MUST READ:
Gary North's REALITY CHECK
Issue 149 June 14, 2002
MICAWBER'S AGREEMENT
Charles Dickens created a character for DAVID
COPPERFIELD, Mr. Micawber. And macabre he was! He was a
promoter, a blower of bubbles, a schemer, a spinner of
dreams. Nothing ever quite worked for him as planned, but
he was always hopeful. His philosophy of life has come
down to us in his famous phrase, "Something will turn up."
In the 1935 movie, W. C. Fields played Micawber. This
was an example of flawless casting.
Dickens identified the mind-set of the huckster, the
man who substitutes schemes on paper for productivity.
Dickens was convinced that capitalism is basically little
more than a gigantic system of schemes. He saw the system
as a bubble. He was wrong about capitalism, but he was
correct about the central institution of capitalism,
fractional reserve banking. This institution, from the
creation of the Bank of England in 1694 until the present,
has been the creation of government. It could not exist
without The Agreement: "You license our monopoly over
money, and we'll guarantee a market for government debt."
I call it Micawber's Agreement.
The Agreement is at the heart of the modern world's
economy. Only one thing has ever proven successful in
exposing this agreement as a Micawberesque scheme: a rising
price of gold. This is why, above all else, central
bankers strive to keep down the price of gold.
The price of no other commodity attracts as much
attention. The price of no other commodity is the subject
of extended editorials in financial publications. Gold is
not just another commodity, despite what the gold-haters in
the media assure us. If it were, then they would not have
to keep writing their articles that assure us that it is.
I realize that expert opinion can be awe-inspiring. I
fully understand that when Alan Greenspan appears on
Capitol Hill, Congressmen, Senators, and WALL STREET
JOURNAL columnists are impressed by rhetoric that is
matched only by Dwight Eisenhower's and Professor Irwin
Corey's. (http://www.professor.irwincorey.com) But, as I
listen to his presentations and read them on-line, I keep
in mind an image of W. C. Fields. This helps me to put
things in their proper perspective.
DISHONOR AMONG THIEVES
Prior to the outbreak of World War I in 1914, gold
coins served as money for the masses of the West. Gold
bullion is still money within the closed fraternity known
as central banking. It is money for central bankers
because they do not trust each other. They expect each
other to cheat, to debase their currencies, to defer
payment, to lie without embarrassment, and to stiff their
brethren if they think they can get away with it on the
cheap. They know from experience over centuries that
debtors cheat creditors. The modern economy is based on
massive debt, and every debt is denominated in a means of
payment: a currency.
Central bankers want to be able to cheat the public.
Cheating the public is the number-one goal of all central
banking. The system has always rested on monopoly and
deception. At the same time, the number-two goal of
central bankers is to avoid being cheated by each other.
These goals are always in conflict. That which best
protects the central bankers from each other -- a gold coin
standard -- also protects the public from central bankers.
In 1914, all central banks except the Federal Reserve
System stole the gold that three generations of citizens
who had dutifully and foolishly handed over to commercial
bankers. The only people who were not big losers were
those who had not been rich enough to open a bank account.
The "best and the brightest" were the biggest losers.
After 1914, shell-shocked European depositors trusted the
words -- no longer redeemable in gold -- of the commercial
bankers' official representatives, central bankers.
In 1933, Franklin Roosevelt acted as the agent of the
Federal Reserve, and confiscated Americans' gold, hiking
its price in 1934 by 75%, after the government was in
possession of the stolen goods. The government turns over
the stolen gold to the central bank. This is how the
system has always worked. This is The Agreement.
Central bankers are like most other debtors: they want
to be able to escape their creditors if bad times arrive.
They want to be able to get out of their obligations. They
did this in 1914. The FED did it in 1933. Central bankers
cheated millions of depositors, who had naively believed
the commercial bankers' original promise: "Invest your gold
with us, and we'll pay interest to you. You can get your
gold back on demand at any time (you dumb clucks)."
Central bankers are also like creditors: they don't
want to be cheated by their debtors. They wanted
protection. They trusted gold. So, having stolen the
public's gold with the politicians' blessing, they created
an inter-bank gold standard for themselves: the gold-
exchange standard. It began in 1922 (the Genoa agreement).
