Gold and debt default

The government decided to default on all of the domestically held Liberty Bonds by refusing to redeem in gold to Americans. Then the Gold Reserve Act of 1934 devalued the dollar from $20.67 per ounce to $35 per ounce, a reduction of 40 percent. Or, put another way, the amount of gold represented by a dollar was reduced to 59 percent of its former amount.

THIS is a topic that comes up from time to time usually when inflation is high and the US government must raise its “debt ceiling.” And also, coincidentally, when the price of gold is at a “historic” high.

There are those who believe that The Deity or perhaps aliens riding balloons through the sky ordained that humans should use a bright, slightly orange-yellow, dense, malleable, and ductile metal with the atomic number 79 as the only sensible form of money.

If only paper currency was backed—meaning convertible—to gold, then all the world’s financial problems would be solved. We now even have gold-backed cryptocurrencies that have an exchange rate of 1 token to 1 gram of gold, for example.

But first, let’s talk about government debt. The US government is bound by law to carry up to a specified amount of debt, the limit of which must be raised nearly every year as government borrows more and more. In 2000, the US government debt was $5.5 trillion and is now $31.5 trillion, having increased by almost six times.

There are two justifications for the US government constantly borrowing more and more money. The first is, because they can. It can borrow virtually an unlimited amount because financial institutions and other governments are willing to loan the money even knowing that the principal amount of the debt will never be paid, unlike when you or I borrow money. All they care about is the interest payment.

The thing that no one wants to talk about is that all of it is a giant Ponzi scheme. Uncle Sam borrows money from a bank today to pay the interest on the money it borrowed from Japan last year, and on and on forever.

The second justification is the belief that the US government has never defaulted on its debt, which is false and brings us back to gold.

A Liberty Bond was a war bond that was sold in the US to support the Allied cause in World War I. In 1934, the US government defaulted on the Fourth Liberty Bond as the terms of this debt was clear. The bonds were to be payable in gold. In 1933, the interest payments alone were draining the treasury of gold; and because the treasury had only $4.2 billion in gold it was obvious there would be no way to pay the principal when it became due in 1938. The solution was simple.

The government decided to default on all of the domestically held Liberty Bonds by refusing to redeem in gold to Americans. Then the Gold Reserve Act of 1934 devalued the dollar from $20.67 per ounce to $35 per ounce, a reduction of 40 percent. Or, put another way, the amount of gold represented by a dollar was reduced to 59 percent of its former amount.

When a currency is “backed” by gold, the government determines the exchange rate. Even the gold Cryptos say specifically that the price of the token is determined by the price of gold. And how is gold priced? In good old US dollars.

Nowhere does the crypto contract say the token price is “Two hundred kilos of pork forever and ever.”

But the “gold bugs” say that if the currency says “one piece of paper for one ounce of gold ” then all problems are solved because the law will say the government cannot print more paper than it has gold in the vaults. Going all the way back to the Ancient Roman Empire, the government response has and will always be the same: “Oops, my bad. Our money; our rules.”

Notice that foreign governments and banks are not the ones pushing for a gold-backed currency. They like the current system just fine. And which government really cares about The People? “You don’t like our money? Use seashells or cow horns instead.”

Further, money means something real to We the People. To government and banks, money is only numbers on a spreadsheet. And if the numbers do not look good, change them to whatever you want.