Report from New Hampshire

Readers of the Kitco site understand the revolution which would occur if America were to return to a gold standard, such as was erected by the Founding Fathers and lasted until 1933.  During this time America had the wealthiest and most rapidly growing economy in the world, and prices over the period were stable.  Or, we might even settle for the partial connection to gold of the Bretton Wood System (1944-1971).  America was still the world’s best economy (albeit by a smaller margin).  Either of these events would cause a major change in the financial world.  That is, the above political revolutions would cause an economic revolution.  And no one would stand a chance to predict what was going to happen in the economic world unless he understood these changes in the political world.

Many readers of Kitco are aware that there is one presidential candidate who is in favor of returning the country to the gold standard.  This is an unusual event because the gold standard was not discussed as a political issue in the 20th century.  Indeed, the expression “gold bug” originally had a political meaning.  It was adopted by supporters of William McKinley in the election of 1896.

Kitco readers should not be taken in by the assertion that the Federal Reserve is independent.  A central bank is created by politics, and it can be abolished by politics at any time.  Every Fed chairman and every Open Market Committee member is keenly aware of politics, and his actions are colored by the need to keep political support.  If a gold standard candidate scores a victory in the presidential primaries, then the Fed will be forced into a much tighter policy than otherwise.  Any good economic analyst will have to take this into consideration if he wants to stand any chance of predicting the markets and the economy.

First, it might be a good idea to review the gold standard as a political issue in American history.  Gold/silver money versus paper money, or hard money versus soft money in a general sense, was a big issue in early America.  Bitter battles were fought on this issue, and much of American history (including the adoption of The Constitution and the founding of the Democratic Party) came out of it.  But the bottom line was that, whenever the issue went to the people for a vote, the people were solidly for hard money, and it won every time:

1. Many states issued paper money after the end of the Revolutionary War.  For this reason the Founding Fathers were fighting mad on the issue when they met in Philadelphia in the summer of 1787 to write The Constitution.  They prohibited state-issued paper money (via Article I, Section 10), and they forbade the Federal Government to issue paper money via the 10th Amendment.  When The Constitution went to the people for ratification, it won in all 13 states.  America was on a gold standard.
2. In 1791, Alexander Hamilton proposed a plan to water down the strict gold standard with a central bank.  Thomas Jefferson was, among his other accomplishments, a brilliant economist, and he opposed the central bank.  Elected in 1800 on the issue of abolishing the bank, he was unable to get his bill through Congress.  But the bank’s charter came up for renewal in 1811, and James Madison (a Jeffersonian) killed it with a veto threat.
3. .However, the U.S. then became involved in the War of 1812.  It borrowed from the private banks to finance the war, and these banks issued more paper bank notes than they had gold/silver.  When people went to the banks for their gold, the banks defaulted.  Madison did not have Jefferson’s expertise; he did not know what to do; so he allowed a second central bank to come back (1816) A few year’s later, a young politician, Martin Van Buren, visited Jefferson (now retired) at Monticello.  Jefferson poured out his heart to the young man.  Everything they had fought for was gone.  The cause had been betrayed.  Van Buren left resolved to fight the second bank.  He recruited war-hero Andy Jackson, founded the Democratic Party and got Jackson elected in 1828.  But since the bank’s charter expired in 1836, the important election was 1832.  Jackson declared that the people could have, “a bank and no Jackson or no bank and Jackson.”  They voted overwhelmingly for Jackson, and it was writ large in American politics for the remainder of the 19th century that to advocate a central bank was political suicide.
4. Lincoln left the gold standard to finance the Civil War, but there was a general consensus to return to it after the war.  However, in 1874 the railroads (the paper aristocracy of their day) snuck through a bill to postpone the resumption of gold convertibility.  But when the congressmen went back home to campaign for reelection in 1874, they realized that they had completely misjudged public opinion.  Back in Washington in Jan. 1875, they reversed themselves and enacted resumption in 1879.  America returned to the gold standard.
5. In 1884, the Democrats had a chance to win the White House because of a Republican scandal (very similar to 1976).  The Democratic Party of that time was flirting with an anti-gold position, but the pragmatic politicians won out.  They said, here’s our chance to win, and we don’t dare mess it up by nominating an anti-gold candidate.  This is how Grover Cleveland became President.
6. But in 1896, the Democratic ideologues got their chance.  They nominated William Jennings Bryan, and he declared, “you shall not crucify mankind upon a cross of gold.”  He ran for President 3 times and lost every time.

