Tuesday, December 29, 2009

Gold and Economic Freedom

A friend recently remarked to me,

I am also not convinced that if there is a total meltdown like these guys predict that precious metals are going to be all that precious anymore. They become themselves a fiat currency, since gold is useless. It's merely a social convention that it's valued (along with being fungible and limited), and that can break down pretty easily. It's easier to believe people will be forced to barter in immediate necessities (e.g. food/water/guns/ammo).

I had to respond to the suggestion that precious metals might not be precious, even in some horrendous economic conditions. I agree, in a way it's a curious thing that people value gold and silver as much as they do, but it's also remarkable that they have valued them so much for so many thousands of years, in economies (Incas, for instance) that were so immeasurably worse than ours. Why this is so is interesting in itself. Some of it was discussed in Greenspan's essay "Gold and Economic Freedom" in "Capitalism, the Unknown Ideal". (I hate referring to Greenspan, but the points in the article are still valid, even if he betrayed his own ideals and everyone else much later.) So I answered:

Gold is far from useless -- many properties of gold make it valuable, even in a primitive society, but even more so in an advanced one:

  • malleability and ductility (it's easy to form into complex shapes, and easy to subdivide into very small quantities),
  • non-reactive, non-corrosive, and low immiscibility (if that's the right word) with many other elements, so it stays pure,
  • non-toxic (safe to handle),
  • doesn't oxidize easily (it won't corrode like iron or even silver does, so it retains its form in jewelry, coins and bullion over long periods of time),
  • very high density (it has one of the highest atomic numbers to occur naturally and very small quantities can represent large stores of value in other things),
  • high electrical conductivity (useful for engineering, but also for verifying the purity of gold),
  • easily electroplated (it can be deposited in atomically thin layers), not to mention
  • a highly desirable appearance that is created and maintained because of these properties.

Then throw in the historical and mythological value of gold to people -- it occurs throughout history. Subjective, perhaps, but not to be dismissed.

Then consider that someone can't just make gold in their basement -- alchemysts notwithstanding. (Only 161,000 tonnes of gold have been mined in human history -- a cube 67 feet on a side; compare that to all the iron ever produced!)

And last, all these properties make it extremely easy for someone to objectively determine if they are receiving pure gold and not some fake dubloons. It's impossible to devalue gold with fakes, and this offers tremendous protection against being defrauded. Putting aside reports of gold depositories storing fake bullion that no one can get access to to verify, it's extremely hard to make undetectable "slugs" or bullion filled with some heavier metal filling (a combination of two isotopes of tungsten have damn near the density of gold). Combined with a heavy gold plating, it might have a net density and exterior appearance of gold, but you can detect the fake. I looked into it at length a few months ago, not cause I wanted to go into that line of work, but to prove it couldn't be done. I found several completely reliable means of detecting pure gold. For one, electrical conductivity. There's simply no way to fake it, and the equipment to do so can be made in your garage. Magnetic properties exist, also.

Applications today abound in engineering (gold has long been used in many high-performance microchips), dentistry, etc., but even today most gold usage is in jewelry. I did some research awhile ago into gold pricing to figure out why the price wasn't moving very much and found that almost 60% of gold consumption was jewelry (see http://www.research.gold.org/supply_demand/ for instance), and most of the remainder was electronics and bullion, with relatively little into coins. That's one reason the high demand for coins today hasn't driven up the price of gold more than it has.

Back to the main point. As Greenspan discussed (and remember, Ayn Rand edited all those essays -- nothing got written without her agreement with the content), gold is invaluable even in a pre-industrial society as a form of money because it simply is incredibly difficult to conduct transactions on a barter basis alone.

Take an industrial example of barter, though. Imagine you're a big farmer with a lot of wheat and what you need desperately is gasoline to power your tractors, but the guy selling the gasoline has plenty of wheat already, and he doesn't want to expend the effort to find buyers of wheat, nor build facilities to store your wheat, nor bear the risk of having the wheat go moldy on him till he finds a buyer. (Maybe it's right after the wheat harvest and everyone and their cousin is selling wheat, but fall rains are a possibility.) But suppose you have some hard money -- great: for the guy selling gasoline, that's fungible and it saves him a lot of work and eliminates the risk of your transaction. But suppose the government is promoting paper currency while running xerox machines night and day. That paper may be rapidly diminishing in value (as today). The guy selling the gas has to make an estimate of the rate of decline in value of the paper money, including a generous margin of error in his own estimate. He ups the price of his gas to include the extra risk and the time value of money, till he can spend it himself.

But suppose you, the seller of wheat come to this guy with hard gold -- a form of currency that the government *can't* dilute and devalue. Your stature goes up with the gasoline seller, immensely. (Assuming he won't get thrown into prison because the government has made possesion of gold a capital offense.) You've suddenly eliminated the risk and time factors from his transactions. You get a big discount on your gasoline. Likewise, when you want to sell your wheat to the local grainery, how do you view the transaction if the grainery pays you in gold or in government fiat? I bet you offer a much better price for gold, especially if the economy sucks.

But what if the grainery offered you copper instead (maybe they're getting paid in copper wire stolen from the power lines around the country)? Copper is running around $3/lb today (http://www.metalprices.com/FreeSite/metals/cu/cu.asp). Gold, in contrast, is about $1100/troy ounce (14.6 troy ounce/lb), or $16,000 per pound. On top of that, gold is over twice as dense as copper (19.3g/cc vs 8.92 g/cc), so you can carry home almost twice the value of gold from your harvest ($35k/lb). Or twice the value back into town to pay for other farm supplies (like gasoline).

When you consider all these factors, it's just very, very unlikely (I would say impossible, barring the wiping out of 99.99% of the human race to scattered tribes of 20 people or less per tribe) for gold to lose its value, and for humans to rise to any higher level, they will need an objective form of currency which gold provides better than any other substance.

Gold Price Manipulation?

Here's something I wrote about 10 months ago that is relevant to my last post. I dug up information in relation to the question of "is the price of gold being manipulated?" While I don't claim to have a good answer to my speculation about gold swap/trades being a possible mechanism for price suppression (I've had a half-dozen people respond, about 50-50 pro-con), this data at least appears to support the assertion that demand is way up relative to supply:

http://www.research.gold.org/supply_demand/ Identifiable gold demand

Note that the table shows that gold bar hoarding is only 9% of total demand. True or not, that would greatly diminish the upward price pressure on gold from panicked investors. On the other hand, note that I don't have figures for Q4 2008 or Q1 2009 -- the panic has surely accelerated since the election and the "stimulus bill" (even among supporters of that bill).

If you grant that gold production is declining, the link says:

"The biggest contributor to the increase in total identifiable demand in Q3 was identifiable investment, up 137.5 tonnes (56%) relative to year-earlier levels. Jewellery demand rose 45.5 tonnes or 8%, while industrial and dental demand declined 11%."
In other words, even after significant declines in industrial consumption of gold, demand is way up. Interestingly, you'll note that they say "bar hoarding" is only about 9% of total demand -- but up 69% from a year ago. What *isn't* given is coin hoarding. Right now, all accounts suggest that something approaching 100% of coins are being hoarded... and coin minting is up 60%.

A related report from the same guys says (see http://www.gold.org/assets/file/pr_archive/pdf/GDT_Q1_2008_pr.pdf):
" With financial markets still reeling from the global credit squeeze amid growing inflationary pressures, dollar demand for gold reached US $20.9bn in the first quarter of 2008, a 20% increase over the same period in 2007 and more than double the level of four years earlier. However, tonnage demand for gold at 701 tonnes was down 16% on the same period last year and represents the lowest quarterly figure for five years, according to Gold Demand Trends, which is released today by World Gold Council (WGC)."
This is from May 2008, but I still find it absolutely bizarre, if I even understand what they are saying. Jewellry accounts for about 60% of world gold demand, and they say

"Jewellery demand declined 21% year-on-year to 445.4 tonnes, the lowest quarterly level since the early 1990s"?
Perhaps it's the general economic decline. They do say (again, this was May 2008),
"Industrial and dental demand declined by 5% on year earlier levels to 110.3 tonnes, primarily in response to the deteriorating US economy, and a slowing in demand for consumer electronics."
From the charts below, industrial and dental demand for gold is about 20% of world demand, so a 5% drop represents about a 1% drop in overall world gold demand, year on year.

