A Short History Of Post-War German Gold:
In the aftermath of WW II, Germany stood in physical ruin and without a viable media of exchange at all. In October 1951, the Bank deutscher Lander (the Bundesbank’s predecessor) initiated post WWII official German Gold holdings with a purchase of 529 kg or just over half a tonne. In October 1951, the official US Gold stock was 22,175 metric tonnes. By mid 1956, official German Gold holdings had risen to 1,328 tonnes while the “stash” in New York had fallen to 19,462 tonnes. The modern Bundesbank came into being in 1957. By 1970, its official Gold reserves were about 3,540 Tonnes while US Gold reserves had plummeted to about their present official level which is 8,136 Tonnes. Today, German Gold reserves have officially fallen by about 140 tonnes from their 1970 levels while US Gold reserves have not moved an ounce. But NEITHER of these huge piles of Gold has been physically counted and weighed since then.
In 1971, the final “connection” between Gold and any national currency was severed. In 1973, the fiat currency era began. The point here is that over the past 60 years, official German Gold reserves have gone from nothing to 3400 tonnes while official US reserves have fallen by nearly two-thirds (63.3 percent). Today, on a per capita basis, official German reserves are half again as big as official US reserves. Germany’s problem is a very old one. When push comes to shove – possession is nine-tenths of the law. At present, Germany only holds 31 percent of its Gold reserves at home. The rest is in New York, London, and Paris. Up until late last year, the Bundesbank professed itself to be perfectly happy with that arrangement. But the German people are NOT happy with it and have made their displeasure very clear.
Just over a decade ago, Germany very quickly repatriated just over 900 tonnes of Gold from the UK. The official reason was that the Bank of England charged half a million Euros a year to “store” the Gold while the Bank of France and the Fed did it for free. The real reason was the 1999 announcement by Gordon Brown of the now infamous Bank of England Gold auctions. Now, in the face of potentially much bigger currency crises all over the world, the Bundesbank is proposing to repatriate 734 Tonnes from New York and Paris over a seven-year time frame. This does not show much of a sense of urgency, to put it mildly.
The Monetary Deadly Sin – 1944 to 1971:
Since WW II, there have been two cardinal monetary sins which cannot be committed by any nation with impunity. The first deadly sin spans 1944 – 1971 – the period from the instigation of Bretton Woods with the US Dollar as the only global currency officially redeemable in Gold and only redeemable by governments and central banks. The second one spans the period since 1971 – the fiat currency era – the era when NO global currency has been redeemable in anything tangible at all.
In the first era, the one utterly verboten action was for ANY government or central bank to demand that the US actually DO what it had promised to do – to redeem its currency at the rate of $US 35 for one troy ounce of Gold. By 1956 – there were more US Dollars in circulation OUTSIDE the US than there was official Gold INSIDE the US to redeem them at that official $US 35 per ounce. From that point forward, Bretton Woods was a dead letter because the Fed was issuing Federal Reserve NOTES which it could not redeem in Gold. This fact became known very quickly around the world and led to ever greater pressure on the Bretton Woods mandated “price” of Gold at $US 35 per ounce.
Initially, this pressure was met by the setting up of the London Gold Pool in 1961. In June 1967, President Charles de Gaulle became an international financial pariah by pulling France out of the “Pool” and going on to demand Gold in return for the US Dollars France was earning in return for its exports to the US. In stark contrast, three months before France began demanding Gold, Germany had agreed to give up its right to demand Gold for US Dollars. That was, in effect, the end of Gold as an official international monetary reserve. The pretense finally fell in ruins in August 1971 when President Nixon closed the “Gold window”.
Throughout this period, of course, American citizens were not allowed to own Gold at all. But for sovereign governments, the one cardinal sin was to ask that the only currency in the world which was officially redeemable in Gold be REDEEMED IN GOLD. Once that sin was committed, the system was doomed.