So 6 times the issue of hard money versus soft money went to the people.  Six times the hard money forces won victories, some of them so overwhelming that they are still enshrined in history.  How then did we lose the gold standard in the 20th century?  Just what happened?  Was there an election with the good guy for the gold standard and the bad guy against it where the bad guy won?

No, there was no such election.  In 1913, Woodrow Wilson enacted a (3rd) central bank, but the Democratic Platform of 1912 had promised, “we oppose…the establishment of a central bank.”  In 1932, FDR said not a word about abolishing the gold standard.  Instead he declared that he would balance the budget and cut government spending.  (FDR could not even carry his own Secretary of State with him, and in 1944 this man forced a partial return to gold via the Bretton Woods System.)  Then in 1968, Richard Nixon copied FDR.  After promising to balance the budget, cut government spending and oppose price & wage controls, he threw out all of his promises and abolished Bretton Woods.  When, a year later, he became involved in the Watergate scandal, his supporters deserted him, and he became the first American President forced from office by threat of impeachment.

In short, whenever the issue is fought out in the open, when candidates declare themselves honestly – like Andrew Jackson – the gold standard wins.  The only time paper money wins is via lies and behind the scenes dealings.  So the fact that we have an explicit campaign over the gold standard here in 2007-08 is big news.

Nineteenth century elections were very different from 20th century elections.  In the 19th century, politicians ran on issues.  They did not take polls.  Political activists who admired a candidate’s positions and respected his character would come over to his side, and they would shoulder the burden of winning over the average person.  Why bother to take a poll when the average person’s position was changing as he learned more and more through the campaign?

Now in modern American politics the media anoint a few candidates with the labels “can win,” “might win,” “can’t win.”  The can and might candidates are given enormous free publicity and name recognition, which boosts their standing in the polls.  This name recognition, which is very casual support, is then interpreted as strength.  But no one has ever invented a poll which measures the depth of a voter’s support and his resistance to change.  Then all of the big money – which is buying favors from the government – comes in to the front runner.

The gold standard candidate is running a very different type of campaign.  He is appealing to activists, who are very knowledgeable about politics and economics. These activists are the backbone of his campaign.  They provide money and volunteer labor.  He started low in the polls because the media did not anoint him with name recognition.  But his activists are winning people over to his side.  This candidate raised $5 million in the 3rd quarter.  This was so out of line for a “can’t win” candidate that it even attracted establishment attention. Now he has raised his goal to $12 million for the 4th quarter. (For context, the top Republican candidates raised $10 million in the 3rd quarter.)  And with the quarter 2/3 gone, he has already raised $9 million.

My report from New Hampshire is that the gold standard candidate’s money is starting to pay off.  His ads are running regularly on TV.  His signs are all over the state.  He is the most visible Republican candidate.  And now he is rising in the polls.  The latest poll of New Hampshire Republicans gave him 8% (up from 1% to start).  This, of course, is a hard core 8%  These people have a lot of enthusiasm, and they will probably turn out in much larger numbers to vote.  (For example, if the front runner, who has been built up by the media, is running 20% in the polls and ¼ of his supporters bother to vote in the primary, then he will lose to a candidate who runs 8% but all of whose supporters come out.)

Of course, if a candidate who wants to return to the gold standard and abolish the Fed, wins the Republican primary in New Hampshire, then Ben Bernanke is going to sit up and take notice.  He is going to have to compromise in the direction of hard money positions.  He might even begin to worry about the value of the dollar.

The Republican primary here in New Hampshire is Jan. 8, 2008.  Everything is starting to come together.  There is enthusiasm, momentum and money.

Once again Bretton Woods may play an important role in world monetary affairs.

From,
Howard Katz

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Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965.  His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31).  Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.).  Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002.  His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures.  This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100.  Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  (Include both electronic and mailing address.)  Mr. Katz’s blog is available weekly (no charge) at www.thegoldbug.net.