming of these Civilizations took place when they adopted Gold or

Silverbasedcurrency.

One such example is the Solidus which was used from China to Britain during the

Byzantine

Empire.

It

was

used

basically

as

a

world

currency

for

over

800

years.

Another

interestingaspectisthatwhenempirescollapsedsodidtheircurrency.Thiswasnotduetothefactthatgoldwassuddenly lessappreciatedbythepopulationofothercountries,butwasdue togovernment intervention.Whengovernments ran into (financial) trouble


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they startedmixing inworthlessmetals intogold coins. They could then issueand spend

moremoneythantheyactuallyhad.Liketoday,thesemeasuresleadtotheimpoverishment

of the middle class and fueled corruption and wars. It is important to understand that

alreadybackthenthisprocessleadtoamassivewealthredistributionfromthebottomtothe

top,

from

normal

people

without

privileges

to

the

elites

with

the

privilege

to

control

the

currencysupply.

What we learn from history is that money doesnt come into existence by force or

legislation.Itisinessenceamarketprocess;whereparticipantsdecidefreelywhichmedium

theywanttouse. Ithastobeeasilyrecognizableandtransportable. Ithastoberareso it

cantbeeasilyreproducedandso itcanactasastoreofvalue.Goldandsilverfulfillthese

criteria,havean intrinsicvalueandarefreeofanycounterpartyrisks.Therefore, it isclear

whyhistoricallytheywerethemostwidespread mediumofexchange(money)usedovera

timeperiodofover3000years.Aristotlecametothefollowingconclusion:Ineffect,thereis

nothing inherentlywrongwithfiat money,providedwegetperfectauthorityandgodlike

intelligenceforkings.

We will now discuss the origins of our current banking system. You might be askingyourselfifweforgottotalkabouttodaysmoney.Notatall!Themoneywhichweholdinourhands today (orhold inour accounts) isjust so strongly connected to thebankingsystemthatunderstandingthebankingsystemfirstisessential.TheoriginoftodaysbankingsystemInancientGreece,templesactedasbanksbecausetheywereregardedassafe;becauseof

religious reasons and due to the fact that they usually had their own militia for

protection.Sinceitwasnotadvisableeventhen;towalkaroundwithtoomanyGoldorSilver

coins,peoplehavealways soughtaplacewhere they could safely store largeamountsof

coins.Laterinhistory,thegoldsmithsstartednotonlytomintpreciousmetalcoins,butalso

toactasdepositorieswheregoldcouldbedeposited.

Peopledepositedtheirgoldwiththegoldsmith,who inreturndemandedastoragefee for

safekeeping.Thegoldsmithwasobligedtohandoverthisgoldondemand.Thedepositors

werestilltheownersandthegoldcouldntbelentout.Thedepositorreceivedareceiptfor

thedepositedgold.Over time, this receiptbecameameansofpaymentbecause itwasa

titleof

ownership

on

gold

and

was

seen

to

be

as

good

as

gold.

This

development

was

thus

thebirthofthemodernbankingsystemandthedematerializationofmoney.

Greed,however,tookover,andthegoldsmithswantedtomakemoremoney.Actually,the

first documented case of fraud by a banker dates back to the year 393 BC. Isocrates

describesinaspeechhowthebanker(Passio)usedbribes,deceivedandfalsifieddocuments

to misappropriate the gold which was entrusted to his bank. It became a widely used

practiceofthesegoldsmiths(andotherdepositories)tolendoutthegoldwhichwashanded

tothemforsafekeeping;earninginterestonlendingoutgoldintheformofreceipts;which

wasntlegallytheirs.Asthereceiptswereperceivedtobeasgoodasgold,byincreasingthe

amountof

receipts,

they

actually

created

money

out

of

thin

air

and

were

earning

interest

on

it. This Ponzi scheme worked well as long as the people had confidence in thebank and

didntalldemandtoretrievetheirgoldatthesametime.


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Throughout history, the above mentioned scam was considered fraud. Not anymore!Today, in fact,under theguiseof fractional reservebanking, it isevenprotectedby thestate.