The Monetary Deadly Sin – 1971 to ????:
Paper currencies redeemable in Gold survived WWI, but not for very long. Britain went off Gold in 1931 and the US government made it illegal for American citizens to own Gold in 1933. That made US Dollar redeemability a dead letter inside the US. So it was outside the US too, with the sole exception of sovereign governments and their central banks. But with the short-lived exception of France, sovereign governments did not redeem their US Dollars for Gold because they were “encouraged” not to by the US government. Thus, US Dollars and government debt instruments became the de facto global “reserves”. But because Gold formed a part of the international monetary system – at least according to international convention – there was still a check on the willingness of governments to “fund” their spending via credit creation. In a quarter of a century – the funded debt of the US Treasury went up a mere $US 140 Billion – from $US 260 Billion at the end of WWII to $US 400 Billion in 1971.
Once the US Dollar was no longer officially redeemable in Gold or anything else of tangible value, the brakes were taken off borrowing everywhere. In the 25 years leading up to August 1971, the US Treasury borrowed $US 140 Billion. In the 41.5 years since August 1971, the US Treasury has borrowed $US 16,000 Billion. This borrowing shows up as the Treasury debt paper of the US government. That debt paper, in its turn, has been and remains the ultimate “reserve” of the entire global monetary system.
Since 1971, the monetary deadly sin has changed from demanding Gold in return for US Dollars to demanding anything at all in return for US Dollars – except additional quantities of US Dollars. For more than four decades now the international rule has been that US Treasury debt paper can be bought but it cannot be “sold”. It can merely be rolled over into new and ever larger “supplies” of same.
Another statement from Mr Obama which he made a short time later puts the entire situation in perfect perspective: “The full faith and credit of the United States is not a bargaining chip.” In reality, the full faith and credit of the United States has long since become the biggest “bargaining chip” in the history of global finance. Nobody dares to call – or fold – so everybody plays the game. At least they have so far.
Maybe Central Banks Don’t Trust Each Other:
On January 15, PIMCO boss Bill Gross was out on the internet musing that the repatriation of German Gold by the Bundesbank might be a sign that “central banks don’t trust each other”. Mr Gross is a veteran of the fiat currency era. He co-founded Pacific Investment Management Company (PIMCO) in 1971, the same year as Nixon repudiated the last link between the US Dollar and Gold. He has been well aware – from that day to this – of the fact that central banks don’t trust each other. To imply that the Bundesbank’s “sudden” decision to start repatriating their Gold is a first sign of such distrust is beyond hilarious.
Here is an excerpt from a January 16 piece in The Washington Post on the subject of why Germany wants (at least some of) its Gold back: “The system, of course, is built upon trust – that the New York Fed won’t suddenly be taken over by people with no respect for those nations’ property rights and seize it for their own use, and that the central banks won’t lie about how much gold is in their vaults. Among the world’s central bankers, that trust runs deep.”
To give an example of the reason why central bankers do NOT trust each other and have NEVER trusted each other, consider just one historical event. On Friday, September 18, 1931, the head of the Netherlands Bank telephoned the Governor of the Bank of England, Mr Montagu Norman. He asked Mr Norman if it was safe for him to continue to hold the Pound Sterling. Mr Norman replied with an unqualified assurance that England would remain on the Gold standard. On Sunday, September 20, 1931, the Bank of England officially abandoned the Gold standard.
There are huge numbers of parallel historical examples. The US government and its central bank declared de facto bankruptcy in 1933 when it confiscated privately-held Gold and made the ownership of Gold illegal for Americans. It did so again in 1971 when it refused to honour its pledge to redeem the US Dollar in Gold for anyone whether American or not. Central banks do not trust each other because their core function is the debasement of money. Those who run the central banks know this. They know what they do and they know what all their “colleagues” in all the other central banks are doing. In the sense that there is “honour among thieves”, there is “honour” among central bankers too. As a rule, they keep this knowledge to themselves. They will not expose the actions of their fellow central bankers because they do not want their fellow central bankers to retaliate in kind.
An Indirect Slap In The Face:
In August 2011, President Hugo Chavez of Venezuela abruptly nationalised the gold mining industry of his nation and announced that he was repatriating all the Venezuelan Gold held in foreign central banks. If you remember, August 2011 was the month when the debate over the US Treasury’s debt limit was finally resolved with all other fiscal issues being “postponed” until the beginning of 2013.
