Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll continue our discussion on sound money with none other than Tom Woods – a great historian and author as well as a tremendous political and economic commentator. Tom shares his thoughts on why the Founding Fathers recognized the importance of including gold and silver in our monetary system and why it’s essential for you personally to consider owning some to protect yourself against what lies ahead. Don’t miss a sensational interview with Tom Woods, coming up after this week’s market update.
Precious metals markets faced selling pressure this week as gold prices once again got pushed down from stubborn overhead resistance levels. Gold bulls had made a run above the $1,360 level last Friday but couldn’t hold it through the close. The bears pounced when U.S. markets re-opened on Tuesday, shaving $30 off spot prices.
As of this Friday morning recording, gold trades at $1,329 an ounce, down 1.4% on the week. Silver shows a weekly loss of 0.9% to come in at $16.54. Platinum is off 1.2% to $997. And finally, palladium is unchanged to trade at $1,047.
Also getting hit with selling this week was just about every other asset class – bonds, stocks, and crypto-currencies. On Thursday, Bitcoin prices fell back below $10,000 as New York Federal Reserve President William Dudley bashed crypto markets. Dudley called the Bitcoin trade a “speculative mania” and suggested the need for more regulation.
The global central banking establishment is now out in full force against crypto-currencies. Agustin Carstens of the Bank for International Settlements recently called Bitcoin a “Ponzi scheme.” Bank of England governor Mark Carney declared Bitcoin a failure. And International Monetary Fund chief Christine Lagarde complained that Bitcoin mining is consuming too much electricity.
The keepers of the world monetary order feel threatened by competition. They also feel threatened by the potential for criticisms leveled at Bitcoin to backfire on them. Hard money advocates note that most crypto-currencies aren’t backed by anything tangible. If it’s a valid criticism of Bitcoin, it’s also just as valid when leveled at government-controlled fiat currencies.
Prominent technical analyst Tom McClellan appeared on CNBC yesterday and deftly turned the tables on Bitcoin critics such as the Fed’s William Dudley.
Tom McClellan: The comment from Dudley was very interesting. He talked about how he's failed to see the inherent underlying value behind crypto-currencies. I wonder if he would any similar comment about the inherent underlying value behind a dollar bill.
CNBC Anchor: You know, that comes up a lot with a lot of the people who endorse Bitcoin, when people, "Well, it's not really ... There's nothing backing it." And they say, "Yeah, there's nothing backing the dollar either, remember?"
Of course, the U.S. dollar is in a sense “backed” – backed by the world’s strongest military and by the ability of the IRS to demand tax payments in dollars. The government can compel people by force to use its currency. What it can’t do is guarantee the value of the currency – not since the last vestige of gold redeemability was ended in 1971.
The U.S. government still possesses one of the world’s largest gold hoards, at least if you believe what it reports. But even assuming all the gold reported to be in Fort Knox is still there and hasn’t been leased or sold or encumbered in some other way, it’s nowhere near enough to back all the dollars now in existence… at least not at current gold prices.
Top currency analyst Jim Rickards told Money Metals podcast listeners in an interview earlier this year that a gold price of $10,000 or more would be necessary to account for the currency supply as it stands now.
One way the market could re-impose a sort of de-facto gold standard is by re-valuing gold up to the minimum price that would be required to back the dollar. The explosive rise in crypto-currencies shows that paradigm shifts in how people perceive a store of value can occur quickly. The flaws of digital alt coins that aren’t backed by anything tangible suggest the need for a digital currency tied to physical gold.
Australia’s Perth Mint is developing a crypto-currency that promises to be backed by physical precious metals. The development of crypto-currencies linked to gold and possibly silver and other hard assets will surely help stimulate demand for the metals.
In the meantime, there is no substitute for owning actual physical metal off the financial grid for wealth preservation and potential use as money in barter transactions. Money Metals offers gold and silver products in a variety of sizes and forms.
Some are designed specifically to be versatile enough to be used in common barter and trade. For example, the Valcambi gold CombiBar comes in a 50-gram denomination and breaks into 50 individual one gram gold pieces.
Money Metals Exchange now also offers a 100-gram silver Combibar that is divisible into smaller bars down to 1 gram in size each. Each separated bar features the Valcambi hallmark, along with its silver weight and purity.