When

you

make

a

deposit,

the

bank

is

only

obliged

to

hold

a

small

fraction

of

the

deposit

as

areserve;therestislentout.Whenthemoneylentisdepositedatanotherbank,theother

bankinturncandothesame.Sothetotalmoneyincirculationcanincreasebyamultipleof

whatthecentralbankcreated.Inbankingterms,thisiscalledthemoneymultiplier.Theonly

reasonthatbankrunsareevenpossibleisbecauseasthenameimplies;thebankonlyholds

afractionofthedepositsasreserves.Thismultiplyingofmoneyorcreditexpansionleads

to inflation and artificial booms; that end in recessions. In the end, the conduct of thegoldsmiths and todays bankers is basically the same: Both are in essence a fraud.Although one holds the name fractional reserve banking and has the governmentsblessing!

Letsconsiderthatabankisrequiredtohold5%asaminimumreserveforthedepositsheld.Letsassumeadepositof100,000USDismade.Thebankwouldkeep5,000USDandwould

lendout95,000USD.Apersondecidestogetaloanfor95,000USDtobuyacar,whenthe

cardealerdepositsthese95,000USDintohisbankaccount,thebankisagainonlyrequired

toholda5%reserve(4,750USD)andcan lendout90,250USD. Thiscanbedoneuntilthe

banks have created 2,000,000 USD based on a deposit of only 100,000 USD. They can

increasethemoneysupplybyupto20times!

Hellenismwasaturningpointinthehistoryofthefinancialsystem.Thefirststatebankwas

created. The Ptolemy dynasty was the first to realize how profitable this more or less

fraudulentactivity

of

the

private

banks

was.

Instead

of

fighting

against

these

scams,

they

decidedtojoininandcreatedastatebank.TheEgyptianswentastepfurtherandcreateda

central bank in Alexandria. It had branches throughout the country and marginalized the

importanceofprivatebanks.Thisbankwasresponsibleforthecustodyoftaxes,butitalso

tookdepositsfromindividuals.Astobeexpectedfromastatebank,thefundswereinvested

forthebenefitofthestate.

InRome,where thestatepossessed theplaceofbusinesswherebankingwasconducted;

bankersneededtoobtainalicensebeforetheyconductanybankingbusiness.Byforminga

guild (inordertodefend theircommon interests)theywereabletoobtainprivileges from

theemperors.

In the end, the economic and social collapse of the Roman Empire was

causedbytheinflationarypoliciesofthestate;whichreducedthepurchasingpowerofthecurrency.Ontheotherhand,pricecapsweresetforbasicgoods.This ledtothedemiseofmany businesses and brought trade in the Empire to a halt. This development brought

bankingtoanabruptend.Ittooknearly800yearsuntilthebankingsystemwasrediscovered

duringtheMiddleAgesintheItaliancities.SimilarsituationsasinRomereoccurredandthe

main profiteers were not the depositors, but the bankers and the power elite who gave

themthelicenses.

Thisalliancebetweenbanksandgovernmentscontinues till thisday.Toput itbluntly; the

governmentsgive

the

banks

the

right

to

print

money.

In

exchange,

they

expect

the

banks

tobuytheirbonds (debt)sotheycancontinuetospendmoneytheysimplydonthave. In


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the20th

centuryalone,wehaveseen50hyperinflationsandcurrencycollapses.Incontrast,

GoldandSilverhavealwaysremainedtoworkasacurrency.

Foramoredetailedoverviewonthedevelopmentofthebankingsystem,Irecommendthe

book

Geld,

Bankkredit

und

Konjunkturzyklen

by

Professor

Jess

Huerta

de

Soto,

which

I

usedasasourceforthissection.

MilestonesinrecentmonetaryhistoryAfter introducing you to the early foundation of how our monetary and banking system

developed. Iwouldnow like toelaborateonmore recenthistory.Starting in1816,and to

explainwhichsteps, includingwars,wereundertaken toslowlydrivegoldandsilveraway

outofourmonetarysystem.