They also say
"The supply of gold was 6% higher in Q1 2008 than a year earlier, primarily driven by increased scrap supply which in turn was a reaction to the rising gold price. Mine output remained constrained, little changed from Q1 2007 levels at 593 tonnes, while net official sector (central banks) sales were 8% higher than in Q1 2007."
These guys are a little more optimistic about gold production than other reports, which suggest an actual decline in mine production. But again -- this report was May, 2008.

Here's a possible partial explanation for the price of gold not skyrocketing: Maybe it's already priced out for today's events. From this link:
"While it has already come far from its humble beginnings in the $250s in April 2001, [gold's price] has a long way to run yet."
In other words, gold is 4 times more expensive today than 8 years ago. Now, one of the most interesting (and significant) things about price mechanisms is that they anticipate events. Let me hypothesize, then, and ask: did smart investors start anticipating world events from 2001 forward to bid the price of gold up? In other words, is the explanation for the lack in more dramatic upward movement in the price of gold today simply because the price of gold has already anticipated today's events?

I think that is part of the explanation, though not all of it. The same applies to stocks when a glowing earnings report causes a decline in the stock price, simply because the earnings half a point below expectations -- the stock declined because it was priced at the market's expectation of all future earnings, and when the most recent earnings report comes in a little lower than that projection, the cumulative future earnings decline in the new projection, so the value of the company declines. (That is, I'm arguing on the basis of my theory that the value of a company is the sum of all future net earnings, discounted for risk, uncertainty, and the time value of money.)

But anticipated gold price projections can't be the full explanation for the relatively stable price of gold today. The dramatic increase in demand today should still be driving prices up at a faster rate than they are, I think. I go back to my comment that a 5% increase in the demand/supply ratio of oil can double the price of oil.

So the question here remains to be proved: is the rate of increase in the price of gold in line with the increased demand, or is there government manipulation holding the rate lower?

Look at the price over the last 34 years, unadjusted for inflation:



You might not think the price of gold is being suppressed, but now here it is adjusted for inflation:



Wait till the coming increase in inflation (maybe hyper) steps in about 12 - 24 months from now. That curve will rocket upward.

This article http://www.zealllc.com/2008/goldfund2.htm makes the point

"...global gold production is actually falling despite the relatively high gold prices. Annual gold mined today, which is 70% of the world’s supply, is running over 4% lower than when this bull began in 2001! "
They provide a chart in another link (http://www.zealllc.com/2008/goldprod2.htm):

When you consider that the economy is far worse today that it was in 1980, and the panic among investors is unequaled since 1929, and gold production is declining as well, you simply have to suspect Something is Rotten in Denmark.

As an experienced gold mining investor on my list remarks (http://www.larrymylesreports.com/Case_For_Gold.htm):

"In mid-December a reader forwarded me a timely article exposing the plight of Swiss gold refiners and their ‘difficulty in keeping up with demand for gold bullion leading to long delivery times as investors were becoming wary of other stores of wealth.’ ...'I have been in the gold business for 30 years and I have never experienced anything like this,” said Bernhard Schnellmann, director for precious metal services at Argor-Heraeus, one of the world’s three largest refineries. He went on to say, “Even though production has increased dramatically since the middle of the year…..we simply cannot cope with the demand.' ...In the case of coins, the delivery date has gone from a couple of days at the beginning of the year, to six to eight weeks! And remember, the Swiss refineries are working day and night, seven days a week. ...Something has to give - especially when global production is estimated at approximately 2,500 tonnes annually…and global demand is closer to 4,000 tonnes. And those are 2007 figures and do not take into consideration the dramatic rush to bullion."
I've heard and read of numerous reports of long delivery times, which are consonant with a much higher price of gold than we are seeing -- certainly much higher than $950/oz in today's world.

Total identifiable demand (World Gold Council): 1133 tonnes (Q3 2008). Up 18% from Q3 2007.

Let's take the premise that Q3 numbers, being before the election and before the meltdown, are grossly understated. I'm going to arbitrarily put the present Q1 2009 non-industrial bullion and coin demand at 100% higher than than Q1 2008 (bar hoarding / coins from table at top): 400 tonnes. I suspect this considerably understates the actual private demand at this moment in time. This represents an increase in world wide demand of 200 tonnes, year-on-year. Out of a total demand of 1133 tonnes, that's a 17.6% increase in the supply/demand ratio.

If you take a cue from the oil market, and say that each 5% increase in supply/demand doubles the price, I'd expect that 17.6% increase to be reflected in a 2^(17.6/5) = 11.5: increase in price -- say, $10,000/oz.

NOTE that I don't include national gold reserves in this calculation -- they are "out of the market" and don't represent a supply on the market, per se, except to the extent governments choose to throw them in. It's a government-run cartel, not unlike the diamond cartel which keeps diamond prices higher than they would otherwise be.

But let's see what total national reserves of gold are. From Wikipedia: "11,065 tonnes as of December 2007" (http://en.wikipedia.org/wiki/Official_gold_reserves). So the current private demand of 400 tons (I speculate from extrapolation) is a miniscule fraction of national reserves:


I abridged the full table. But what you can see is that the U.S. reserves (73.5% of the world) are by far the largest, and an increase in private demand of 200 tons for Q1 2009 (as I speculate) can easily be handled by the Treasury simpling selling bullion onto the market. They aren't going to run out. Of course, to keep it up for an entire year would take 800 tons -- not chump change.

It appears that at present I don't have to go to more exotic gold-swap theories to explain how central governments can suppress the price of gold, and the day to revisit that discussion may yet be coming, but about then governments will begin nationalizing gold. So ... buy small quantities to avoid reporting requirements, and find a secure hiding place. (NOT a safe deposit box.)

Tungsten Plugged Gold?

A month ago a friend sent me a gold investment article (at bottom) regarding the risk of buying gold ETF's backed by fake gold bars and a conspiracy theory involving the U.S. government, so I did a little investigating. I concluded that, while it is possible to fake the density of gold with gold-plating on tungsten bars, it wasn't possible to fake gold bars for even moderately sophisticated testing using other criteria. Since this dovetails with my last two posts on gold, I thought it might be of general interest so I'm posting here. I replied as follows:

----- begin reply -----
I see from google (searching "gold tungsten plugged bars fraud") that this story also was on kitco, but do you really think the U.S. Government was involved (even indirectly) in making plugged gold bars to suppress the price of gold? You didn't express an opinion.

Did they really do it? That's the $1123/oz question. I couldn't find anything on snopes. It would be a fraud the likes of which I've never heard, and the consequences would be, well, earth shaking. It seems rather unlikely, but I've gotten so suspicious of the government that I could almost believe it.

I looked up the density of gold and tungsten to verify the claim of equal density. It's hard to get an exact definition for a given temperature and isotopic composition, and web values are vague, but for best information I could quickly find, gold comes is 19.32 gm/cc at 293Kelvin and Tungsten comes is 19.3 gm/cc @ 293Kelvin (http://www.chemicalelements.com/elements/w.html).

The half-lives of gold isotopes are relatively short -- seconds to days, so it's not possible to have any appreciable mass fraction in any isotope but Au-197. Tungsten, however has stable isotopes of W-180, W-182, 183, 184, and W-186. The given values of tungsten density do not, as I say, indicate the mass fraction for each isotope, but W-184 is the most common isotope (31% of mined tungsten). That means, a bar of pure W-186 could be 1.1% more dense (or 19.5gm/cc) than a bar of W-184. So it's entirely feasible to mix 10% W-186 with 90% W-184 to get exactly the same density of tungsten as gold.

W-184 constitutes about 31% of known tungsten, and W-186 is 29% (http://en.wikipedia.org/wiki/Isotopes_of_tungsten). Even if we assume this is the fraction going into the density of 19.3gm/cc, it is still possible to skew the mass fraction of W-186 upward to give the same density of gold.

That said, there are tests other than density to detect a tungsten bar plated with gold. (eg, http://reactor-core.org/~djw/myblog/archives/2008/10/24/T12_14_56/) Nuclear resonance imaging would NOT help (gold plating shields the measurements), but magnetic fields reportedly have unique eddy-current signatures. I didn't investigate further here. It's possible. Eddy currents excited by an oscillating magnetic field will cause a material to heat up in proportion to the resistivity of the material. Some cook top ranges use this effect, and might be employed to analyze a gold bar. You could probably put a gold bar in a caloric bomb surrounded by a 60Hz field from a transformer, and measure the temperature rise over some minutes. A tungsten plugged bar should give higher temperature for the same heating time.