These bars are ideal for anyone preparing a metals holding for practical use in barter and trade. Other fractional sizes of bullion bars, rounds, and coins from various other mints are available as well. You never know when they may come in handy.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my great privilege to be joined by Tom Woods, senior fellow at the Mises Institute, and host of the Tom Woods Show. Tom is a well-known Liberty minded scholar with a Bachelor's in History from Harvard and a Doctorate from Columbia University. He's authored many books including Nullification, Meltdown, The Politically Incorrect Guide to American History, Who Killed the Constitution, and many others which you can learn all about at TomWoods.com.
Tom, first off I want to thank you for spending some time with us and I'm excited to have you on today. Welcome.
Tom Woods: You too Mike. Thank you very much.
Mike Gleason: Your background in both U.S. and world History along with your understanding of free market economic theory is the primary reason we asked you to come on today because history is such an important guide for us. Now first, I want to have to take us back to the formation of our country and give us a brief summary if you would about why our Founding Fathers devised and constructed things the way they did, primarily as it relates to our money and our monetary system and the role that gold and silver were to play.
So first off before we get into how much we've gotten off track from what the founders had in mind, talk about why they came up with a bimetallic system that used gold and silver.
Tom Woods: It was very common in colonial times for people to use... it was actually a Spanish coin that was the most frequently used coin. It was called the Spanish Milled Dollar and it was a silver coin. This was in wide circulation. It's true that there were episodes in which paper money was used in the colonies. We see that first in Massachusetts in 1690. And Benjamin Franklin was actually agitating for paper money in Pennsylvania. It turned out that guess whose print shop was going to get the contract to print the money. Might not have been entirely an economic argument that old Ben was making in that case.
By and large there was, with the exception of the Revolutionary War, there was an emphasis on hard money. Of course during the Revolutionary War, we all know the standard story, which is that the continental currency was continually debased. It was a paper kind of money and it would be debased. We even had a story of somebody wanting to pay back a debt and the money was so worthless that the creditor was actually running away. The person was threatening to repay him. He didn't want to be repaid in that type of worthless currency.
So a lot of people drew conclusions from this that it's much, much better to have a sound currency, a sound money, that can't be so easily manipulated by government. That is the reason that precious metals, gold and silver in particular, have been the money in so many parts of the world. They were money for a thousand years at least in the Byzantine Empire, that's why. In fact Ludwig von Mises, the great economist, said that sound money belongs right up there with bills of rights and written constitutions in terms of guarantees of the rights of the people. Sound money. It's disparaged today, it's made fun of today, people say it's backward and stupid and we're much more sophisticated now, but there's nothing to that whatsoever.
Mike Gleason: Now the hard money advocates did face some dissention however, talk about what followed and some of the other key moments in our monetary history during say the first 100 years of our nation.
Tom Woods: I do want to say just a little something about how other people who might've had maybe looser monetary ideas came to hold hard money ideas. The panic of 1819 in U.S. history was a pivotal moment because there you had a case in which a lot of people blamed first bank of the United States and the state banks for having initiated a major flood of money printing.
So you had the first bank being decommissioned just around the time of the War of 1812. But then we get the second bank, we get a lot of inflationary activity going on at the state bank level and people concluded that the reason that the economy had been so unstable in the years prior to the panic of 1819, leading up to that panic, was precisely that you had artificial encouragement of the creation of paper money. And that if we had had a sounder money system and we hadn't allowed the government to accept the paper money so that that would've given us a particular impetus to the use of hard money, we wouldn't have had this up and down, up and down economic fortune.
You see numerous Americans coming to the conclusion that what we need is, in fact as Jefferson said at the time, let's try and take all the paper money in circulation now and retire it and replace it entirely with a 100 percent hard money system. We see this, people like Jefferson, all down the line over and over. You see people saying I might've been wrong about money in the past - Jefferson was always sound on money - but clearly this panic of 1819 has taught us something.
That was the narrative. You see this repeatedly in U.S. history. In 1857, the panic of 1857, President James Buchanan said that the thing is causing this is not the gold standard, it's precisely that we have banks that are going off the gold standard, that are creating all this phony baloney money. Then we have these laws at the state level that allow them to do this and then when people make a run on the bank to try to get their money back and the banks can't give it to them, we have laws that let the banks stay in business for a couple of years while they try and fetch these people's money. He said "that's just crazy, that's giving special privileges to the banks."
There's a lot of sound knowledge and sound analysis of money in the 19th century from the early part up to the mid 19th century in the US.
