10 June 2010

Gold and the Clash of Civilisations by Andy Smith

Well, it’s not ‘the end of history’, as Francis Fukuyama originally forecast in 1989. As events, as much as Samuel Huntington’s 1993 counter-thesis ‘The Clash of Civilisations’, have shown. For Fukuyama, it was ‘the politics’ that mattered. And these ‘ended’ when the Berlin Wall fell and, soon after, victory in the Cold War was declared by liberal democracy, happily “free from such fundamental internal contradictions” that undermined alternative forms of government. For Huntington, it was all about ‘the religious’, ‘the ethnic’. Since history, like nature, abhors a vacuum, ‘politics’ would be replaced by something .... like 9/11, and the Iraq and Afghanistan wars.

What if both are wrong? What if it’s ‘the economic’? And record gold prices (in all currencies) ‘prove’ it? In late 1993 Huntington challenged his critics to come up with an “alternative paradigm that accounts for the more crucial facts in equally simple or simpler terms.” A little late, here goes.

The deepest and most enduring schism in and between societies is that dividing creditors and debtors, and surplus and deficit countries. In turn, these sides champion hard or soft money, deflationary or inflationary policies. In the ‘good old days’ this was an even fight. Indeed, the climax of the ‘Gilded Age’ of prosperity in America at the end of the nineteenth century was marked by three successive defeats for the soft-money candidate, William Jennings Bryan.

The “plain people of this country” were Bryan’s army. And you’d “search the pages of history in vain to find a single instance in which the common people of any land ever declared themselves in favor of a gold standard”, ie hard money. For Bryan “the idle holders of idle capital” (with assets to defend) were pitted against “the struggling masses” (with debts to burn, they hoped). And “where, in law or morals” was the “authority for not protecting the debtors?” Or, as his more memorable rallying cry went: “you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”

This was probably the high water mark for the forces of hard money. Their ‘cross of gold’ discarded in the 1930s, now they have simply been outnumbered by debtors. And in democracies, power is a numbers game. In America today almost half the working population pays no Federal income tax, compared with only a fifth as recently as the late 1980s. What is this great subsidized majority going to vote for? Smaller government and fewer benefits - ‘hard choices’? A strong dollar that keeps inflation low and the real value of their debts up? Or personal profligacy funded by government excess?

The dwindling minority of (‘idle’ but taxpaying) creditors has worked this one out. And it is investing accordingly, in an asset viewed beyond the grasp of the mob or its elected representatives:
  • in gold coin - American Eagle sales an 11 year high for May
  • in gold bars - the securitized version, gold ETFs; 5 million ounces of the largest of these were bought in the thirty days after the Greek crisis broke, 23 April when Athens officially requested a bail out, more than in the month after the fall of Lehman Brothers, 15 September 2008
Similarly Europe’s largest creditor nation Germany finds itself ‘out-voted’ by debtor members of the euro. Albeit under duress, it has signed up to contribute over a quarter of the capital to the 440 billion euro ‘bail out’ fund – and the euro has reacted accordingly, falling to $1.19, no better than its launch on 1 January 1999. As the world’s biggest creditor, China, jumping from the frying pan of the dollar into the fire of the euro this past decade, will note, painfully. In fact, since the inception of the euro, all major currencies have fallen some 75% against gold. Bryan cannot have imagined that debtors would enjoy such ‘protection’.

A few hard money guerillas survive, in what some might call the backwoods. Ten American states are considering bills to reintroduce ‘Constitutional Money’. Namely, proposals to break the Federal Reserve’s monopoly (of paper currency) and return to Article 1, Section 10 of the 1787 Constitution which forbade states from making “anything but gold and silver coin a tender in payment of debts.” Stranger than the fiction of Ayn Rand? (In whose 1957 novel ‘Atlas Shrugged’ society’s creditors, its movers & shakers, fled a rapacious government to a hidden valley where gold and silver were the basis of transactions and savings.) Or the golden nail in the coffin of Fukuyama’s thesis that democracy is not “prey to ... contradictions so serious that they will eventually undermine it as a political system”?


  1. This post seems unfinished?

    That said, I'm not sure that the premise holds (that the driver of 'history' is the struggle between credit and debt)

    Maybe it can be viewed in terms of economics, but history in many ways is the story of the struggle between 'good' and 'evil'. In economic terms, this is the struggle between reward for effort and risk and reward through theft and manipulation.

    I suspect that at times this is visible in the distribution of credit and debt, but credit and debt are not the cause.

  2. Attention munchkins: We're off to see the financial engineering wizards, the wonderful wizards of .999 fine Oz.

    Sung to the tune of Somewhere Over the Drainflow.

    William Jennings 'Scopes Trial' Bryan somewhat recanted in his later years allowing that new supplies of gold coming onto the market stole his thunder, alleviating the deflationary pressures that were pushing farmers into bankruptcy due to the falling commodity prices of what they produced wasn't enough to pay their loans.

  3. The post is finished, Andy writes compactly.

    Debtors vs Creditors is something I covered in and earlier post http://goldchat.blogspot.com/2009/09/protecting-yourself-from-world-war-iii.html

    Maybe it is not "the" driver of history across time, but I do think it will be for the period we are in/entering now.

  4. Thanks for clearing that up Bron - wasn't sure if it was a portion of the work with more coming later.

    I'll have a look at your other post.

  5. Bron,

    Who is Andy Smith? Can you provide some information on any other writing by this author?

  6. costata,

    Andy Smith is a precious metals market analyst who has worked for various bullion banks over the past 20+ years. As a result his understanding of the PM markets is unmatched in my opinion. He is currently with Prudential Bache Commodities (http://www.bache.com/view/page/gc).

    Unfortunately his research is not public, I asked if I could put this one up. I have quoted from him before, see http://goldchat.blogspot.com/search/label/Andy%20Smith