DC electrical resistance measurements could detect a plugged bar, if you contacted it carefully at both ends. (You'd probably needs a hydraulic press.) The resistivity of gold is 2.271 micro-ohm-cm at 300K. The resistivity of tungsten is 5.65 micro-ohm-cm. A bar plugged 50% with tungsten should have a resistivity about 3.971 micro-ohm-cm, about 74% higher. But you have to measure the resistance of an entire gold bar, which will be VERY low.

A 400 oz gold bar has dimensions of 20cm x 8cm x 4.5cm. The resistance end-to-end is 1.26167 micro-ohms. Applying a voltage of 10 microvolts across it would generate a current of 7.926 amps. A W-plugged gold bar would have a current of about 4.56amps. This would be a very noisy measurement, but if you filter the signal, it could be accurately measured with a cheap multimeter. The effect of contact resistance at both ends of the bar, however are significant. What it will do is reduce both currents and narrow the difference in dc current. That's why I say it's important to get a very good electrical contact which is very low resistance (less than the bar itself, preferably) and consistent from bar to bar measurements. But not impossible.

However, a dead sure test would be to measure the heat capacity of a gold bar, the amount of heat needed to raise the temperature of a material by 1 degree kelvin. Gold has a heat capacity of 0.129 joules / gm-K, and tungsten has a heat capacity of 0.134 J/gm-K. That's a difference of 3.88% which should be easily measurable -- unless someone was REALLY clever and used two or more elements to plug the gold to match both heat capacity and density. Not impossible in principle, but it would require research to ascertain if practical. But it would be difficult if not impossible to match heat capacity, density AND electrical resistivity, because gold is the third lowest resistance material, behind only copper and silver. But Cu and Ag are so much less dense than gold, I'm not sure you could compensate the higher resistivity of tungsten without lowering the density of the gold bar too much.

I could also imagine a sound test -- strike a gold bar with an exact force and duration with a computer controlled metal hammer, and measure the sound generated, then run that through a spectrum analyzer. A quick check shows tungsten has a velocity of sound of 5174 m/s and gold has a velocity of 1740m/s. That's a huge difference. You could hear that difference. For sure by dropping a tungsten plugged gold coin on the floor.

Another test is thermal conductivity. Gold is 320W/m-K and Tungsten is 174W/m-K. That would be just as hard to conceal, though the measurement would be awkward.

What I conclude is that plugged gold bars are easy to detect (and one reason gold is such an ideal monetary standard), but you do have to use the right techniques. I wonder what methods are used by the mints? I could see them getting defrauded by using only a density test, and once they take possession, even if they discover the fraud, they probably wouldn't want to reveal it.

It makes me wonder how silver bars / coins could be faked?

You know, in this day and age, there could be a market for low-cost gold testing machines, but of course, the thieves could fake those, too.

---- end reply to friend ----


-------- Posted Thursday, 12 November 2009 | Digg This ArticleDigg It! ---------
Source: GoldSeek.com
http://news.goldseek.com/GoldSeek/

Gold Finger - A New Take On Operation Grand Slam With A Tungsten Twist
By: Rob Kirby

I’ve already reported on irregular physical gold settlements which occurred inLondon, England back in the first week of October, 2009. Specifically, these settlements involved the intermediation of at least one Central Bank [The Bank of England] to resolve allocated settlements on behalf of J.P. Morgan and Deutsche Bank – who DID NOT have the gold bullion that they had sold short and were contracted to deliver. At the same time I reported on two other unusual occurrences:

1) Irregularities in the publication of the gold ETF - GLD’s bar list from Sept. 25 – Oct.14 where the length of the bar list went from 1,381 pages to under 200 pages and then back up to 800 or so pages.

2) Reports of 400 oz. “good delivery” bricks of gold found gutted and filled with tungsten within the confines of LBMA approved vaults in Hong Kong.

Why Tungsten?

If anyone were contemplating creating “fake” gold bars, tungsten [at roughly $10 per pound] would be the metal of choice since it has the exact same density as gold making a fake bar salted with tungsten indistinguishable from a solid gold bar by simply weighing it.

Unfortunately, there are now more sordid details to report. When the news of tungsten “salted” gold bars in Hong Kong first surfaced, many people who I am acquainted with automatically assumed that these bars were manufactured in China – because China is generally viewed as “the knock-off capital of the world”. Here’s what I now understand really happened:

  • The amount of “salted tungsten” gold bars in question was allegedly between 5,600 and 5,700 – 400 oz – good delivery bars (roughly 60 metric tonnes). This was apparently all highly orchestrated by an extremely well financed criminal operation.
  • Within mere hours of this scam being identified – Chinese officials had many of the perpetrators in custody. And here’s what the Chinese allegedly uncovered:
  • Roughly 15 years ago – during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] – between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA (more than 16 Thousand metric tonnes).
  • Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day. I know folks who have copies of the original shipping docs with dates and exact weights of “tungsten” bars shipped to Ft. Knox.
  • The balance of this 1.3 million – 1.5 million 400 oz tungsten cache was also plated and then allegedly “sold” into the international market.

Apparently, the global market is literally “stuffed full of 400 oz salted bars”. Makes one wonder if the Indians were smart enough to assay their 200 tonne haul from the IMF?

A Slow Motion Train Wreck, Years in the Making

An obscure news item originally published in the N.Y. Post (written by Jennifer Anderson) in late Jan. 04 has always ‘stuck in my craw’:

DA investigating NYMEX executive - Manhattan, New York, district attorney's office, Stuart Smith - Melting Pot - Brief Article – Feb. 2, 2004

A top executive at the New York Mercantile Exchange is being investigated by the Manhattan district attorney. Sources close to the exchange said that Stuart Smith, senior vice president of operations at the exchange, was served with a search warrant by the district attorney's office last week. Details of the investigation have not been disclosed, but a NYMEX spokeswoman said it was unrelated to any of the exchange's markets. She declined to comment further other than to say that charges had not been brought. A spokeswoman for the Manhattan district attorney's office also declined comment.

The offices of the Senior Vice President of Operations - NYMEX – is exactly where you would go to find the records [serial number and smelter of origin] for EVERY GOLD BAR ever PHYSICALLY settled on the exchange. They are required to keep these records. These precise records would show the lineage of all the physical gold settled on the exchange and hence "prove" that the amount of gold in question could not have possibly come from the U.S. mining operations – because the amounts in question coming from U.S. smelters would undoubtedly be vastly bigger than domestic mine production.

We never have found out what happened to poor ole Stuart Smith – after his offices were "raided" – he took administrative leave from the NYMEX and he has never been heard from since. Amazingly (or perhaps not), there never was any follow up on in the media on the original story as well as ZERO developments ever stemming from D.A. Morgenthau’s office who executed the search warrant.

Are we to believe that NYMEX offices were raided, the Sr. V.P. of operations then takes leave - all for nothing? These revelations should provide a “new filter” through which Rothschild exiting the gold market back in 2004 begins to make a little more sense:

“LONDON, April 14, 2004 (Reuters) - NM Rothschild & Sons Ltd., the London-based unit of investment bank Rothschild (ROT.UL), will withdraw from trading commodities, including gold, in London as it reviews its operations, it said on Wednesday.”

Interestingly, GATA’s Bill Murphy speculated about this back in 2004;

“Why is Rothschild leaving the gold business at this time my colleagues and I conjectured today? Just a guess on my part, but suspect:”

*SOMETHING IS AMISS. THEY KNOW A BIG GOLD SCANDAL IS COMING AND THEY WANT NO PART OF IT. …”

“ROTHSCHILD WANTS OUT BEFORE THE PROVERBIAL "S" HITS THE FAN.” BILL MURPHY, LEMETROPOLE, 4-18-2004

Coincidentally (or perhaps, not?), GLD Began Trading 11/12/2004

In light of what has occurred – regarding the Gold ETF, GLD – after reviewing their prospectus yet again, it becomes pretty clear that GLD was established to purposefully deflect investment dollars away from legitimate gold pursuits and to create a stealth, cesspool / catch-all, slush-fund and a likely destination for many of these “salted tungsten bars” where they would never see the light of day – hidden behind the following legalese “shield” from the law:

Excerpt from the GLD prospectus on page 11:

http://www.spdrgoldshares.com/media/GLD/file/SPDRGoldTrustProspectus.pdf

Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss. Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars delivered in settlement of a gold trade, or the London Good Delivery Standards, the standards required by the Trust. If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss.

