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Reply To Paul Krugman Attack on the Gold Standard

Commodities / Gold & Silver 2009 Nov 23, 2009 - 04:43 AM GMT

By: Howard_Katz


Best Financial Markets Analysis Article“Selection of gold as our state mineral is acknowledgement of the intimate part it has played in the history of our people and of the fact that mining is a major California economic activity.” Governor Edmund G. Brown, Apr. 23, 1965 (signing legislation designating gold as California’s official state mineral.

On Oct. 12, 2009, Paul Krugman, columnist for the New York Times (Op-Ed Page) did his column attacking the gold standard and defending the bankers privilege to create money.  This was such a perfect exposition of the lies of our age that it bares closer examination.  Because the more one digs into this issue the more things are not as they seem.  Indeed, this is part of the existing system whereby the government robs wealth from you and gives to the ultra-rich.  Let us start the examination with a number of facts.

First, Krugman asserts: “Peter Temin has argued that a key cause of the Depression was what he calls the ‘gold-standard mentality.”

The United States went on the gold standard in 1788 with the adoption of the Constitution.  Britain followed at the end of the Napoleonic Wars (circa 1815).  These two countries then became the number one and number two wealthiest countries in human history.  The phenomenon which is called the Depression did not occur until 140 years later.  Anyone with the slightest acquaintance with the science of economics has a sense of the time span between cause and effect.  For example, when there is a large increase in the money supply, the consumer price index goes up by a corresponding amount two years later.  The lag between cause and effect is 2 years.

Then what sense does it make to say that the gold standard, adopted in 1788, caused the Great Depression, which started in 1929?  It’s like saying that a person who sneezed in 1776 caused the great flu epidemic of 1918.  A person who would make such an assertion does not have even an elementary understanding of his subject.  If he did, he would be ashamed to make himself look so stupid.

Second, the great defense of the gold standard was made by the Democratic Party, which was founded in 1828 by Andrew Jackson and Martin van Buren.  These men abolished the second central bank (similar to the current Federal Reserve System).  They attacked Wall Street and the bankers, and central bankers became persona-non-grata from 1832 to the early 20th century.

Third, the New York Times, which became a great paper under the leadership of Adolph Ochs, started out as a defender of the gold standard.  Ochs took over the Times in 1896, a year in which there was a classic battle over the gold standard.  William McKinley favored gold.  His supporters were called gold bugs.  His opponent, William Jennings Bryan, warned that “mankind would be crucified on a cross of gold.”  McKinley won – in 1896 and again in a replay election in 1900.   When the present day Times condemns gold, it is spitting in the face of its great founder.

Fourth, it was the liberal party, both in America and the world, which defended gold.  Gold was the money of the people.  Paper money was the money of the bankers and the rich.  America was the country of the common man.  That is why the common man voted Democratic in 1832 and elected Andrew Jackson (thus dealing the final blow to the second central bank).

Fifth, if you are going to understand the history of the United States, and the world, in the 20th century, it is very important to understand the story of the Depression.  The story is absolutely incredible.  In the early 20th century, there was a major world war (WWI), and all nations used this as the occasion for massive depreciations of their currency.  In Germany, from 1914 to 1923, the Wholesale Price Index rose from 1 to 726 billion.  In America, things were much better, and from 1914-1919 the Wholesale Price Index only rose from 1 to 2.  However, this led to a sharp drop in the real wages of the average working man which became a political issue.

The Republicans had the correct answer to this issue.  The exact same thing had happened in the Civil War.  At that time, Congress moved to reduce the quantity of money so that the dollar restored its tie to gold and returned to its pre-war value.  As the Republicans of 1919 put it, “What this country needs is a good 5¢ cigar.”  Cigars had cost 5¢ in 1914 and had risen (along with the general price level) to 10¢ in 1919.  What the Republicans were trying to achieve was a general reduction in prices back to their 1914 level.  Since prices were the same in 1914 as they had been in 1793, this was simply a return to the normal way of doing things.  Prices fell sharply in 1921 and again in 1930-33.  By ’33, the Republican program had been achieved, and prices in America were back to their 1793 level

In the teens and ‘20s in America, pretty much everyone saved.  They put their money in the savings bank and received 5% interest per year.  If you do the compound interest calculation, then money saved over a 50 year working lifetime will multiply in amount by about 4¼ times.  (The first year’s savings multiply by 11 times, the last year’s savings only grow by 5% and the middle years grow proportionally.)  This multiplication is what makes it possible to retire.  As a result, in America virtually everyone saved.  What the Democrats did from 1914-1919 was to cut the value of the working man’s savings in half.