Before

diving

into

the

details,

the

chart

below

is

a

good

summary

of

what

is

to

follow.

These

steps have led to inflation, which has and continues to impoverish the middle class

worldwide.Asyoucanseetheconsumerpricesbetween1661andtheFirstWorldWarfell

andtherefore thepurchasingpowerof thepeople increased.Theywereabletobuymore

goods with the same amount of gold or silver. Only during wars the prices increased,

especially during the FrenchBritish War and the Napoleonic Wars because the British

government financed the war already back then by an increase of paper money at the

expenseofwealthof itspeople. It isalsoclearlyvisible thatwehaveaseriousproblemwithinflationsinceWWIandespeciallysince1940!

Source:F.Lips/J.Trachsler,Geld,GoldunddieWahrheit.


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PhaseI:1816 1914/TheClassicalGoldStandard

FerdinandLipsdescribedthe19thCenturyasaperiodofprosperity,economicgrowthand

without inflation.Atthetime,mostofthe importantcurrenciesremainedstableover long

periods.

It

was

the

era

of

the

classical

gold

standard!

This

standard

was

simple;

currencies

were backed by Gold and could be exchanged into Gold at a fixed exchange rate. It was

practicallyimpossibletomanipulatemoney:Governmentscandoalotofthings,butprinting

gold(tobackmoney)issimplynotoneofthem.Thislackofmanipulationprovidedastable

currency for the citizens. During this period, the living standard of the masses rose

considerably,whichinturnledtoaverylowunemploymentlevels.

Onthe23rdofDecember1913,PresidentWilsonsignedtheFederalReserveAct.Thissetthe

foundationforthecentralbankingsystemweknowtoday.

PhaseII:1914 1918/WWI

In 1914, at the beginning of World War I, the Gold Standard was dropped in several

countries. Under the Gold Standard, governments would simply not have enough money

(gold) to finance costly wars. So they dropped the Gold Standard and began a deficit

spendingspree.InhisfamousbookGoldWarsFerdinandLipswrote:"Ifthegoldstandard

hadnotbeenabandoned,thewarwouldnothavelastedlongerthanafewmonths.Without

the Gold Standard, however, the war went onfor more thanfour years, ruined leading

economiesandclaimedmillionsoflives."

The initialplanwastoreturntotheGoldStandardaftertheendofthewarbecauseofthe

factthat

the

government

printed

so

much

money

however;

they

would

have

had

to

devalue

theircurrencyintermsofGold.FearingthatpeoplewouldlosefaithintheBritishpound,the

Britswereagainstthereintroduction.IntheendmostcountriesdidntgobacktotheGold

Standard.

PhaseIII:19221931/TheGoldExchangeStandard

AttheGenoaConferencein1922,theGoldExchangeStandardwasintroduced;underwhich,

theDollarandtheBritishpoundwereconsideredtobeasgoodasgold(andcouldtherefore

be held as reserve currencies). As already mentioned, it is important to note that these

currencieshad

lost

purchasing

power

and

therefore

couldnt

be

as

good

as

gold.

Theimmediateeffectofthisnewsystemwasthatreserveswerenowcountedtwice;firstin

thecountryof issuance,than inthecreditorscountrythathelditasareserve.Letmegive

youanexampletoexplainhowthiscouldhappen:LetsassumethatanAmericancompany

boughtaGermancompanyfor10millionUSD.UnderTheGoldStandard,the10millionUSD

would have led to a decrease in the money supply in the states because the equivalent

amount of gold would have been shifted to the account of the German Bundesbank. In

return,themoneysupplyoftheGermanDMarkwouldhaveexpandedtotheequivalentof

10millionUSD.

UnderTheGoldExchangeStandard,however, themoneysupplyofGermanyexpandedby

theequivalentof10millionUSDinDeutschmark;andatthesametimethemoneysupplyof

theUnitedStates stayed thesamebecause thedollarwasdeemed tobeasgoodasgold


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undertheGoldExchangeStandard.WhatdidtheGermansdo?Insteadofexchangingthe10

million USD into gold, theyjust kept the amount in Dollarsand bought treasurybills and

bonds;onwhichtheyreceivedaninterestpayment.Therefore,theUSdidnthavetoreduce

thebroadmoneysupplybecausetheykepttheGoldreserves.(TheUSDwasonequalterms

as

Gold

and

therefore

they

gained

the

unmoral

privilege;

together

with

the

Brits,

to

pay

out

othernationsinfiatmoney).

