Silver has officially broken through the $36 per ounce mark, and if you’ve been following the precious metals market closely, this move shouldn’t come as a surprise. For those who have been following, this isn’t about hype—it’s about fundamentals, supply constraints, and a shifting macroeconomic landscape that’s finally catching up with silver’s long-term value proposition.

Industrial Demand Meets Tight Supply

Silver isn’t just a monetary metal—it’s an industrial workhorse. With demand from solar, electric vehicles (EVs), and electronics continuing to rise, the physical market is feeling the pressure. The Silver Institute projects another year of supply deficits, and unlike paper contracts, physical silver doesn’t just appear when demand spikes. That’s a key distinction many overlook, and part of why silver broke above $36.

Monetary Policy and the Flight to Hard Assets

As central banks around the world flirt with rate cuts and inflation remains sticky, investors are turning to tangible assets. Silver, often overshadowed by gold, is now taking center stage. It’s more affordable, more volatile, and historically lags gold in bull markets—until it doesn’t. When silver moves, it tends to move fast.

The Gold-Silver Ratio Signals Opportunity, Even With Silver Breaking Above $36

The gold-silver ratio has been narrowing, which is historically a bullish signal for silver. Even with the recent price movement, there is still plenty of room to grow based on the ratio. When the ratio begins to revert to its long-term average, silver tends to outperform. Smart money is watching this closely—and acting accordingly.

What Silver Breaking Above $36 Means For You

If you’re holding physical silver, this rally validates your long-term strategy. Silver has broken above $36, but it still has not reached its all time high. If you’re still on the sidelines, now’s the time to reassess. But remember: silver is volatile. That’s why we always emphasize a long-term, allocation-based approach, not chasing price action.

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Gold prices surged past $3,100 on March 31st, 2025. The metal continues to break new milestones that were previously considered unreachable. The spot price of gold blew past $3,100, breaking the $3,130 mark. Over the last 12 months, gold has increased in price by 55%. 

Investors, already facing headwinds from persistent volatility in global markets, are turning to gold as the ultimate hedge. Mounting fears of economic slowdowns in key regions and ongoing disruptions in international trade have further fueled the rally. As concerns remain over the effects of tariffs on the price of goods and the stock market’s stability, gold continues to be a safe haven.

What is Next for Gold?

Market analysts suggest that this rise is far from over. With sentiment leaning heavily toward risk aversion and continued uncertainty across various sectors, some experts project that prices could breach the $3,500 level in the coming months. Ultimately, it is impossible to know for sure what the future holds. $3,500 may be overly generous or significantly underselling what gold may do in the coming months.

One thing that has been consistent, every time the “experts” set a new ceiling for the price of gold, gold prices surge right through it. It is easy to see the rise in the value of gold and to be paralyzed by it. “If I buy now, will it drop on me”? “Should I wait for a dip”? Many people have said the same thing over the last year, and gold continues to increase in price. This is why dollar cost averaging is so essential. Instead of being paralyzed by fear, invest the amount you can afford at preset times, whether weekly, monthly, biannually, annually, etc; regardless of the price. This way, you take advantage of the long-term effects of gold, and when the gold price continues to grow, you have a piece of the market.

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In 1971, the United States significantly shifted its monetary policy by abandoning the gold standard. This decision, known as the “Nixon Shock,” was a turning point in the nation’s economic history and has had lasting effects on the global financial system.

The gold standard, which had been in place in various forms since the 19th century, tied the value of the US dollar to a specific amount of gold. This system ensured that the currency had a tangible backing, providing stability and confidence in its value. The Bretton Woods Agreement, established in 1944, further solidified the gold standard’s role in the international monetary system by pegging other currencies to the US dollar, which was convertible into gold.

By the late 1960s, however, the US faced mounting economic challenges. The costs of the Vietnam War and President Lyndon B. Johnson’s Great Society programs had led to significant budget deficits. The government was trying to spend money that it did not have. Additionally, other countries were beginning to question the stability of the US dollar and started redeeming their dollars for gold. This put immense pressure on the US gold reserves, which were rapidly dwindling.

In response to these pressures, President Richard Nixon announced on August 15, 1971, that the US would no longer convert dollars into gold. This decision effectively ended the Bretton Woods system. It marked the beginning of a new era of fiat currency, where the value of money is not tied to any physical commodity but is instead based on government decree.

