The Gold Standard, US Dollar and New Money System — Today’s ‘Philosopher’s Stone’

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When he wasn’t dodging falling apples, Isaac Newton spent a lot of his life trying to turn lead into gold.

The father of modern science was a closet alchemist.

His aim was to find the philosopher’s stone — a substance supposedly capable of turning worthless base metals into valuable gold.

The existence of a ‘philosopher’s stone’ was a popular and persistent myth.

According to alchemical tradition, its history goes all the way back to Adam, who was given knowledge of the stone directly from God!

It might seem a tad unscientific — and it’s the less spoken part of Newton’s official history — but I suppose when it comes to making money, people are willing to believe in all kinds of crazy things.

Funnily enough, Newton’s failure to find the ‘philosopher’s stone’ played a big part in the rise of the gold standard.

The scarcity of gold made it a good store of value.

And, as the thinking went at the time, if as brilliant a mind as Sir Isaac Newton couldn’t forge it, then what chance did anyone else have?

The emergence of the gold standard sat at the heart of the British Empire’s rise. And every other country, seeing Britain’s success, adopted it too.

Trusted gold-backed money enabled trade to spread throughout the world.

Phrases like ‘as sound as a pound’ are still with us today.

But the soundness of modern money is looking increasingly fragile.

You see, the current masters of money think they have found what Newton couldn’t. They now have unlimited power in the creation of money.

But this power looks to be careering out of control.

You could say that modern money ‘isn’t worth a continental.

This phrase originated at the time of the American Revolution. Early colonists experimented with printing their own paper money with disastrous results.

As more and more continentals were printed, it quickly became apparent that such money was actually worthless. The experiment was quickly abandoned.

And the bad experience led to the US’ founding fathers inserting this clause into the Constitution:

Under Article I, Section 10, the states were not permitted to “coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts.”

Of course, those lessons are long since forgotten…

The End of the Gold Standard and How we got to today

The gold standard officially ended with the post-war Bretton Woods agreement in 1944.

Though the tether to gold was already falling apart as the Roosevelt government tried to stimulate the economy out of the Great Depression of the 1930s.

The 1944 meeting of Allied countries set the scene for a new world order that would emerge from the ruins of the conflict.

And it was clear who was calling the shots.

As chief supplier to the Allied war effort, the US ended the war in great shape. They had three quarters of the world’s gold and a burgeoning manufacturing base.

Everyone else was near bankrupt.

Under the agreement, the US dollar replaced gold as the global reserve currency with each country — having little choice — agreeing to fix their exchange rate to it.

Gold still played a role initially though and US dollars could be redeemed for a fixed amount of gold.

At first though, this was a moot point.

The Marshall Plan which helped rebuild Europe meant US goods — and hence US dollars — were in high demand.

Things were ticking along smoothly for two decades until an era of stagflation hit the world in the early 1970s.

Economic growth slowed, unemployment rose, and the US economy ground to a halt.

Suddenly, foreigners wanted to trade in their dollars for gold. To stop this run on US gold reserves, President Nixon abruptly ended the policy.

Now, the US dollar wouldn’t be backed by anything except the substantial cultural, economic, and military power of the US.

And to get oil, you needed US dollars. A case of ‘our currency, your problem’ as one US ambassador famously quipped.

Today, it still retains its position as prime currency and much of the world’s trade is done in US dollars.

But it’s a tool of unconstrained power.

And as we saw last week, in a crisis, it’s a power that’s hard to resist…

$2.3 trillion and counting…

When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.

Frederic Bastiat

We’re accelerating faster down a slippery slope that started many decades ago.

But it’s only now we’re entering the twilight zone of extreme consequences.

Last week, the Fed announced they would provide a further $2.3 trillion to support the economy. This is money literally willed into existence.

Here’s how this looks in context of the Fed’s balance sheet:

Money Morning

Source: Bloomberg

[Click to open in a new window]

Some reasons for this plan are understandable. To support lending for small- and mid-sized business, for example.

However, the bit that gives away the game is this.

As reported in MarketWatch:

The U.S. central bank’s facility buying corporate bonds will also now buy debt from sub investment-grade issuers, or “junk”-rated companies.

This has never been allowed before and it’s hard to stress how exceedingly bad this is.

This is the Fed bailing out private equity and hedge fund speculators who have gambled on high-interest debt products.

These people made fortunes in the good times. And now we’re bailing them out with a wave of the magic money wand.

This outcome is a direct consequence of our current system of money. A system built on power and connections.

It puts ultimate control in the hands of big government and their cronies at the central banks.

And they pick the winners.

This situation is completely bizarre. Think about it. How do you navigate a market that has a buyer of last resort for everything?

As someone quipped on Twitter:

Will the Fed now buy my baseball cards?

What’s next, the Fed buying stocks?


With unconstrained money supply and an unquenchable thirst for power and control, nothing is off the table.

Which leads to a big problem for you and me…

Markets could soar in this rigged game

What value is the sweat of hard work, innovation or intelligence in this kind of world? What value is savings and prudent risk management?

When political connections and crony capitalism rules, the rest of us suffer.

But if the game is rigged, what can you do?

One answer is to join them, as bad as that sounds.

My thinking is markets could soar higher in the short term.

Even as unemployment rises and company profits fall. Because you now have infinite money willing to backstop markets.

The two headlines in this screen grab of Jim Cramer’s show sum up the distortion at play in our new reality:

Money Morning

Source: CNBC

[Click to open in a new window]

In the long term we’ll either see one of two results emerge:

A return to growth as a new bubble inflates into the next crisis.

Or, just maybe, perhaps it’s finally the end of the Fed’s power as the rigged game becomes apparent to all.

That outcome will put us into uncharted territory and could even signal the start of a new system of money.

Either way, we’ll find out if the philosopher’s stone exists after all, and who controls it…

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: FREE ‘Crisis Money Guide’ explains how a currency crisis could suddenly unfold and how to survive it. Click here to claim your copy now.

About Ryan Dinse

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately…

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