What the Republicans wanted to do was to restore the value of the working man’s savings.  By bringing the value of the currency back up to its 1914 level, this was accomplished.  That is, the Republicans were the party of the working man.

A depression is a period during which the vast majority of the people become poorer.  A recession is similar in kind but smaller in degree.  Defined in this way it would seem quite unreasonable to have recessions or depressions.  After all, the world is made up of many different kinds of people.  They differ in many ways, and the concept that they would all either get richer at the same time or poorer at the same time is somewhat strange.  There can be some exceptions to this.  For example, the early 1940s were a depression in the United States (and most countries).  You could not buy a new house or a new car.  You could not buy more than 3 gallons of gasoline per week.  Important food items, such as butter and meat, were rationed.

Yet, as incredible as it sounds, Mr. Krugman, as well as the whole economic establishment is unaware of the depressions of the 1940s and places, not merely an ordinary depression, but what they call a great depression in the 1930s.

I have frequently pointed out that the period 1930-34 saw a rise in meat consumption in the U.S. from 129 lbs per person to 144 lbs per person (Historical Statistics of the United States, Colonial Times to 1970, series G-881).  Similarly, there was a rise in butter consumption and a fall in margarine consumption.  At the same time, people started giving more to charity.  These actions are hardly the behavior of people getting poorer.

The same source also gives the annual earnings for an average worker for 1932 as $1120.  This may not seem like much, but one must keep in mind that prices in 1932 were much lower than today.  At that time, the U.S. was on the gold standard.  A dollar was defined in law as 1/20 oz. of gold.  That is, in 1932 the wage for the average American was 56 oz. of gold.  By 1974, the average wage was down to 40 oz. of gold, and today the average wage is 32 oz.  In short, America is poorer today than it was during what Paul Krugman calls the “great depression.”

That is, as prices fell due to the Republican policy of restoring the currency, wages also fell but more slowly.  Real wages rose.  Keynes openly admitted this.  Further, virtually all working men had a cushion from the rise in value of their savings.  They were able to live off this cushion and hold out for higher wages.  This is the reason for the high unemployment of that period.

It is interesting to note that there was a period similar to “The Great Depression” in the 1870s.  The correct term is credit contraction, and one of these occurred in 1873-79.  There was a period of high unemployment, but it only lasted for a few years.  The party in power was not blamed for anything, and economics did not become a political issue.  The Republicans were reelected in 1876.  That is, people understood that it was the job of government to protect people’s rights, and that every time a government tries to make its country richer the country gets poorer.  What was the result?  This period in America, the late 19th century from 1866-1896, was the period of the greatest economic growth in the history of any country in the world.  One after another great new inventions flowed from the minds of the country’s smartest men, and these were quickly mass produced for the convenience of the average person.  The electric light, the telephone, the automobile came from this period.  It was the great age of the railroad and saw the beginnings of crude oil.  The average working man saw a 90% rise in his real wages.  This compares with the last 37 years over which the wages of the average working man declined.  It was a period when the country was on the gold standard and during which prices declined.  An average item which cost $1.00 in 1866 was down to 30¢ by 1896.

This wonderful system was overthrown in the early 20th century by a massive outpouring of lies  These lies came do thick and fast, one on top of the other, like the layers of an onion, so that I call them the onion of lies.  The first lie in the onion was that J.P. Morgan was on the political right and Woodrow Wilson was on the political left.  In fact, both Morgan and Wilson cooperated to slip in the third central bank.  (The Democratic platform of 1912 promised,” We oppose the so-called Aldrich bill or the establishment of a central bank”)  Morgan (the Republican) financed Teddy Roosevelt’s 1912 campaign so that he could divide the Republican vote and act as a spoiler, allowing Wilson to win the 1912 election.  Wilson campaigned against Morgan and then, as soon as he was elected, hastened to do Morgan’s bidding.

