For three thousand years China has been at the forefront of monetary innovation. It was the first to legalize gold money in the tenth century BC and two millennia later it issued the world’s first paper currency. Fast forward to 2012 and China is at it again, eclipsing Australia as the largest producer of gold and increasing its monetary gold reserves at an alarming rate. Five years ago China surpassed the US in gold production and five years from now it will own more gold than the US Federal government.
Do not dismiss this as just another example of China’s insatiable appetite for natural resources. It is not. China is preparing for a world beyond the inconvertible paper dollar, a world in which the renminbi, buttressed by gold, becomes the dominant reserve currency.
Lest anyone doubt China’s resolve, just consider the following: The Chinese government has recently removed all restrictions on personal ownership of gold; legalized domestic gold exchange traded funds; is currently purchasing 100% of domestic gold mine production; has imported over 750 tons of gold (27% of global output) in the last 12 months; stated publically its intention to add 1,000 tons per year to its central bank gold reserves; and is buying major stakes in foreign gold mining companies. The scale of this initiative is extraordinary.
Commenting on the recently announced acquisition of African Barrick Gold Ltd. by state-owned China National, CEO Sun Zhaoxue stated, “As gold is a currency in nature, no matter if it’s for state economic security or for the acceleration of renminbi internationalization, increasing the gold reserve should be one of the key strategies of China.” This statement regarding the internationalization of the currency through the production and acquisition of gold reserves is in stark contrast to the attitude of Federal Reserve Chairman Ben Bernanke. He told students at a lecture at George Washington University earlier this year that the problem with the gold standard is that it requires “an awful big waste of resources” to produce the gold. It seems that what we consider waste, China considers essential for the establishment of a sound currency.
There are two important reasons why any of this matters. First, the scale of China’s gold initiative is unprecedented in world history. This alone should make us take notice. Second, China is signaling that the currency wars of the past decade are changing. Soon, the battle will be influenced by gold. Here in the West, we cling to the notion that our experiment with floating exchange rates and unreserved currencies will somehow save the day. We forget that it was only 41 years ago, when the US suspended dollar-gold convertibility, that our current system was born. China suffers from no such delusion. It is voting with its wallet that the experiment has failed. It is preparing for the demise of the US dollar.
Fortunately, we still have something to say about this. As long as the US dollar remains the world’s reserve currency, we can act from a position of strength and credibility. China does not know what the next monetary system will look like – it just knows that when the dust settles, gold will once again be an important monetary asset. The US can avoid being a victim of this uncertain future by designing and implementing a modernized gold standard. We have done it before with great success. In fact, for most of US history, the dollar was defined as a weight unit of gold. It is no coincidence that we enjoyed our greatest economic growth during those periods.
Will America start prospering again — as it has not prospered for over a decade? Likely yes. But not without a fight. Now that Jim DeMint has raided Steve Moore from the Wall Street Journal that card might be Heritage Foundation vs. the White House. Could be big.
John Holdren, now Obama’s White House science advisor, 40 years ago termed America “overdeveloped.” Holdren co-authored a 1993 book, Human Ecology: Problems and Solutions, with Anne and Paul Ehrlich reportedly saying that, “A massive campaign must be launched to restore a high-quality environment in North America and to de-develop the United States….” (Emphasis supplied.)
As a soldier of France, no one knew better than Professor Jacques Rueff, the famous French central banker, that World War I had brought to an end the preeminence of the classical European states system and its monetary regime, the classical gold standard. World War I had decimated the flower of European youth; it had destroyed the European continent’s industrial primacy. No less ominously, the historic monetary standard of commercial civilization had collapsed into the ruins occasioned by the Great War. The international gold standard -- the gyroscope of the Industrial Revolution, the common currency of the world trading system, the guarantor of more than one-hundred years of a stable monetary system, the balance wheel of unprecedented economic growth -- all this was brushed aside by the belligerents.
Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.
By John D. Mueller
LBMC’s Growth Model
In L’Ordre Social, Rueff constructs a theoretical model of the world economy. In it, output is the flow of goods and services produced by the stocks of labor and capital. His analysis includes the interaction of market prices and costs of production (net of taxation); markets for goods claims and foreign exchange, which are integrated through internal and external trade by purchasing power parity (and disparity), including transportation costs and tariffs, a monetary system which may be either gold-convertible or inconvertible, with or without reserve currencies, with or without adjustment lags (which produce overshooting effects in the price level and exchange rates); a theory of how economic policy operated through incentives and disincentives, including not only taxation but also price- and other regulation; alternate methods of financing budget spending (taxation, borrowing, monetization) and their effects – among other things.
"Commercial banking grew out of the desire (inspired by the profit motive) to conserve cash (gold) and by means of credit to provide financial elasticity and growth in the commercial process of exchange. That is, all producers (sellers) who desired true money (gold), instead of the short-term secured credit bills – promissory notes of their customers (the buyers) – could, through the mediation of goldsmiths-turned-bankers and bill-merchants-turned-bankers, obtain real money by discounting their bills of exchange for gold with the emerging commercial bankers of early modern Europe. The combined institutions of stable money and secured credit enabled commercial civilization to make of the entire world the only closed economy."
Argentina is floundering. Brazil is struggling. Colombia is growing. Colombia is now the third largest economy in Latin America, according to Capital Economics. The Wall Street Journal’s Darcy Crowe and Taos Turner wrote recently: “After Argentina’s economy dwarfed Colombia’s for decades, economists say the trend reversed in January as the...
One of the themes for the Akan gold counterweights is the electric mudfish.
Image courtesy of AfricanMasks.info
Spark From The Deep by William Turkel has this to say about the fish upon which this counterweight is modeled:
The electric catfish also played an important role in the west African kingdom of Benin, which...