Furthermore, the reserve countries (USA and Great Britain) were able to run balance of

paymentsdeficitswithoutbeingpunishedas longastheothernationshadconfidence in

theircurrencies.Thenewsystemsetagiganticmoneyandcreditmachine intomotionand

createdtheinflationaryboomofthe1920s.Thenewmechanismprovedtobeanengineof

inflationwhoseproduct excesspurchasingpower flowedabundantlyintorealestateand

thestockmarkets.ThiswasthecausefortheinevitablecorrectiveDepressionstartingwith

thecrashof1929.

In 1925,the French and the Brits wanted to stop this craziness. Winston Churchill andMinister of Finance Pointcar decided to return to the system of Gold Parity, as used

previoustothewar. Duetothis,GreatBritainfacedthebiggestdrainofgold.Thisleadtoan

enormous reduction in themoney supplyand theUK drifted intoa severedeflation. The

immediateoutcomewas the longeststrike in thehistoryofGreatBritainwhichparalyzed

theeconomy in largescale.Stillnumberone intermsofglobalpower,theBritscalledthe

Americansforhelp.

TheirinitialplanwastostopthemassivegolddrainbyloweringtheinterestratesintheUS

to the same low levelsas inGreatBritain:Becauseof the strikesand theongoing severe

depressionthey

couldnt

increase

the

interest

rates

(which

would

have

led

to

more

capital

inflowsintoBritain).Therefore,theFEDreducedtheinterestratestothelowlevelsintheUK

and injected excessively paper money into the US Banking System. The gold drain out of

London finally stopped. However, as a consequence, the excessive liquidity and credit

injectionfloodedintothestockexchangeandintorealestate:Thisleadtotheartificialboom

ofthe1920s.Thecentralbankswereoncemoreunabletoabsorbtheexcess liquidity;the

imbalancehadalreadybecometoobig.Thisistherealcausebehindthegreatdepression.

PhaseIV:19311945/Fluctuatingcurrencies&WWIIKeynesian

economics

had

become

the

worlds

dominant

economic

theory.

The

stock

market

crashedbetween1929and1932andtheDowJonesIndustrialAveragelostabout90%ofits

value. Even tangible assets, such as real estate, were hit similarly hard. Residential and

commercialbuildingslostupto80%oftheirvalue.Mostcommoditiessufferedasimilarfate.

During 1929 and 1933,the consumer price index dropped by 24%. In 1933, President

RooseveltabandonedtheGoldStandardandUScitizenshadtohandoveralltheirGoldto

the government in exchange for paper money. It was forbidden to hold Gold in the US.

Shortlyaftertheenactmentoftheseprohibitions,thepresident;underauthoritygrantedby

theCongress,devaluedtheDollarvsGoldby75%from20.67USDto35.00USD.Themain

difference to today is that back then Gold was still considered as the backbone of the

currencysystem.The

US

had

to

back

Dollars

with

25%

of

physical

gold,

therefore

they

had

to

steal it from their citizens because otherwise they could not have printed the necessary

money to increase their debts and to bailout their bankrupt banking system. They also


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achieveda lowerUSD (increase in internationalcompetitiveness)andreduced theexisting

debt through inflation.Thegovernmentbetrayed theirownpeoplebystealing from them

and implementing a form of financial repression because they pushed every citizen into

usingpapermoney.

Before1933,theFederalReservenotescontainedthepromisethattheycouldbeconverted

intogold.Later,thecaptionwaschangedtoreadthatabillcouldbeexchangedforlawful

moneyoftheUnitedStates.