The Fed Has Already Been Caught Lying

Liberty Coin’s Patrick Heller http://www.libertycoinservice.com/ recently wrote,

Earlier this year, the Gold Anti-Trust Action Committee (GATA), filed a second Freedom of Information Act (FOIA) request with the Federal Reserve System for documents from 1990 to date having to do with gold swaps, gold swapped, or proposed gold swaps.

On Aug. 5, The Federal Reserve responded to this FOIA request by adding two more documents to those disclosed to GATA in April 2008 from the earlier FOIA request. These documents totaled 173 pages, many parts of which were redacted (covered up to omit sections of text). The Fed's response also noted that there were 137 pages of documents not disclosed that were alleged to be exempt from disclosure.

GATA appealed this determination on Aug. 20. The appeal asked for more information to substantiate the legitimacy of the claimed exemptions from disclosure and an explanation on why some documents, such as one posted on the Federal Reserve Web site that discusses gold swaps, were not included in the Aug. 5 document release.

In a Sept. 17, 2009, letter on Federal Reserve System letterhead, Federal Reserve governor Kevin M. Warsh completely denied GATA's appeal. The entire text of this letter can be examined at http://www.libertycoinservice.com/ http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf

The first paragraph on the third page is the most revealing. Warsh wrote,

"In connection with your appeal, I have confirmed that the information withheld under exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

This paragraph will likely be one of the most important news stories of the year.

Though not stated in plain English, this paragraph is an admission that the Fed has in the past and may now be engaged in trading gold swaps. Warsh's letter contradicts previous Fed statements to GATA denying that it ever engaged in gold swaps during the time period between Jan. 1, 1990 and the present.

[Perhaps most importantly], this was GATA's second FOIA request to the Federal Reserve on the issue of gold swaps. The 173 pages of documents received for the 2009 FOIA request all pre-dated the 2007 FOIA request, which means they should have been released in the response to the earlier FOIA request. This establishes a likelihood that the Federal Reserve has failed to adequately search or disclose relevant documents. Further, the Fed response admitted that it had copies of relevant records that originally appeared on the Treasury Department Web site, but failed to include them in its response.

Now that Federal Reserve governor Warsh has admitted that the Fed has lied in the past about the Fed’s involvement with gold. It should now be very clear to everyone why the Fed is lying and the true nature of what they are hiding / withholding.

On Doing God’s Work

An important footnote to consider is the intertwined-ness of the U.S. Federal Reserve and the U.S. Treasury (can anyone really tell them apart?] as well as this duopoly’s two principal agents – J.P. Morgan-Chase and Goldman Sachs. When one truly grasps the nature of these highly conflicted relationships it gives a fuller meaning to words recently uttered by Goldman head, Lloyd Blankfein, who claimed, “I’m doing god’s work.”

Does this really mean that Mr. Blankfein believes that the Federal Reserve is god? You can judge for yourself. While the Fed prints money like no one else could - except god almighty himself (or Gideon Gono http://www.reuters.com/article/latestCrisis/idUSL2176351, perhaps?) – I really doubt that was the intent back in 1864, when the U.S. adopted “In God We Trust http://www.reuters.com/article/latestCrisis/idUSL2176351 http://en.wikipedia.org/wiki/In_God_We_Trust ” as their official motto.

And that’s my two cents worth for today.

Got (real) physical gold yet?

Rob Kirby

More for subscribers. Subscribe here http://www.kirbyanalytics.com/amform.htm.


Sunday, December 27, 2009

Deja Vu

Reading the NY Times story copied at bottom, I had something flash before my eyes...


At Least 4 Dead as Americans Fight Police in Streets

By Philbert I.M. WORTHLESS
Published: July 4, 2017
GNN
Washington D.C, N.A.P. — American Capitol police opened fire on protesters in Washington on Sunday, killing at least four people, including a nephew of the opposition leader, John Locke, as vast crowds of demonstrators flooded the streets of cities across the North American Protectorate's middle province and fiercely fought security forces, according to witnesses and opposition Web sites.




Government News Network Worldwide Photo Agency

An American Tea Party Protester ran as police burned his motorbike during an anti-government demonstration in Washington on Sunday.

The protests, taking place on July Fourth, were the bloodiest — and among the largest — since the uprisings that followed North America’s disputed governor's election last November, with hundreds of thousands of people thronging in Washington alone, witnesses said. There were reports of hundreds of injured people and numerous arrests.

In Washington, thick crowds of Tea Party protesters marched down a central avenue in mid-morning, defying official warnings of a harsh crackdown on protests as they chanted, “Death to the dictator!” They refused to retreat even as police fired tear gas, charged them with batons and discharged warning shots.

The police then were forced to open fire directly into the crowd, opposition Web sites said, citing witnesses. At least four people were killed, the Web sites reported, and photographs circulated of a man with a bloodied head being carried from the scene.

One of the dead was Tom Jefferson, Mr. Locke's 35-year-old nephew, the Government News web-site reported. He was shot in the heart at midday near the site of the former Washington Monument, the report said.

Protesters successfully pushed the police back in some areas, hurling rocks and capturing several police cars, which they set on fire. Videos posted to the Internet showed scenes of mayhem, with dumpsters burning and groups of protesters attacking loyal Amerikorp militia volunteers amid a din of screams.

Protests and clashes also broke out in the cities of New York, Chicago, Dallas, St. Louis, Denver, Miami, Baton Rouge, Tucson and St. Paul, opposition Web sites said, but government sources assured GNN that these reports were false and malicious propaganda of a weakening protest movement.

The protesters deliberately blended their reactionary message with the day’s former patriotic meaning, alternating anti-government slogans with cries of mourning for their "Founders", whose alleged struggle for freedom used to be commemorated on the former national holiday.

“This is the month of blood, Obama will fall! Mmm, Mmm, Mmmm!” the protesters shouted, referring to North America's governor and supreme leader, Ayatollah Barack Hussein Obama, who ordered an end to the national holiday after the United States joined the new Federation of World Socialist States in 2015.

The day’s clashes showed an opposition movement that some says is becoming bolder and more direct in its challenge to the North American Protectorate's legitimate ruling authorities. Yet as protesters continued to attempt to reclaim American symbols from their decadent past, the government has successfully cast its opponents as religious zealots.

On Saturday in Philadelphia, protesters gathered outside the prayer hall once known as "Independence Hall", and prevented former vice-president and the Reverend Al Gore from delivering his talk on "Cap and Trade: A Model for Personal Sacrifice and Redemption" before being driven away by stone-throwers. Protesters chanted, “The family of George are with us,” an obscure reference to George Washington, the leader of America's 1776 revolution.

Some protesters claim Washington's descendents are behind the opposition movement, further reason, authorities say, for the clamp-down against them, and the Federal Secret Service asserts that their program of eradication, which is modeled on the Chinese crackdown against the former Falun Gong, has been successful, despite the fall of the Chinese government and their withdrawal from the Federation.

Candlelight vigils for the Jefferson Memorial were also being held not only by older and more traditional residents who revered him for reasons of an outdated notion of patriotism, but by younger activists and students who have dominated protests in recent months and suffered the heaviest casualties to superior government forces.

Sunday marked the 240th year since the original colonists revolted against a more refined world opinion, and still represents an important day in the pantheon of bourgeous American rituals. The protests may have received a boost with the razing last week of the Washington Monument, which His Highness, Ayatollah Obama, had ruled a decadent symbol of an imperialist past that was corrupting the minds of the Protectorate's youth.


http://www.nytimes.com/2009/12/28/world/middleeast/28iran.html?_r=1&hp

At Least 4 Dead as Iranians Fight Police in Streets

By ROBERT F. WORTH
Published: December 27, 2009

BEIRUT, Lebanon — Iranian police opened fire on protesters in Tehran on Sunday, killing at least four people, including a nephew of the opposition leader Mir Hussein Moussavi, as vast crowds of demonstrators flooded the streets of cities across Iran and fiercely fought security forces, according to witnesses and opposition Web sites.




European Pressphoto Agency

An Iranian ran as protesters burned police motorbikes during an anti-government demonstration in Tehran on Sunday.

The protests, taking place on the holiday marking the death of Shiite Islam’s holiest martyr, were the bloodiest — and among the largest — since the uprisings that followed Iran’s disputed presidential election last June, with hundreds of thousands of people thronging Tehran alone, witnesses said. There were reports of hundreds of injured people and numerous arrests.