F.D.R. was a Wall Streeter, a Gordon Gecko type.  He had seen how the central bank’s expansion of money and credit during WWI and again in 1922-28 had made the stock market go up and had made the real wages of the working man go down.  His intent was to continue this policy of robbing from the poor and giving to the rich.  On his first day in office, he rammed a bill through the new congress to abolish the gold standard and give commercial bankers the privilege to create money.  They have been creating money for the past 76 years.

Since F.D.R.’s intent was to rob from the working man, this had to be covered over.  How can you put a good face on low wages?  Well low wages reduce unemployment.  So the New Deal’s mantra became “unemployment.”  And that has been the story of the past 76 years, a pseudo-Democratic Party which robbed from the poor to give to the rich and which won the votes of the poor by screaming “unemployment.”  Matched with the scheming Democrats was a clueless Republican Party which was dragged along with every lie and often did the Democrats’ work (e.g., Nixon’s price and wage controls in 1971).

An average 30-year period in the late 19th and early 20th centuries saw the real wages of the average working man advance by 60%.  As noted, the one 30-year period when prices declined saw real wages advance by 90%.  As prices started to rise, the wage advance slowed.  For example, in the 30-year period 1942-1972 real wages rose by only 40%.  Then as the rate of price increase accelerated, real wages turned down, and to this day 1972 is the high point for real wages in American history.

Note that, as the last tie to the gold standard was cut (1971) and the money supply began to accelerate to the upside (Reagan,/Bush, Sr.) both the stock market and corporate profits exploded to the upside.  Under the gold standard, from 1885 to 1933, stock prices were flat.  But since the abolition of gold, the country has seen its greatest stock market rise in history.  F.D.R.’s program of robbing from the working man to benefit Wall Street and the bankers is in full swing, and Ronald Reagan was one of its greatest disciples.

Indeed, the only thing which seems to have changed is that the evil has become more blatant.  Mr. Krugman, the whole New York Times and the rest of the nation’s media supported Henry Paulson’s program to openly steal $750 billion from the American people and give it to Goldman Sachs.  Paulson didn’t even pretend to be helping the poor.  He was just stealing from the average American to benefit the rich.  Also, the character of the rich has changed.  The Robber Barons of the late 19th century were great, productive geniuses.  They got rich by increasing production, and they made the rest of the country wealthier with them.  Henry Ford made himself rich by making a car so inexpensive that the average guy could afford to buy it.  But today’s rich get rich by having the government (via the central bank) manipulate stock prices up and thus bring them $billions in stock options.  Socialists of yesterday, who violently hated the old rich, do not have any problem with today’s rich, who are nothing but a bunch of parasites.

Well, people, this is the world into which you were born.  Your “education” has consisted of an onion of lies, and all of these lies were designed to steal your money and make you a serf of the new rich.  The original government of America was set up to protect the right of property.  Now the government robs from the poor and gives to the rich.  All the “economists” you read in the news papers or magazines are charlatans and crackpots who tell us that the Federal Government does not have to balance its budget and that creating money out of nothing does not depreciate its value.

You have got to get mad.  But in order to get mad you first have to get smart.  And if you don’t get mad at the people who are lying to you, then you will wind up as a serf: no rights, no wealth, no freedom, no dignity.

My place in this evil world is to write a small newsletter, the One-handed Economist, telling you how you can protect yourself from the power structure’s program to reduce you to poverty.  I do pretty well in my economic predictions because I make it my business to see reality as it is.  I was a gold bug in 1970.  I turned bearish on gold in 1980 and by 1982 I had become a stock bug.  Since 2002, I am a gold bug again.  For the past decade, my model portfolio is up almost 80% while the average U.S. mutual fund is flat.  I came through 2008 with a whole cloth (which is more than Krugman could do), and I am looking forward to a very successful 2009. 

I hope the above is useful information for many people.  I publish a fortnightly newsletter, The One-handed Economist ($300).  You can subscribe via my web site, or send $300 to The One-handed Economist, 614 Nashua St. #122
Milford, N.H. 03055.  You may also enjoy reading my blog at  This week’s blog is “Attempted Murder” about the recent attempt of the medical establishment to murder anti-cancer activist Suzanne Somers.

© 2009 Copyright Howard S. Katz - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.  

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