Mike Gleason: A little over 100 years ago, Wall Street special interests started pushing silver out of the monetary system in favor of a gold only standard. Then things really started going off the tracks a few years later when banking elites met secretly to devise the Federal Reserve. Talk about that event, why they felt the need to form the Fed and some of the consequences that immediately followed in those first years and decades afterwards.
Tom Woods: The long and the short of it is that it was thought that if we centralize the monetary system in the U.S. – now they tried to conceal the fact that they were centralizing it by creating all these regional Federal Reserve banks, but this is mostly window dressing. What they wanted to do was to centralize the money supply, not so much at the beginning because they wanted to plan the economy the way the Fed does today where they have inflation targets and they're trying to target employment and output and trying to make sure they balance everything. That wasn't really on their minds, that wasn't really what economics was saying at that time.
Instead it was thought that the banking sector will be more stable if we have an institution governing it that can in fact control it in some way, that can centralize reserves and that can create money in particular circumstances when it would relieve stress on the system.
They were thinking about the panic of 1907 when we had a series of difficulties, particularly in New York with a series of banks. It was thought if we had this one institution that could be a backstop for the whole system and then could, when the banks need liquidity, could create that money and it could serve as basically a kind of a lender of last resort, this would create more stability.
Of course not considered was, maybe you could create a more stable system without the need for a lender of last resort if the banks weren't engaged in all these shady practices. If they were keeping good control over the money that had been entrusted to them, they wouldn't be having these problems in the first place. Instead, much easier than just engaging in sound banking practices, was to have a bail out system in case you engage in riskier banking practices.
So that was, leave aside all the phony baloney sugar coating explanations for the Fed, this was the intent. Just think of it. There's no other industry that has a lender of last resort. There's no other industry that has a bail out-er of last resorts. Only banking. The idea was, we all basically want to create money beyond the gold holdings that we have. Everybody wants to do that, but there's a risk that people will catch on to what we're doing and come try and claim their money when they think we've created too much paper.
So the idea of the Fed would be, especially at the 20th century wore on, that the Fed would be a coordinator of the inflation so that all the banks would be inflating at roughly the same rate, so that all the various withdrawals on net would tend to cancel each other out and the system could be maintained and the banks could profit in this way instead of just having to operate like every other kind of institution in the economy, whereby you are expected to be a good husbander of your resources and you are expected to pay out on demand.
Nobody would think it would be acceptable to have a dry cleaner, that if I went to pick up my dry cleaning and the cleaner said my wife is wearing your pants, but when she gets them back next week, I'll give them back to you. Nobody would think that was acceptable.
So if we had a central dry cleaning agency that could stitch together a pair of pants for a situation like that, we wouldn't really think that was the way to go. We would say don't engage in this type of behavior to begin with. Banks should be earning their money in other ways. They should be earning their money through time deposits, where people give their money for a period of time. The banks know this, they invest that money for that period of time. The money is not available to you during that period of time or only at a penalty. At the conclusion of that period, you can get your money back with interest. That's how banks can engage in traditional banking activity without the shenanigans that lead them to demand a central bank.
Mike Gleason: What is the harm of punishing savers the way the current system seems to do? We talk about the war on cash a lot on this program and then you've got potentially negative interest rates coming out. What are some of the ramifications of that type of policy as we progress through time here? Punishing savers.
Tom Woods: They do this because they think that if they punish saving, they can force people to spend. Spend, spend, spend. They did that in Japan deliberately. They even used the word threat. We should threaten that we're going to destroy your purchasing power to get people to go out there and buy consumer goods. This is a juvenile understanding of how an economy works. An economy is not just dollar bills chasing consumer goods and then the consumer good sellers use their dollar bills to buy more consumer goods and then those recipients buy more consumer goods. That's the way a seven year old looks at the economy.
There's much more to it. We don't want just consumption. That's not what we want. We want production, we want investment, that's all left out of this juvenile force people to spend. When people save, they are making resources available for investment purposes. They're making it possible for investors to build new retail outlets, to build new factories, to engage in more research and development. By forgoing spending and by abstaining from spending, people are releasing resources for use by entrepreneurs. They are doing something important in the economy.
It's not the case that we necessarily want to artificially encourage them to go out and instead just buy toothbrushes today. We want long term projects to be undertaken. That's how you get long term growth. Moreover if we think about the pure logic of their position, imagine if I have 10 dollars and I just go spend it on three gallons of milk, because that's a good thing, because I think I'm helping the economy by buying consumer goods. Well okay, it does help the milk seller.