In Tehran, thick crowds marched down a central avenue in mid-morning, defying official warnings of a harsh crackdown on protests as they chanted, “Death to the dictator!” They refused to retreat even as police fired tear gas, charged them with batons and discharged warning shots.

The police then opened fire directly into the crowd, opposition Web sites said, citing witnesses. At least four people were killed, the Web sites reported, and photographs circulated of a man with a bloodied head being carried from the scene.

One of the dead was Ali Moussavi, Mr. Moussavi’s 35-year-old nephew, the Parleman News Web site reported. He was shot near the heart at midday in Tehran’s Enghelab Square, the report said.

Protesters successfully pushed the police back in some areas, hurling rocks and capturing several police cars, which they set on fire. Videos posted to the Internet showed scenes of mayhem, with dumpsters burning and groups of protesters attacking Basij militia volunteers amid a din of screams.

Protests and clashes also broke out in the cities of Isfahan, Mashad, Shiraz, Arak, and Najafabad, opposition Web sites said.

The protesters deliberately blended their opposition message with the day’s religious meaning, alternating anti-government slogans with ancient cries of mourning for the prophet Mohammed’s grandson, Hussein, the 7th-century saint whose death in battle is commemorated on the Ashura holiday.

“This is the month of blood, Yazid will fall!” the protesters shouted, equating Iran’s supreme leader, Ayatollah Ali Khamenei, with Yazid, the ruler who ordered Hussein’s killing.

The day’s clashes showed an opposition movement that is becoming bolder and more direct in its challenge to Iran’s ruling authorities. Yet the protesters continued to reclaim Islamic symbols from the government, which has cast its opponents as anti-religious rioters. On Saturday, when protesters gathered outside a prayer hall where the reformist former president Muhammad Khatami was speaking, they chanted, “The family of the Imam are with us,” a reference to Ayatollah Ruhollah Khomeini, the leader of Iran’s 1979 revolution. Ayatollah Khomeini’s grandson, Hassan, is widely said to support the opposition movement.

The protests may also have received a boost from the death last week of Grand Ayatollah Ali Hossein Montazeri, a patriarch of Iran’s Islamic revolution who became a fierce critic of the country’s rulers, especially in recent months. His memorials have brought out not only the young activists and students who have dominated protests in recent months, but older and more traditional residents who revered him for reasons of faith as well as politics. Sunday was the seventh day since his death, an important marker in Shiite mourning rituals.

Tuesday, December 22, 2009

Amendment 29

In response to someone sending me a proposed Constitutional amendment "28" to require Congress to be subject to the same laws as everyone else (they aren't -- they are exempting themselves from the Health Care Bill), I had a lively exchange with some friends about my proposal for an Amendment 29:

Any member of Congress, or the Executive Branch, or the Judiciary, who approves or administers or enforces laws later found to be unconstitutional by the Supreme Court shall be immediately removed from office, permanently barred from any future office, and held liable for all damages suffered by the citizens of the United States as a consequence thereof, and be subject to both civil and criminal penalties.

The "lively" part was some strong objections, primarily on grounds of impracticability without philosophical change.

There's pro's and con's to the idea, for sure. As I told another friend, I agree completely that we mustn't ever have a constitutional convention at this juncture in time. The potential for abuse would be immense. You could count on pure, unfettered totalitarianism to emerge. A single amendment doesn't require a convention, but I'd also agree there is the potential for other bad amendments being introduced once someone starts the process, and that's a legitimate danger.

I'd also agree that the chances of getting an "Amendment 29" passed are zilch. I threw it out there as a purely hypothetical idea, and one I was really thinking of in some better future. As an engineer, I can't help observing that stronger feedback mechanisms would be essential even in a purely rational world. Quite honestly, it's crazy to create any system--electronic, mechanical or governmental--without appropriate feedback mechanisms, and the ones in the Constitution, better though they may have been than any other in historical terms, are pretty weak. Politicians today, with acquiescence of the courts, run roughshod over any checks and balances and principles of objective law.

I'd also agree that right now it's almost too late to implement an "Amendment 29" -- the courts, for one are so corrupted that you might not get so much mileage out of it, and it could genuinely harm your own cause if your side gets booted -- but can you imagine how much different the health care debate would have gone if every one of the Democrats and Obama himself were potentially going to be booted out of office (permanently!) if their bill was ruled unconstitutional?

What I would say in defense of the "Amendment 29" idea is that it is purely a limit on power. A brake that grants no extra authority but creates consequences for abuse of authority. For instance, you may criticize the idea on the grounds that we first require the philosophy of the country to change for the better, but consider that it has been pretty seriously flawed for the last 100 years -- if we measure from the enactment of trust-busting laws. If an "Amendment 29" had been in place all that time, I don't think we'd be anywhere in near the mess we're in now. For instance, the buffoons who created the Federal Reserve would have been booted out of office when it was first ruled unconstitutional.

Not just Teddy, but Franklin Roosevelt, too, as when he attempted to pack the Supreme Court. And many others. Legislators would have been much more inclined to seek serious legal opinions on the constitutionality of new legislation before voting for it. They would actually read bills they vote for, to be sure they wouldn't lose their jobs. What a concept. (And omnibus bills would diminish to insignificance if legislators were responsible for the entire contents of a bill.)

There are other reasons to potentially criticize the idea, but I think this would have bought us a lot of time -- I'd guess at least 50 years even in today's horrendous philosophical climate -- to achieve the deeper philosophical revolution of ideas we need in this country to cure its ills. An "Amendment 29" would not have been a panacea any more than an emergency brake on a car is a substitute for good design and good maintenance and a sober driver. But engineers tend to think in terms of self-regulating processes and designs that are less likely to fail, or at least, designs which give you more time to limp to the philosophical Philling Station for intellectual fuel, or to get a flat fixed. It's in that spirit that I suggested it.

Friday, December 18, 2009

How to Brainwash a Nation

Stumbled on this interesting description of how Soviets worked during the Cold War to subvert America. Rather simplified, but interesting nonetheless.

I guess you could almost say Obama is the apotheosis of this approach.



Thursday, December 17, 2009

Inflation and the Fall of America

This is one of the most fascinating essays on either economics or Rome that I have ever read. The barest hint:
Now, what were the consequences of inflation? One of the odd things about inflation is, in the Roman Empire, that while the state survived — the Roman state was not destroyed by inflation — what was destroyed by inflation was the freedom of the Roman people. Particularly, the first victim was their economic freedom.
The essay goes on to show how the decline in economic freedom leads to the loss of all freedom.

Of course, what underlying philosophies led to the inflation and the loss of economic freedom? The missing link the Von Miseans always miss: various forms of pragmatism and mysticism and relativism and skepticism. In Roman times: platonism, hedonism, stoicism, epicureanism, etc, ad infinitum. Without a coherent philosophy formulated for reality and human nature and the requirements of human life, and without the discovery of individual rights, the devils were doomed.

To understand this better, ask, in hindsight: what could have been done to save the Roman Empire without the ideas of the Rights of Man, reason, and a committment to human life in an objective reality (of which a gold standard is one form)? As the article notes, what's amazing about Rome is not the wonder that it had fallen, but that it had lasted so long. Of course, this is what Ayn Rand answers, in essence.

Inflation and the Fall of the Roman Empire
Mises Daily: Monday, September 07, 2009 by

[This is a transcript of Professor Joseph Peden's 50-minute lecture "Inflation and the Fall of the Roman Empire," given at the Seminar on Money and Government in Houston, Texas, on October 27, 1984. The original audio recording is available as a free MP3 download.]

Two centuries ago, in 1776, there were two books published in England, both of which are read avidly today. One of them was Adam Smith's The Wealth of Nations and the other was Edward Gibbon's Decline and Fall of the Roman Empire. Gibbon's multivolume work is the tale of a state that survived for twelve centuries in the West and for another thousand years in the East, at Constantinople.

Gibbon, in looking at this phenomenon, commented that the wonder was not that the Roman Empire had fallen, but rather that it had lasted so long. And scholars since Gibbon have devoted a great deal of energy to examining that problem: How was it that the Roman Empire lasted so long? And did it decline, or was it simply transformed into something else (that something else being the European civilization of which we are the heirs)?

I've been asked to speak on the theme of Roman history, particularly the problem of inflation and its impact. My analysis is based on the premise that monetary policy cannot be studied, or understood, in isolation from the overall policies of the state.