Mr Chavez’s announcement was almost universally derided as being typical of the populist head of a third-world nation. Nonetheless, the actual Gold repatriation was begun in early November 2011 and completed less than three months later in late January 2012. In all, Venezuela repatriated 160 tonnes of Gold. Venezuela duly faded from the news screens, only to re-appear momentarily when Mr Chavez was re-elected in October 2012, just under a month before his compatriot in the US achieved a similar victory.
Mr Chavez said nothing about any possibility that he was repatriating “his” Gold because he feared it might be confiscated by the nations in whose central banks it was being stored. Nor did he say anything about the possibility that the Gold might not be there at all. He merely asked for it back, and he got it back.
The global system can easily withstand a “slap in the face” from a comparative non-entity like Hugo Chavez. It cannot withstand a slap in the face from the nation whose economy is one of the most important in the world and whose central bank – the Bundesbank – has been trying to buck the global trend towards the wholesale printing of “money” for many years. The Bundesbank knows this. That is why their polite request to get THEIR Gold back is so modest and is to take place over such a long time period.
But in Germany in particular, there is a growing conviction that the “system” as it is cannot last. That is the impetus behind the huge surge in the demand for physical Gold in Germany over the past few years.
In mid December 2012, the Steinbeis Research Center for Financial Services in Berlin released a study which found that “the average German” owned Gold to the value of 5,750 Euros. At the price extant at the time, that amounts to 117 grams or just over 3.75 troy ounces of Gold. If “the average German” literally does own 117 grams of Gold, then the 82 million people in Germany own 9,594,000,000 grams or 9,594 metric tonnes of the stuff. That is considerably more than the 8136 tonnes reputedly owned by the US Treasury. The study goes on to say that when the Bundesbank’s holdings (3396 tonnes) are combined with the private hoard, Germany has amassed 7.0 percent of all the Gold in the world. Germany’s population of 82 million is 1.15 percent of a global population of just under 7.1 Billion people.
The huge increase in German Gold holdings of recent years has not been the result of the Bundesbank buying more. Since late 2007, German Gold holdings have risen by almost one- third (32 percent). Almost all of this has been bought by private individuals. Seven of every ten Germans own Gold in some form. Slightly more than half of them store some or most of this Gold in their own homes. The Germans are universally seen to be the most dynamic people in Europe and the foundation of the European Union. Yet on a per-capita basis, they almost certainly own more Gold than any other major nation in the world.
Germans are not buying Gold to “make” money from a rise in purchasing power against the Euro. They are buying it to HAVE money in case the European and global currency system unravels in the future. They know that the “European” debt crisis is not over, it is merely comparatively dormant in the face of what is emerging this year as a GLOBAL debt crisis. Germans are buying Gold as financial insurance.
That world died 100 years ago. Consider as a eulogy some passages taken from the first paragraph of the first chapter of Benjamin M Anderson’s Economics and the Public Welfare. The title of the first chapter of Mr Anderson’s book is – “The Prewar World, 1913”:
“Those who have an adult’s recollection and understanding of the world which preceded World War I look back upon it with a great nostalgia. There was a sense of security then which has never since existed. Progress was generally taken for granted. …We had a prolonged period in which decade after decade had seen increasing political freedom, the steady lifting of the standard of life for the masses of men. …It was an era of good faith. Men believed in promises. Men believed in the promises of governments.”
This was a time when markets functioned because there were few rules which impeded them. Even more to the point, this was a time when economic calculation was not only possible but fruitful because the common denominator in all such calculations – money – was stable. Today, nobody has an adult’s recollection of the world which preceded World War I and very few have an adult’s understanding of it. Mr Anderson’s book was published in 1949 and he died in the same year – the year your Captain was born.
In the world of the natural sciences – certainty comes from the simple fact that inanimate objects have no power of choice and will thus always react in exactly the same way to exactly the same stimulus. In the world of human interaction and exchange, “certainty” is not possible. The closest we are ever going to come to it is “good faith” – the confident expectation based on experience that agreements will be adhered to and that principles agreed to by both parties in an exchange will not be arbitrarily changed to the advantage of one over the other. In 2013, it is hard to “believe” that a world like that has EVER existed. But it did.