EconomistandGoldexpertJohnExterdescribedtheperiodasfollows:Thecontractionwas

so powerful that it took Roosevelt three terms and a war to get out of it. In 1933,

unemploymentstoodat25%.By1937,ithadfallento15%.However,in193738,thestock

markettookanotherdive;theeconomywent intoanothercontractionandunemployment

climbedbackto21%.WorldWarIIofcoursecuredunemployment.Withoutthewar,thereis

notellinghowlongitwouldhavelasted.WiththeoutbreakofWorldWarII,Goldbecamea

strategiccommodity.Worldwide tradingof themetalby individualsandcorporationswasbanned.Atthesame time,theGoldstockof theUSTreasurycontinuedtogrow.Thiswas

duetobulliontransfersforforeignpurchasesofmilitaryhardware.InSeptember1949,the

USTreasuryatthehighpointofAmericasgoldpowerownedUSD24.6billionworthof

bullion(at35USDperounce).

PhaseV:19451968/BrettonWoodsSystemInJulyof1944,representativesof44nationsgatheredatBrettonWoodstodiscussthepost

war international monetary system. It was decided that the US Dollar and Gold would

becomethe

sole

reserve

currencies.

The

outcome

was

nothing

more

than

America

dictating

theUSDollarsofficial supremacy.TheUSD shouldbecome theonly currency convertible

intogoldby foreigncentralbanks.Soall theworldcurrencieswereexpressed in termsof

andcloselytiedtotheUSDollar.Inturn,thedollarwasstillfixedtoGold.OnlytheUnited

States could change the price of Gold meaning all other nations were forced to either

increase the value or devalue in terms of Dollars. Under Bretton Woods, the US had a

commitmenttomaintainthevalueoftheDollarbybuyingandsellingunlimitedquantitiesof

Gold,at35USDperounce.Italsohadthecommitmenttodeliveronrequest,Goldtoforeign

central banks: Often that commitment was not met. Diplomatic pressure was applied to

prevent Gold withdrawals from the US. James Dines recalls an incident when President

Johnsondiscouraged

Germany,

for

example,

from

converting

its

USD

into

Gold

by

reminding

it thatUS troops stoodbetween itandRussia. (Youwill findaproof forpoliticalpressure

under the following link Fed Arthur Burns on Gold June 1975:

http://www.gata.org/files/FedArthurBurnsOnGold6031975.pdf)

Fromthatmoment, itwaspossiblefortheUStopaytheirdebtinUSD;whichtheycreated

outofthinair.FrenchPresidentCharlesdeGaullecalledthistheExorbitantprivilege.By theendof1949 at thehighpointofAmericasgoldpower theUS treasuryowned

physicalgoldintheamountof24.6BillionUSDatthepriceof35USDperoz.Thisreflected

approximately700millionouncesofgoldor70%of the totalgold reservesofallcentralbanksinthesocalledfreeworld.10yearslater,in1959theGoldreserveshadalreadybeen

depletedbecause theamountofpaperDollarsdepositedwithother foreigncentralbanks

exceededthetotalvalueofthephysicalGoldkeptwithinthestates.Ifforeigncentralbanks


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haddemandedtoexchangetheirpaperDollarsintorealmoney(physicalGold)thesafesof

FortKnoxwouldhaveonlybeenenoughtocoverafractionofthedebt.

PhaseVI:19681971/TheDownfalloftheBrettonWoodsSystemDuringthe60s,peoplecontinuously lost trust intheUSD.Governmentsaroundtheworld

startedtoexchangetheirUSDintophysicalGold.TheFrenchgovernmentexchangednearly

3billionUSDofGoldfromtheUSTreasury.ShippingthebulkofitsGoldcustodyholdingsat

the New York FED to Paris; generally challenging the functioning of the Bretton Woods

system. The London GoldPool which had been established to oppress the price of gold

failed.On March17th,1968, itwas thendecidedamongst sevenmembersof the London

goldpool(GreatBritain,WestGermany,Switzerland,theNetherlands,Belgium,Italyandthe

UnitedStates)tocloseitdownandtoestablishatwotieredGoldprice:Oneforthecentral

banks at 35 USD and one for the freemarket. Central banks were forbidden to have

anythingtodowiththefreemarket;theycouldneitherbuynorsellinit.