Monetary, fiscal, military, political, and economic issues are all very much intertwined. And they are all so intertwined because any state normally seeks to monopolize the supply of money within its own territory.

Monetary policy therefore always serves, even if it serves badly, the perceived needs of the rulers of the state. If it also happens to enhance the prosperity and progress of the masses of the people, that is a secondary benefit; but its first aim is to serve the needs of the rulers, not the ruled. This point is central, I believe, to an understanding of the course of monetary policy in the late Roman Empire.

We may begin by looking at the mentality of the rulers of the Roman Empire, beginning at the end of the 2nd century AD and looking through to the end of the 3rd century AD. Roman historians refer to this period as the "Crisis of the 3rd Century." And the reason is that the problems of the Roman society in that period were so profound, so enormous, that Roman society emerged from the 3rd century very different in almost all ways from what it had been in the 1st and 2nd centuries.

To look at the mentality of the Roman emperors, we can look just at the advice that the Emperor Septimius Severus gave to his two sons, Caracalla and Geta. This is supposed to be his final words to his heirs. He said, "live in harmony; enrich the troops; ignore everyone else." Now, there is a monetary policy to be marveled at!

Caracalla did not adhere to the first part of that advice; in fact, one of his first acts was to murder his brother. But as for enriching the troops, he took that so seriously to heart that his mother remonstrated with him and urged him to be more moderate and to restrain his increasing military expenditures and burdensome new taxes. He responded by saying there was no longer any revenue, just or unjust, to be found. But not to worry, "for as long as we have this," he insisted, pointing to his sword, "we shall not run short of money."

His sense of priorities was made more explicit when he remarked, "nobody should have any money but I, so that I may bestow it upon the soldiers." And he was as good as his word. He raised the pay of the soldiers by 50 percent, and to achieve this he doubled the inheritance taxes paid by Roman citizens. When this was not sufficient to meet his needs, he admitted almost every inhabitant of the empire to Roman citizenship. What had formerly been a privilege now became simply a means of expanding the tax base.

He then went further by proceeding to debase the coinage. The basic coinage of the Roman Empire to this time — we're speaking now about 211 AD — was the silver denarius introduced by Augustus at about 95 percent silver at the end of the 1st century BC. The denarius continued for the better part of two centuries as the basic medium of exchange in the empire.

By the time of Trajan in 117 AD, the denarius was only about 85 percent silver, down from Augustus's 95 percent. By the age of Marcus Aurelius, in 180, it was down to about 75 percent silver. In Septimius's time it had dropped to 60 percent, and Caracalla evened it off at 50/50.

Caracalla was assassinated in 217. There then followed an age that historians refer to as the Age of the Barrack Emperors, because throughout the 3rd century all the emperors were soldiers and all of them came to their power by military coups of one sort or another.

There were about 26 legitimate emperors in this century and only one of them died a natural death. The rest either died in battle or were assassinated, which was totally unprecedented in Roman history — with two exceptions: Nero, a suicide, and Caligula, assassinated earlier.

Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to a pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated — debased.

But the real crisis came after Caracalla, between 258 and 275, in a period of intense civil war and foreign invasions. The emperors simply abandoned, for all practical purposes, a silver coinage. By 268 there was only 0.5 percent silver in the denarius.

Prices in this period rose in most parts of the empire by nearly 1,000 percent. The only people who were getting paid in gold were the barbarian troops hired by the emperors. The barbarians were so barbarous that they would only accept gold in payment for their services.

The situation did not change until the accession of Diocletian in the year 284. Shortly after his accession he raised the weight of the gold coinage, the aureus, to 60 to the pound — this was from a low of 72.

But ten years later, he finally abandoned the silvered coinage, which by this time was simply a bronze coin dipped in silver rather quickly. He abandoned that completely and tried to issue a new silver coin, called the argenteus, struck at 96 coins to the pound of silver. The argenteus was fixed as equal to 50 of the denarii (the old coinage). It was designed to respond to the need for higher-tariffed coins in the marketplace, to reflect the inflation.

Diocletian also issued a new bronze coin tariffed at ten denarii, called the nummus. But less than a decade later, the nummus had gone from being tariffed at ten denarii to now equaling 20 denarii, and the argenteus had gone from 50 denarii to 100. In other words, despite Diocletian's efforts, the Empire suffered 100 percent inflation.

The next emperor who interfered with the coinage in a meaningful way was Constantine, the first Christian emperor of Rome. In the year 312, which is also the year he issued the Edict of Toleration for Christianity, Constantine issued a new gold piece, which he called by a new name, the solidus — solid gold. This was struck at 72 to the pound, so it was in fact debased more than Diocletian's.

These were very large issues of coin and historians have puzzled over where Constantine got all the gold; but I think the puzzle is not so difficult once you begin to look at his legislation.

First of all, Constantine issued two new taxes. One was on the estates of the senators. This was rather new because senators were usually free of most taxes on their land. He also issued a tax on the capital of merchants; not their earnings, but their capital. This was to be levied every five years and it was to be paid in gold. He also required that the rents from the imperial estates, which were rented out to tenants, were to be paid only in gold.

Constantine took on the bullion reserves of his former partner Licinius, who had extracted, by force, bullion from the treasuries of the cities of the Eastern Empire. In other words, any city that had any gold bullion or silver bullion left in its treasury was simply requisitioned by Licinius. This gold passed on now into the hands of Constantine who had gotten rid of Licinius in a civil war.

We're also told that he stripped the pagan temples of their treasuries. This he did rather late in his reign. In the early days he was apparently still somewhat afraid of angering the gods of Rome. As his Christianity became more fixed, he felt greater ease at robbing the temples.

Now, in one sense, Constantine's reform began the reversal of the process: the gold coinage was sufficiently large that it began to take hold and to circulate more freely. However, the silver coinage failed and, what was worse, at no time in this period did the central government try to control the token coinage. The result was that token coinage was being minted not only by the imperial mints, but also by the mints of cities. In other words, if a city couldn't pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that.

By the late 3rd century we also begin to have the massive appearance of what numismatists call counterfeits. I would say it would be called credit money today. People need small change, and they simply go and manufacture it. All of this of course meant that the amount of token coinage in circulation was uncontrolled and increasingly massive.

Now, one of the things that had happened in the course of this 3rd-century inflation was that the government found that when it paid its troops in token coinage, or even in debased silver coins, prices immediately rose. Every time the silver value of the denarius dropped, prices naturally rose.

The result was that the government, in order to try to protect its civil servants and its soldiers from the effects of inflation, began to demand payment of taxes in kind and in services rather than in coin. They wound up, in effect, repudiating their own issued coins, not accepting them for tax collection purposes.

With Constantine's reform, this situation changed somewhat and, slowly but surely, the government began to move away from collecting taxes and paying salaries in kind, and began to substitute collecting taxes and paying salaries in gold. Over the long run, this meant that the gold standard was strengthened and gold remained the real money of the Roman Empire.

However, the inflation did not end for the masses of the people. In other words, gold was a hedge against inflation for those who had it, and these were principally the troops and the civil servants.

The taxpayers had to buy these gold coins in order to pay their taxes. If they were wealthy enough, they could afford to buy these gold coins, which were increasingly expensive in terms of token money. If they were poorer they simply couldn't pay the taxes; they lost their lands in one form or another or became delinquents. We hear constant references to people abandoning their land, disappearing.

"If a city couldn't pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that."

As a matter of fact in the 3rd century this was a constant problem in Rome: all sorts of people were trying to escape the increased taxes that the military needed. The army itself had grown from the time of Augustus, when they had about a 250,000 troops, to the time of Diocletian, when they had somewhat over 600,000. So the army itself had doubled in size in the course of this inflationary spiral, and obviously that contributed greatly to the inflation.

In addition, the administration of the state had grown enormously. Under Augustus, essentially, you had the imperial administration at Rome, the secondary level of administration in the governors of different provinces, and then the primary governmental units in the Roman Empire in this time were the cities.

By the time of Diocletian this pattern had broken apart. You had not one emperor, but four emperors, which meant four imperial courts, four Praetorian Guards, four palaces, four staffs, etc.

Under them were four Praetorian prefectures, regional administrative units with their staffs and their budgets. Under these four prefectures, there were then 12 dioceses, each diocese having its administrative staff and so on.