Suppose we go along with this idea that consumer goods spending is all that matters, then we would want the milk seller to go out and buy, let's say, a cheap shirt at Walmart. Then the Walmart person would have to go out and buy a pair of sandals and then the sandal person could go out and buy a magazine subscription. But notice every single step would be consumption, consumption, consumption, consumption.
If we had an economy that functioned like that, we would revert to barbarism almost immediately because there'd be no payrolls, that's not consumption. There'd be no business investment, that's not consumption. There'd be no capital maintenance, because that's not consumption. So everything would be crumbling around us, nothing would be kept up, there'd be no investment for the future.
Of course we realize as soon as we try to implement a consumption only economy, we see that consumption does not drive the economy. This consumption is 70 percent of the economy is nonsense. It's a phony baloney calculation that leaves out a huge chunk of what goes on, all the intermediate stages of production between the raw materials and the finished product are a big part of production. They're left out of the figures all together. None of that would be done. None of those intermediate stages of production, none of the maintenance of capital, none of that would be kept up if all we thought about, we were obsessed with consumption. We don't want that.
So yeah, what they're trying to do is to get us to run out and spend. They're trying to punish people who want to save. It's true. Of course there isn't a whole lot that we can do about that. They're putting us in an extremely difficult position and it forces people to become even more speculative with their money because now they really can't provide for their futures. It's absolutely horrifying and we should not allow the so called experts to portray themselves as the saviors of the economy when they're absolutely killing the average person.
Mike Gleason: When it comes to the world of academia, you're a bit of a black sheep so-to-speak in terms of the ideals of liberty and speaking out against the dangers of too much government intervention and markets and the harm of Keynesian theory, which just dominates most of the economic and political thinking these days.
So why is it that the Austrian school is in such a minority in the mainstream financial world and especially in the field of academia? For instance, economic scholars like Richard Ebeling and we've been fortunate enough to have on this program before, don't get much recognition compared to someone like say Paul Krugman. Why is that?
Tom Woods: Well for one thing, the way academia works typically is it's not just that it favors state solutions, although it obviously does, it's not going to bite the hand that feeds it. Secondly, it's that the way academic knowledge proceeds, it's not some linear thing where every year the knowledge increases slightly and you could just graph it. It's that there's a way of thinking. Heaven help me I hate the word paradigm. It's a terrible word, but I have to use it in here.
There's a paradigm. It's like for instance when you had Isaac Newton talking about physics. Well we thought about Isaac Newton style kind of physics and that was the way everybody operated. It wasn't like we had Newtonian physics and then two percent of it became Einsteinian physics, but it was 98 percent Newton still and then it became 10 percent Einstein and 90 percent Newton. Then 30 percent Einstein and 70 percent Newton, it didn't happen that way at all. Overnight it became Einsteinian, period. It doesn't move smoothly, the history of thought. One paradigm gives way to another.
So the Austrian school in fact was it seems strange to say today but it really was the reigning paradigm, or one of them, for quite a while. It was the Austrian school that had the major theoretical insights about marginal utility starting in the 1870s. A lot of what the Austrian school had to say was highly mainstream and acceptable.
But after the Great Depression, the scheisters exploited that and said "the Great Depression proves that the free market, left to its own devices, gives you all these problems so we can't have that anymore." But it wasn't a free market, it was a totally manipulated market. Every country in the world had had a 1920's period in which its central bank was manipulating the money supply and pushing interest rates artificially low. Those are the ingredients of the business cycle. That's the whole Austrian point.
The thing is that we've now seen a replacement of one paradigm by another. Now on the other hand, the Keynesians have suffered. They did suffer in the 1970's because they could not account for the stagflation, but they've had a roaring comeback ever since the financial crisis.
What I would say though is that the Austrian school is never the less growing in academia. Slowly, but it is growing. It's much bigger than it's ever been. We have hundreds of professors who teach in the Austrian tradition throughout the United States and it is not the kiss of academic death. You get plenty of economics departments who think it would be very nice to have an Austrian or two on the department just to give another perspective on things. Certainly the most robust school where we see the greatest growth is the Austrian school.
Things are definitely changing. They're much better than they were even 10 years ago. I didn't think we'd get to a point where we would have this much enthusiasm among young people. I don't know of any young people who are Keynesians who spend a week of their summers at a Keynesian economic institute having the time of their lives, but they do do that at the Mises institute every summer.