They extended it in 1944 (the Bretton Woods agreement). By
these agreements, the Bank of England and the FED promised
to pay other central banks -- but not the general public --
gold on demand. By 1944, the Federal Reserve System had
most of the world's gold. The FED then persuaded the
United States government to extend a promise to other
central bankers on its behalf: "Invest your gold with us,
the United States government, and we'll pay interest to
you. You can get your gold back on demand at any time (you
dumb clucks)." It worked like a charm. It always does.
The market for U.S. government debt became the largest debt
market on earth.
On August 15, 1971, President Nixon did to the world's
central bankers what all of the central banks and their
governments had done in 1914 to their equally naive
citizens. Without warning on a Sunday afternoon, he
revoked the promise and closed the gold window. "Suckers!"
From that time on, the price of gold in relation to
any national currency was set by the law of supply and
demand. But, then again, it had always been set by supply
and demand. The question of the gold value of any currency
is always settled by supply and demand. How much currency
is coming out of some central bank? How much gold is being
made available by suppliers? Will existing monetary
policies be continued?
LIAR, LIAR
The larger the debt, the more tempting the lie.
"You're check is in the mail." This is because the present
threat of the future costs of defaulting on a loan pale in
comparison to the present cost of repaying. Bankruptcy
looms. Deferral now looks like a reasonable policy. If
the debtor can defer the day of reckoning, he will be
sorely tempted to do this. Bankruptcy tomorrow is a
greater threat than losing access to the credit markets in
a year. Maybe the lie will work. "Something may turn up."
If the creditors keep pushing for payment, the
debtor's lie become obvious. At that point, the debtor
admits the truth: "I can't repay." When the debtor is a
sovereign government, nobody can do much about it. What's
gone is gone. It was nice while it lasted.
Creditors may threaten to cut off future loans, but
everyone knows that's also a lie. Latin American
governments have been playing the default game with gringo
bankers ever since the 1830's. Argentina is only the
latest example. Brazil will probably follow.
Do foreigners still loan money to the United States
government? Of course. Did our government stiff them in
1971? It stiffed their central bankers, but politically
speaking, central banking is not a big issue. The public
doesn't understand international economics and currency
markets, so voters don't toss out governments because their
governments have stiffed foreign creditors, including
foreign central bankers. If anything, the Senior Liar of
the existing government is likely to be re-elected. Nixon
was overwhelmingly re-elected in 1972.
The public ought to care. It pays for losses
sustained by the nation's bankers. Taxes bail out recently
stiffed bankers. The central bank says, "If we win, you
get to keep more of your money. So do we. If we lose, you
will pay for our losses." Nice work if you can get it.
The way the public pays is through higher taxes,
especially the inflation tax. Consider the year of the
great confiscation in the United States: 1933. To match
the purchasing power of the dollar of 1933, a person needed
over $3 in 1971. That is, the purchasing power of the
dollar fell by two-thirds. That's what President
Roosevelt's unilateral abolition of the gold standard did
to trusting Americans who had naively believed the
government's promise to redeem the public's gold at
$20.67/oz. This depreciation took 38 years. Suckers!
Ever since Nixon's unilateral abolition of the gold-
exchange standard in 1971 -- refusing to sell gold at
$35/oz to central bankers -- the dollar has fallen in value
by almost 80%. It takes $4.44 to buy today what it took $1
to buy in 1971. This depreciation took 31 years. Suckers!
See the inflation calculator:
bls.gov
The falling value of the dollar is the irrefutable
evidence of the effects of government lies. But hardly
anyone cares. Everyone thinks he is getting richer.
Through politics, the over-65 crowd has gotten a cost-of-
living escalator written into the Social Security law.
This is why the government uses the standard Consumer Price
Index to calculate inflation rather than the more accurate
Median CPI, which today indicates that price inflation is
three times higher than the CPI says.
clev.frb.org
Sometime in 1980, Dan Ackroyd did a skit on "Saturday
Night Live" called "Inflation is our friend." He came on-
screen with a Jimmy Carter-like accent, which was pretty
good for a Canadian. "Didn't you always want to wear $400
suits and live in a $200,000 home. I know I did. Well,
now we can. All it takes is a little ink and some paper."
Too bad it's true. |