The Consequences of Abandoning the Gold Standard

The transition to fiat currency had significant implications for the US and the global economy. Without the constraints of the gold standard, the US government gained greater flexibility in its monetary policy. This allowed for more aggressive measures to manage economic cycles, such as adjusting interest rates and controlling the money supply. This control allowed the government to spend money without having to back it up with physical gold. Gold no longer needed to be available for foreign entities that wanted to trade their dollars for gold. If the government needed money, they could create it out of thin air.

However, this newfound flexibility came with obvious problems. The absence of a tangible backing for the currency opened the door to fiscal irresponsibility. The US national debt began to soar, and the government increasingly relied on printing money to finance its expenditures. This led to a devaluation of the dollar and a loss of purchasing power for ordinary citizens. Since 1971, on average, prices have increased by approximately 632%. In other words, what cost $1 in 1971 would now cost around $7.32. Just since 2020, costs have increased by 22.8%. This is all based on the assumption that the Consumer Price Index is accurate. There are many reasons to believe that the percentages are incorrect based on biased ways of reporting price increases.

According to the Shadow Government Statistics (SGS) Alternate CPI, which uses methodologies from before the 1980s and 1990s changes to the official CPI calculation, the inflation rate would be significantly higher than the official CPI. While the official CPI might report an inflation rate of around 85-86% since 1971, the SGS Alternate CPI indicates that if inflation were calculated using the pre-1980 methodology, the cumulative inflation rate since 1971 would be around 1,000%. Regardless of the methodology, the point is this: the dollar has and continues to lose value rapidly.

Inflation became a persistent issue, eroding the value of savings and disproportionately affecting those with fixed incomes. The centralization of monetary control in the hands of policymakers, particularly the Federal Reserve, also concentrated economic power and introduced the risk of policy errors and market distortions.

A Call for Sound Money

The abandonment of the gold standard marked a significant departure from sound monetary principles. This move has led to fiscal irresponsibility, inflation, and the centralization of power. A return to a system of sound money, backed by tangible assets like gold or silver, would restore economic stability and safeguard individual freedoms in the face of an increasingly interventionist monetary policy.

Unfortunately, we cannot control what the government does with our money alone. However, we can implement the same principles that we want the government to implement. Instead of relying solely on Fiat currency, we can back our wealth by investing in gold and silver. The price of gold has increased by approximately 8,300% since 1971. This is why gold is the best way to avoid the adverse effects of inflation.

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Fiat currency, like the US dollar, is not backed by a physical asset like gold or silver. Instead, its value is derived from government regulation and the trust and confidence of the people. It is valuable because the government says that it is valuable. It is also the reason your grocery prices continue to increase.

The Nature of Fiat Currency

Fiat currency is created through a process called the “Mandrake Mechanism,” where money is created out of debt. When a loan is issued, new money is created, and the money disappears when the loan is repaid. This system creates a flexible money supply, but it introduces significant risks.

Effects on the Monetary System

The shift to fiat currency has fundamentally transformed the monetary system. Central banks, like the Federal Reserve, can control the money supply, which can be used to manage economic cycles. Central banks can increase the money supply during economic downturns to stimulate spending and investment. Conversely, they can reduce the money supply to curb inflation during rapid economic growth.

However, this flexibility comes with challenges. The absence of physical backing means that the value of fiat currency is highly dependent on the stability and economic policies of the issuing government. Any loss of confidence in the government’s ability to maintain economic stability can lead to currency devaluation and inflation.

Inflation and Fiat Currency

One of the most significant criticisms of fiat currency is its propensity to cause inflation. Since fiat money can be printed at will, its supply has no intrinsic limit. This can lead to an increase in the money supply without a corresponding increase in economic output, resulting in inflation. Inflation is a hidden tax, as it reduces the purchasing power of money. When new money is created, new value is not. That value has to come from somewhere, and that somewhere is the purchasing power of previously issued currency. Inflation is a tax because it takes value that the everyday person has earned and redistributes it, often without the person realizing it.

Historically, periods of high inflation have been associated with excessive money printing, such as during the 1970s. The Federal Reserve’s response to high inflation, including raising interest rates, has profoundly affected the economy.