Mike Gleason: As we begin to wrap it up here Tom, what do you see happening with precious metals in terms of their importance in the monetary system moving forward? And how about the importance it could play from a personal investor standpoint given all these economic headwinds, massive inflationary measures and so on?
Tom Woods: I would say that you're certainly not going to go wrong holding precious metals but make sure understand what you're doing and go in with your eyes open. Because they will have ups and downs. There's just no getting around that. You're not buying it to get rich and you're not buying it for six months from now. You're buying it partly as a hedge against any kind of real disaster and partly as something to hold for the long term. Don't be thrown if it should go down. Because you shouldn't be thinking in terms of the short run, you should be thinking way, way in the future when you do that.
In terms of precious metals playing a role in the economy or in the monetary system in the U.S., that's something I can't predict. It could happen. Crazier things have happened. I think before that can happen, we need to continue to have more successes in terms of promoting the ideas of Austrian economics, using all these resources we have available to us now on the Internet where we could get our ideas out there for free. We have to persuade people that there's merit to what we're saying. Certainly Ron Paul played an important role in breaking through the blackout on this subject.
You could see here's a guy who's obviously informed, who says there's something wrong with the current system and we need to think about alternatives. The more we talk about that, the greater the likelihood is. But the more we let ourselves be intimidated by the other side, because we say I don't have the knowledge necessary to defend myself so I better just keep quiet, buy some gold, and shut up. Well that's better than nothing, but I think we should have higher aspirations than that.
Mike Gleason: It's truly great stuff and all very fascinating if not a little bit scary to think about. As you mentioned, more and more people do need to contemplate these subjects and they need to know about it. Speaking of that, Tom, before we let you go, please tell our listeners about what you're working on these days. A little bit about the Tom Woods Show, the Liberty Classroom, the website, and anything else they need to know about.
Tom Woods: I have, for the past two years, been producing a free daily podcast, Monday through Friday, about half an hour a day on every topic under the sun relating to the general issues of liberty. Sure, sound money is a part of that, but everything you can think about that would have anything to do with liberty, whether it's war and foreign policy or the Constitution, or "hey if you hate government so much, why don't you move to Somalia?" You get that a lot. I answered that on the show or the FDA or whatever. All these agencies we couldn't possibly live without them or what would we do without the welfare state and all these sorts of questions that you get confronted with and you're expected to have the quick pat answer, I give you the pat answers because I have the best guests in the world coming on that show.
That's TomWoods.com. It's free Monday through Friday. The tag line is Become a Smarter Libertarian in just 30 Minutes a Day. Now, not everybody listening to this will be a Libertarian necessarily, but you're going to find the topics quite congenial. I do that.
TomWoods.com is the pivot around which everything I do revolves. You mentioned the Liberty Classroom site. We know that in the university system today you are not going to learn the history and economics that you should learn. A lot of us get out of college and we feel gypped. I didn't learn what I know I should know. I learned a boat load of propaganda, but I didn't get the real thing.
I created a website where you do get the real thing. Where professors like me, I have a PhD in U.S. History, teach economics, the real economics. Ludwig von Mises economics, F.A. Hayek economics. Real U.S. History, not the politically correct version. Courses where you can learn the stuff we should've gotten in school so that you don't have to bite your tongue the next time you're around colleagues who disagree with you. You'll know exactly what the arguments are.
You can learn in your car with these courses. It's over at LibertyClassroom.com. I think it's the most important project I've ever done. That and TomWoods.com would be the most important two things I would say that I've been up to in recent years.
Mike Gleason: Well whenever the name Tom Woods comes up in conversation around the halls of our Money Metals Exchange offices, we often comment about how great it is to have you on our side. By that I mean the side of liberty, capitalism, Austrian economics, and so forth. You're a tremendous ambassador for the cause and a great historian and we're delighted you agreed to talk with us today. So we wish you the best of success in your personal pursuits and business pursuits. Thanks for the time, really appreciate it, and hope you have a great weekend.
Tom Woods: You too, Mike. Thank you very much.
Mike Gleason: That will do it for this week. Thanks again to Tom Woods. For more information be sure to check out TomWoods.com, a wonderful resource for anyone wanting to know more about some of the things we've just been talking about and a whole lot more.
That will do it for this week. Be sure to check back next week for our next Friday for our next weekly Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange, thanks for listening, and have a great weekend everybody.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.