ByMarch1968,theUSGoldstockhadplummetedtoaround10.5billionUSDpricedat35

USD per ounce (vs. 24.6 USD billion in 1949). Within the same month, the US congress

removed the 25% Gold reserve requirement for Federal Reserve Notes. The end of this

monetarytragedywasreachedwhentheBankofEnglandandtheSwissNationalbankasked

forGold inexchange for theirDollars in1971. RichardSalsman (AmericanEconomistand

lecturer)wrote inhis book Goldand Liberty that By 1971, more than half of theGold

supplythatwasforciblytakenfromUScitizensinthe1930iesendedupinthevaultsofforeign

centralbanks.Thiswasthebiggestbankheist inworldhistory. Ithappened inslowmotion

andmaynothavebeentheintentofeveryofficialwhoparticipatedinit.

OnAugust15th

1971,PresidentNixonrespondedbytemporarilyclosing thegoldwindow;

by refusing toallow the treasury to redeemany foreignheldDollars inGold.Closing the

Gold Window was according to Salsman, a polite expression for defaulting on Gold

paymentsandrepudiatingan internationalmonetaryagreement.Salsmanalsosaid,when

Goldwasdemonetizedin1971,manycriticsofGoldpredictedthatitspricewouldfallbelow

35USDperounce.TheyassumedthatthepaperdollargavevaluetoGold,nottheotherway

around.Thepasthasshownthatnothingcouldbemorewrongthatthisstatement!

In contrary, the announcement of Nixon was nothing less than a declaration ofbankruptcy.

Instead

of

going

bankrupt

the

USD

became

the

worlds

reserve

currency

the

Emperorwithoutclothesexpandedhispowersbasedonpapermoneywhich isnotworth

thepaperitisprintedon!

PhaseVII:Ourpapermoney

SinceAugust15th

1971, theDollarbecamenothingmore thana fiatcurrencyand theFED

hasbeen free tocontinue itsmonetaryexpansionatwill.Theresult isaswehaveseen,a

massiveexplosionofdebt.Theproblemwiththismountainofdebt isthat itsimplycannot

berepaid.DebtisasJohnExtermentionedonce,Afunnything:italwaysmustberepaid,if

notby

the

debtor,

then

by

the

lender,

or

worse

still,

the

taxpayers!


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TheimpactonourlivesLetsstartwithalittlestory.Imagineyouareonanislandwith9otherpeopleandeveryone

has100$(sothetotalis1000$andeveryoneowns10%ofthemoney).Amongstthese10

people,there

is

abanker

(who

is

responsible

for

taking

care

of

the

money

supply)

and

his

friend.One day, the banker decides to print an additional 1000 $. He keeps 500 $ for

himselfandhandanother500$tohisfriend.Nowthetotalsupplyofmoneyis2.000$,but

youstillonlyhave100$(youonlyown5%ofthetotalmoneysupply).Thismoney inyour

handwillnowonlybeabletobuyhalfofwhatitcouldbefore.Althoughnoonehasactually

physically stolen anything from you; half of your wealth was stolen by the banker and

dividedbetweenhimselfandhisfriend.

Admittedly,this isabitofasimplificationandthebankersandhisfriends intodaysworld

takemorecare; toat leastkeepup theappearance that this isnthappening,but it is the

same.The

chart

below

shows

how

strongly

currencies

have

devalued

vis

vis

Gold

since

the

Goldwindowwas closed byNixon. Even the Swiss franc,which is seen as a stable and

durablecurrencyhaslostaround90%ofitsvalueinthepast40years.