Conclusion

The transition to a fiat currency system has given central banks incredible power to manipulate the economy and the value of money. This hidden tax is the real reason prices continue to increase. Given the potential for inflation and economic instability, it’s crucial to diversify your assets to safeguard your wealth and ensure its preservation over time. Don’t put all your eggs in the fiat basket; explore other investment options to protect yourself against the unpredictable nature of fiat currency. It is prudent to put a portion of your net worth into tangible, physical assets like gold and silver. Something that cannot be debased, cannot be inflated, and has been used as a store of value for thousands of years.

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February 5, 2025 – Gold prices soared to an all-time high on Wednesday, topping $2,870 per ounce. Global trade tensions, a weakening U.S. dollar, and inflation concerns continue to push the gold price.

Key Drivers Behind the All-Time High

1. Trade War Tensions: The ongoing trade war between the United States and China has prompted investors to flock to gold as a safe-haven asset. China’s recent tariffs on U.S. imports in retaliation for U.S. duties on Chinese goods have only heightened these tensions. For example, China recently imposed tariffs on U.S. imports such as coal, LNG, crude oil, farm equipment, and automobiles in retaliation for U.S. duties on Chinese goods. This tit-for-tat tariff exchange has heightened economic uncertainty.
2. Weakening U.S. Dollar: A softer U.S. dollar has made gold more attractive to international buyers. When the dollar weakens, gold becomes relatively cheaper for holders of other currencies. This increased affordability boosts demand as international buyers seize the opportunity to buy gold at lower prices. Additionally, gold’s status as a safe-haven asset during times of currency volatility makes it a more appealing investment, further driving up demand.
3. Inflation Concerns: Gold is traditionally seen as a hedge against inflation. With rising inflation risks and uncertainty over the Federal Reserve’s policy path, investors are turning to gold to protect their wealth. By investing in gold, they aim to preserve their purchasing power and shield their assets from inflation.
4. Central Bank Buying: China’s continued accumulation of gold reserves amid escalating trade tensions also contributes to the price surge. Analysts believe that gold prices could cross the $3,000 per ounce mark (a new all-time high) if trade tensions persist this year.

Market Reactions and Future Outlook

The surge in gold prices has had a ripple effect across other precious metals, with silver, platinum, and palladium also experiencing gains.

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The historic significance of gold has been evident in almost every culture and has captivated the hearts and minds of people worldwide. Its radiant luster and rarity have made it a universal symbol of wealth, power, and spiritual significance. It is easy to get caught up in the short term. However, we should remember that the value of gold has been maintained for thousands of civilizations all across the world. Gold has shown significant increases in price over the last few years, but it has been valuable for all of human history. Let’s explore how different civilizations have valued gold throughout history.

Ancient Egypt 

In Ancient Egypt, people considered gold to be the flesh of the gods, especially the sun god Ra. The Egyptians used gold extensively in tombs and temples to signify the pharaohs’ eternal nature. They also commonly incorporated gold in jewelry. The famous burial mask of Tutankhamun, crafted from gold, symbolizes the historic significance of gold to the Egyptians.

Mesopotamia 

The Mesopotamians were among the first to use gold in jewelry and currency. Religious artifacts used gold in their decorations. Wealthy people used gold to show their status. The lavishly decorated temples and ziggurats often featured gold elements, reflecting the metal’s historic significance and divine connection. The Mesopotamians imported gold from distant regions due to the lack of local metal deposits. Even in this very early period of human history, the Mesopotamians were importing gold because of the demand for it.

India

 In Indian culture, gold is profoundly spiritual and culturally significant. It is integral to religious ceremonies and weddings, symbolizing purity and prosperity. This reverence towards gold goes back to India’s first roots. The Rigveda, one of the oldest sacred texts, mentions gold and its extraction from rivers like the Sindhu and Ganga. Gold artifacts and coins from various archaeological sites highlight its importance in trade and daily life. The tradition of gifting gold jewelry during considerable life events continues today, rooted in the belief that gold brings good fortune, showcasing the historic significance of gold in Indian traditions.