Under the diocesan rulers, the vicars of the dioceses, we have the provinces. In Augustus's time there were approximately 20 provinces. Three hundred years later, with no substantial increase in territory, there were over a hundred provinces. The Romans had simply divided and subdivided provinces for the purposes of maintaining internal military control of the regions. In other words, the cost of policing and administrating the Roman state became increasingly enormous.

All these costs, then, are some of the reasons why the inflation took place; I'll get to others in a moment. To give you some idea of the situation after Constantine's reform of the gold, let me just briefly give you the figures for what it cost in terms of the denarius, the silver coinage, or token coinage now, to buy a pound of gold.

In Diocletian's time, in the year 301, he fixed the price at 50,000 denarii for one pound of gold. Ten years later it had risen to 120,000. In 324, 23 years after it was 50,000, it was now 300,000. In 337, the year of Constantine's death, a pound of gold brought 20,000,000 denarii.

And by the way, just as we are all familiar with the German currency of the 1920s with the bigger stamp on it, the Roman coinage also has stamps over stamps on the metal, indicating multiples of value.

At one point, one of the Roman emperors had a marvelous idea: instead of issuing coins he devised a method to handle the inflation. He took brass slugs, put them in a leather pouch, and called it a follis; and people began passing these pouches back and forth as value. I guess it was the Roman equivalent to those baskets of paper we see in the pictures of Germany in the 1920s.

Interestingly enough, within ten years or so after that began, the word follis — which had meant this bag of coins — had now drifted to mean just one of those brass slugs. One of those slugs was now the follis. They couldn't even keep the bags stable, they too were inflated.

Now one interesting thing with all this inflation should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation — or perhaps we should say, because of all of this inflation — the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this other coinage just became increasingly worthless.

What were the causes of this inflation? First of all, war. The soldiers' pay rose from 225 denarii during the time of Augustus to 300 denarii in the time of Domitian, about a hundred years later. A century after Domitian, in the time of Septimius, it had gone from 300 to 500 denarii; and in the time of Caracalla, about 10 years later, it had gone to 750 denarii. In other words, the cost of the army was also rising in terms of the coinage; so, as the coinage became more worthless, the cost of the army had to be increased.

The advance in the soldiers' pay in the rest of the 3rd century and into the 4th century is not known; we don't have figures. One reason is that the soldiers were increasingly paid in terms of requisitions of supplies and goods in kind. They were literally given food, clothing, shelter, and other commodities in lieu of pay. This applied also to the civil service.

When one Roman emperor refused to pay a donative on his accession — this was a bonus given to the soldiers on the accession of the emperor — he was simply murdered by his troops. The Romans had had this kind of problem even in the days of the Republic: if the soldiers don't get paid they rather resent it.

What we find is that the donatives had been given on the accession of a new emperor from the time of Augustus on. In the 3rd century, they began to be given every five years. By the time of Diocletian, donatives were given every year, so that the soldiers' donatives had in fact become part of their basic salary.

The size of the army, I indicated already, had also increased. It had doubled from the time of Augustus to that of Diocletian. And the size of the civil service also increased. Now, all these events strained the fiscal resources of the state beyond its ability to sustain itself; and the ship of state was kept going, frequently by debasing, then by taxing, and then often simply by accusing people of treason and confiscating their estates.

One of the Christian fathers, Saint Gregory Nazianzus, commented that war is the mother of taxes. I think that's a wonderful thing to keep in mind: war is the mother of taxes. And it's also, of course, the mother of inflation.

Now, what were the consequences of inflation? One of the odd things about inflation is, in the Roman Empire, that while the state survived — the Roman state was not destroyed by inflation — what was destroyed by inflation was the freedom of the Roman people. Particularly, the first victim was their economic freedom.

Rome had basically a laissez-faire concept of state/economy relations. Except in emergencies, which were usually related to war, the Roman government generally followed a policy of free trade and minimal restriction on the economic activities of its population. But now under the pressure of this need to pay the troops and under the pressure of inflation, the liberty of the people began to be seriously eroded — and very rapidly.

We could start with the class known as the decurions. This was your prosperous, small- and middle-landowning class who were the dominant elements of the cities of the Roman Empire. They were the class from whom the municipal counsels, magistrates, and officials were chosen.

Traditionally, they had viewed service in the governments of their towns as an honor and they had donated, not merely their time, but also their wealth to the betterment of the urban environment. Building stadiums and bathhouses, and repairing the streets and providing for pure water were considered benefactions. It was a kind of philanthropic act and their reward was, of course, public recognition and esteem.

This class, in the mid-3rd century, was assigned the task of collecting the taxes in the municipality. The central government could no longer collect its taxes effectively, so they made the decurion class collectively responsible for getting revenues and passing them on to the imperial government.

The decurions, of course, had as much difficulty as anyone else in doing this, and the returns were, again, frequently inadequate. So the government solved that problem by simply passing a law that any taxes that decurions could not collect from others, they would have to pay out of their own pockets. That's known as the incentive method for the tax collector. [laughter]

As you can well imagine, as the crises became greater and the economy was disrupted by civil conflicts and invasions and the effects of inflation, the decurions, strangely enough, no longer wanted to be decurions. They began to abandon their lands, abandon their cities, and escape to wherever they could find refuge in other larger cities or other provinces. But they were not to be allowed to do that with impunity, and a law was then passed that any decurion discovered somewhere else was to be arrested, bound like a slave, and carted back to his hometown where he would be restored to his dignity as a decurion. [laughter]

The 3rd century is also the period of the persecution of the church. We find that at least some of the emperors must have had a sense of humor because they passed a regulation that if a Christian was arrested and found guilty of a capital crime, namely believing in Christ, he was not to be executed but offered the option of becoming a decurion. [laughter]

Now, the merchants and the artisans were traditionally organized into guilds and chambers of commerce and that sort of thing. They now, too, came under government pressure because the government could not obtain enough material for the war machine through regular channels — people didn't want all that token coinage. So merchants and artisans were now compelled to make deliveries of goods.

So that if you had a factory for making garments, you now had to deliver so many garments to the government requisitions. If you had ships, you had to carry government goods in your ships. In other words, what we have here is a kind of nationalization of private enterprises, and this nationalization means that the people who use their money and their talent are now compelled to serve the state whether they like it or not.

When people tried to get out of this they were then, by law, compelled to remain in the occupation that they were in. In other words, you couldn't change your job or your business.

This was not sufficient because, after all, death is a relief from taxes. So the occupations were now made hereditary. When you died, your son had to take up your profession. If your father was a shoemaker, you had to be a shoemaker. These laws started by being restricted to the defense-oriented industries but, of course, gradually it was realized that everything is defense-oriented.

The peasantry, known as the coloni, were leaseholders on both imperial and private estates. They too were formerly a free class. Now under the same kinds of pressures that all smallholders were in in this situation, they began to drift away, trying to find better opportunities, better leases, or better occupations. So under Diocletian the coloni were now bound to the soil.

Anyone who had a lease on a particular piece of land could not give that lease up. More than that, they had to stay on the land and work it. In effect, this is the beginning of what in the Middle Ages is called serfdom, but it actually has its origins here in late Roman society.

"War is the mother of taxes."

We know for example from studies of Palestine, particularly in the Rabbinical writings, that in the course of the 3rd and early 4th century the structure of landholding in Palestine changed very dramatically. Palestine in the 2nd century was mostly composed of peasant landholders with very small acreage, perhaps an average of two and a half acres.

By the 4th century those smallholders had virtually disappeared and been replaced by vast estates controlled by a few large landowners. The peasants working the estates were the same people, but in the meantime they had lost their land to the larger landowners. In other words, landholding became a kind of massive agribusiness.

In the course of this, the population of Palestine, still principally Jewish, also changed in that the ownership of land passed from Jews to Gentiles. The reason for that undoubtedly was that the only people with large amounts of cash who could buy out these smallholders who were in distress were, of course, the government officials. And we hear of them being called potentates, powerful ones. In effect there is a shift in the distribution of wealth in Palestine; and obviously, from other evidence, similar things were happening in other places.

With regard to taxes, they naturally increased across the board, but Diocletian decided that it was a very inefficient system that he had inherited. Every province more or less had its own system of taxation going back to pre-Roman times. And so he, with his military mind, demanded standardization.

And what he did was to have all wealth, which was of course landed wealth, assessed by a standard unit of productivity, the iugum. In other words, every person who had land was either singly, if he was a large landowner, or collectively, for those who were smaller landowners, put into a iugum.