Source:IncrementumLiechtenstein/R.Stfferle.As I have alreadymentioned, governments play a big role in ourmonetary and banking

system.Theyarethefriendsofthebanker,similartotheexamplewiththeisland.Why?The

answer isdebt!Mostwesterncountrieshavepiledupagiganticdebtburden.To illustrate

this, the chartbelow shows thedebtburden inpercentofGDP for selected countries. It

becomesclearwhenyouhavealookatthechartbelow.Evencountries,whicharecurrently

notinthespotlight,havedebtlevels,whichalreadytodayseemsimplyunsustainable.Ifone

takesthesocalledunfundedliabilitiesintoconsiderationwhicharepromisesalreadymade

(likepensionsetc.)which arentfundedyet,thesituationseemsdramatic(redbar).Dueto

these

extremely

high

debt

levels,

governments

all

over

the

world

have

an

incentive

to

help

banksbecauseoftworeasons:Thefirstreasonisthatbanksaremajorbuyersofgovernment

debt (withyourdeposits).Thesecond reason is that themoneywhich isproducedby the


11/12

banks increases the money supply and reduces the buying power of money; or put in

anotherway,reducestherealdebt,whichgovernmentshavetorepay.

Howcanyouprotectyourselffromthesedevelopmentsintheworld?

AlthoughwearenotfansofAlanGreenspanspolicywhenhebecamethechairmanofthe

FED;many

years

prior

to

this,

he

wrote

an

excellent

essay

called

Gold

and

Economic

Freedom,wherewecanreadthefollowing:

This istheshabbysecretofthewelfarestatists'tiradesagainstgold.Deficitspending is

simplya schemefor the confiscationofwealth.Gold stands in thewayof this insidious

process.Itstandsasaprotectorofpropertyrights.Ifonegraspsthis,onehasnodifficulty

inunderstandingthestatists'antagonismtowardtheGoldstandard.

WeagreewithGreenspans viewandbelieve that theonly way toprotect onesproperty

rights is by holding unleveraged and unencumber direct ownership of physical precious

metals;asfarawayaspossiblefromthebankingsystem!

The coremission ofGlobalGold is the safekeeping ofpreciousmetals.We store and

protectyourassetsonyourbehalf,wherebytheownershiprightsstaywithyouatalltimes

andisnottransferable,unlessyoupersonallyinstructusotherwise.Wearenotallowedto

pledge, hedge or loan out your metals, nor are they part of our balance sheet. We

guarantee the completeavailabilityonetoone in theformat youpurchased themetals

untilyouaskforphysicaldeliveryordecidetosellyourmetals.Themetalsarefullyyours

andatyourowndisposalatanytime.

Written

in

Rapperswil,

June

2013


12/12

ContactdetailsofGlobalGoldGLOBALGOLDAG

Herrengasse9

CH8640Rapperswil

Tel.:+41588101750Fax:+41588101751

Email:[email protected]

www.globalgold.ch

AbouttheauthorClaudioGrassjoinedtheGlobalGoldteamin2011asManagingDirector.

Priorto

joining

Global

Gold

he

gained

vast

experience

in

international

sales

and

marketing

workingformultinationalcorporationsespeciallywithintheairline,NGOandITbusiness.He

bringsalongexperienceininternationalbusinessconsulting,businessdevelopmentandkey

accountmanagementwithfocusonsales,sourcingandstrategy.Heisastrongadvocateof

freemarketprinciplesandthereforehefeelsattractedtotheprinciplesofthelibertarian

philosophies.

ClaudioGrassholdsacommercialdegreefromtheZurichBusinessSchoolandstudied

businesseconomicsattheEuropeanEconomicsAcademyinSt.Gallen,Switzerland.

DisclaimerNothingwithinthisdocumentofGlobalGoldshouldbeconstruedasasolicitationoroffer,

orrecommendation,toacquireofdisposeofanyinvestmentortoengageinanyother

transaction.

Nothingcontainedinthisdocumentconstitutesinvestment,legal,taxorotheradvicenoris

ittobereliedoninmakinganinvestmentorotherdecision.Youshouldobtainrelevantand

specificprofessionaladvicebeforemakinganinvestmentdecision.

Thisdocument

is

intended

for

educational

purposes

only.

Global

Gold

assumes

no

responsibilityforthecontent,accuracyorcompletenessoftheinformationpresented.

real vs false money - how our monetary system works and fails

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