This meant that the emperor for the first time had the basis of a national budget, something the Romans never had before. Therefore, he knew at any given time how many taxable units of wealth there were in any province. He could simply levy an assessment and expect to get a fixed amount of money.

Unfortunately, this took no account of the fact that in agriculture productivity varies considerably from season to season, and that if an army has passed through your district it may take years to recover. The result is that we hear of massive petitions from whole regions asking the emperor to forgive them their taxes, to remit five years of past dues, or to reduce the number of units of productivity to reflect the loss of population or materials.

As a matter of fact, when people began to say "it used to be I had five people paying this unit of taxation, but two of them have fled and it's only half the land in production," the response of the government was, "that doesn't matter, you still have to pay for the land that is now out of production." So, I mean, there was no relationship between taxes and actual productivity.

How did people protect themselves from this? Well, first of all, long-term mortgages virtually ceased to be given. Long-term loans of any kind disappeared. No one would lend unless they were guaranteed payment in gold or silver bullion.

In fact the government itself, under Diocletian and Constantine, refused to accept gold coins in payment of taxes, but insisted instead on gold bullion. So that the coins that you bought in the marketplace had to then be melted down and presented in the form of bullion. The reason was that the government was never sure how adulterated its own gold coinage really was.

Pledges and securities for crops and for loans were always in gold, silver, or indeed in crops themselves. In Egypt we have a document in which it seems that the banks had been refusing to accept coins with the divine image of the emperor; in other words, state issues. The government's reaction to that, of course, was to force the banks to accept the coinage. This led to wholesale corruption in Roman society, as people refused to exchange coinage at the officially fixed tariffs but instead used the black market to exchange coinage on a market principle.

There was, obviously, flight from the land, massive evasion of taxes, people left their jobs, they left their homes, they left their social status. Now, Diocletian's final contribution to this continuing disaster was to issue his famous Edict on Maximum Prices, in 301 AD. This is a very famous instance of a massive effort by the government to limit inflation by price controls.

You have to realize that there was a little problem: the Roman Empire was a vast region running from Britain in the West to Iraq in the East; from the Rhine and the Danube to the Sahara.

It included areas of very sophisticated and very primitive economies, and thus the cost of living varied considerably from province to province: Egypt seems to have had the lowest cost of living; Palestine had a cost of living twice that of Egypt, and Roman Italy had a cost of living twice that of Palestine.

"The Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy."

Diocletian ignored that; he just issued a single standard price for the entire empire. The result was that in Egypt, the Edict probably had no effect, because the maximum price fixed in the Edict was very rarely reached in Egypt. It was the people in Rome, of course, who found the maximum price lower than the market price.

The result of that, of course, was riots in the street, and the disappearance of goods. The penalty for violating this law was death, a very common penalty in Rome for almost anything.

The mentality of Diocletian, and the cause of the maximum price edict, comes out in the preface to the law. I'll just quote briefly some of it. When you hear these first words I'd like you to pay attention, because you may have a different interpretation of them than what Diocletian meant.

He says, "if the excesses perpetrated by persons of unlimited and frenzied avarice could be checked" — he doesn't mean himself [laughter] — "if the general welfare could endure without harm this riotous license, if these uncontrolled madmen, the unscrupulous, the immoderate, the avaricious, could be persuaded to desist from plundering the wealth of all, then all would be well." Now who are these people? They are the merchants; they are the avaricious greedy types who cause inflation as we all know.

Then he speaks about himself and his three partners. "[We, the protectors of the] human race" — sounds familiar, doesn't it? [laughter] "We are agreed that decisive legislation is necessary, so that the long-hoped-for solutions, which mankind itself could not provide" — you know, it's the same stuff [laughter]; we can't do anything ourselves, we need the legislator.

"By the remedies provided by our foresight [laughter], these things may be remedied for the general betterment of all."

In fact, as you read through the rest of the thing it becomes clear that the reason the Edict on Prices was issued was that the soldiers were the principal victims of the inflation. Diocletian was afraid he was losing control of his army. And so the people who are to be protected are the soldiers and the other servants of the state.

Now Diocletian's monetary reforms were tentative steps in the right direction; except for the Edict on Prices, which, by the way, simply didn't work and was gradually dropped. But his steps were not radical enough.

Because of his inability to create a sufficient supply of gold and silver coinage, combined with his continued reliance on payments in kind for taxes and salaries, and his continued issuance of fiat bronze coinage in endless amounts, he failed to make a significant dent in the problem.

Constantine's reforms were also partial, but of sufficient vigor and radical character to make a difference. Through his willingness to extract by compulsion the gold reserves of the taxpayers, forcing them to disgorge their bullion, he placed an ever-increasing supply of gold in the hands of government officials.

This was increasingly used to pay military bonuses, salaries for bureaucrats, and even payments for certain public works. Increasingly, then, a two-tier monetary system emerged in which the government, the soldiers, and the bureaucrats enjoyed the benefits of a gold standard while the nongovernmental portion of the economy continued to struggle with a rapidly inflating fiat currency.

The new gold solidus — circulated widely by its possessors, the government-salaried employees — sold at various market rates to customers who desperately needed it to pay their taxes. Thus the state had found a way to protect itself and its servants from the unwholesome effects of its own earlier inflationary cycle, while slowly withdrawing from the cumbersome and wasteful system of accepting taxes and paying salaries in kind. Meanwhile, the masses suffered from a massive injection of fiat money, which they had to accept in payment for government requisitions of gold, silver, or other commodities.

Now, we may wish to find some lessons in this tale of the monetary policies of the late Roman Empire. The first lesson, I think, must be that if war is the health of the state, as Randolph Bourne said, it is poison to a stable and sound money. The Roman monetary crisis therefore was closely connected with the Roman military problem.

Another lesson is that problems become solvable when a ruler decides that something can be done and must be done. Diocletian and Constantine clearly were willing to act to protect their own ruling-class interests, the military and the civil service.

Monetary reforms were necessary to win the support of the troops and the bureaucrats, who composed the only real constituency of the Roman state, and the two-tier system was designed to this end. It brought about a stable monetary standard for the ruling group, who did not hesitate to secure it at the expense of the mass of the population.

The Roman state survived. The liberty of the Roman people did not. When freedom became possible in the West in the 5th century, with the barbarian invasions, people took advantage of the possibility of change. The peasantry had become totally alienated from the Roman state because they were no longer free. The business community likewise was no longer free. And the middle class of the cities was no longer free.

The economy of the West was perhaps more fatally weakened than that of the East. The early 5th century Christian priest Salvian of Marseille wrote an account of why the Roman state was collapsing in the West — he was writing from France (Gaul). Salvian says that the Roman state is collapsing because it deserves collapse; because it had denied the first premise of good government, which is justice to the people.

By justice he meant a just system of taxation. Salvian tells us, and I don't think he's exaggerating, that one of the reasons why the Roman state collapsed in the 5th century was that the Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy.

In other words, the Roman state was the enemy; the barbarians were the liberators. And this undoubtedly was due to the inflation of the 3rd century. While the state had solved the monetary problem for its own constituents, it had failed to solve it for the masses. Rome continued to use an oppressive system of taxation in order to fill the coffers of the ruling bureaucrats and soldiers. Thank you. [applause]

Monday, December 14, 2009

Slipping under the TARP

I had an exchange with someone on 12/8 and I made this side comment regarding Obama:
Everyone is underestimating one sheer evil of TARP: have you noticed that most of the TARP money has not been spent? Something like only 15 or 20% of the $1T had been spent. Obama was saying even today that the banks needed far less money than they expected. Why? Think like a man committed to pure evil. He got in office and what immediately had to have struck him was that he had been given the world's largest slush fund for bribing, buying, conning, conniving, stealing and undermining the system, advancing a Marxist agenda and enriching his power. Congress handed him $1T to do with as he pleased. Not counting the $800billion Bush raised and didn't fully spend (I think). Obama's hoarding that money for ANYthing other than economic recovery. Road projects and other such things as he dribbles it out for are just a cover for the real purpose. Right now, he's still figuring out just exactly what he wants to do with it to promote his agenda, so he can preserve it till the next election.

Another thing: many people commented on my remark (in a post) about why Pelosi had thrown 40 members of her party under the bus to get the Health Care bill passed in the House. Remember the gerrymandering that's going on right now? These guys simply don't believe they will lose because of that. At the least.