China 

Gold has long been a symbol of good luck and prosperity in Chinese culture. Gold decorations are typical during the Lunar New Year, as they are believed to attract wealth. Sycees, gold ingots, were used as currency and remain a symbol of wealth and prosperity in modern China. Ancient Chinese emperors also adorned themselves and their surroundings with gold to showcase their divine right to rule, emphasizing the historic significance of gold in Chinese culture.

The Americas

 The pre-Columbian American civilizations, such as the Incas and Aztecs, highly valued gold for its beauty and spiritual significance. For the Incas, gold represented the sweat of the sun, and they used it to craft stunning ceremonial objects. The Incas, Aztecs, and other civilizations used gold in elaborate headdresses, jewelry, and offerings to deities. Rituals incorporated gold artifacts and symbols to demonstrate power and immortality. Craftsmen designed gold objects to dazzle and reflect light, showcasing the wearer’s rank and authority. The Spanish conquest, driven by the pursuit of gold, profoundly impacted these cultures, marking the historic significance of gold in shaping their histories.

Modern Times

 Today, gold remains a powerful symbol of wealth and status. Gold is used in various forms, from investment commodities to luxury goods. Its cultural significance endures, reflecting our fascination with this timeless metal and maintaining the historic significance of gold in contemporary society.

Gold’s allure transcends time and geography, weaving a thread through the tapestry of human history. It is easy to want to overreact to the factors that influence gold in the short term, however, it is important to remember the historic significance of gold. Gold has been used as a store of value for 5,000 years and will continue to be a store of value going forward.

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Federal Reserve’s Stance on Inflation

In a recent statement released after their December 2024 meeting, the Federal Reserve highlighted ongoing concerns about inflation. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) index, showed inflation running at 2.4% in November 2024, above the Fed’s target of 2%. The Fed’s Chair, Jerome Powell, emphasized that while inflation has progressed toward the 2% target, it remains somewhat elevated.

Slower Pace of Federal Reserve Interest Rate Cuts

Due to persistently high inflation and potential policy changes under the incoming administration, the Federal Reserve indicated a slower pace of interest rate cuts in 2025. The Fed’s projections now foresee two rate cuts next year, down from an earlier projection of four. Balancing economic growth with inflation control drives this approach. However, with the Fed showing renewed concern over inflation, these moves are still subject to change.

Federal Reserves Impact on Gold Prices

Gold is often considered a safe-haven asset during economic uncertainty and inflation. When inflation rises, the purchasing power of currency declines, leading investors to turn to gold as a hedge against inflation. The recent Federal Reserve statement, indicating a slower pace of interest rate cuts and ongoing inflation concerns, will likely boost gold prices. Although it may be unlikely to see the same gains as we saw in 2024, there is still plenty of room for growth with the precious metal.

Why Gold Prices Rise with Inflation

Gold’s limited supply and intrinsic value make it an attractive option for investors looking to preserve wealth. As inflation increases, the demand for gold typically rises, driving up its price. Historical data shows that gold prices have surged during high inflation, such as the 1970s and the 2008 financial crisis. This trend has replicated itself in the 2020’s and, based on the Fed’s pessimism, should continue to do so.

Conclusion

The Federal Reserve’s recent statement on inflation and the slower pace of interest rate cuts are expected to impact gold prices positively. Investors seeking to protect their portfolios from inflation may find gold to be a valuable addition. As always, staying informed about market trends and economic indicators is essential when making investment decisions.

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As we enter 2025, the gold price outlook remains positive, driven by macroeconomic factors and geopolitical uncertainties. Analysts predict a promising year for gold, with prices expected to reach even higher heights than 2024.

Central Bank Purchases and Geopolitical Tensions

One of the key drivers for gold’s performance continues to be central bank purchases. Global central banks have been steadily adding gold to their reserves, reflecting a shift away from the U.S. dollar and towards more stable assets. Additionally, ongoing geopolitical tensions, such as conflicts in Ukraine and the Middle East, are expected to sustain high demand for gold as a safe-haven asset.

Inflation and Monetary Policy

Inflation remains a significant factor influencing gold prices. As central banks, including the Federal Reserve, consider more rate cuts, gold is positioned to benefit from a declining real yield environment. Lower interest rates typically make gold more attractive as an investment, offering a hedge against inflation and currency devaluation.

Weakening U.S. Dollar

The U.S. dollar’s performance will also be crucial in gold’s outlook. A weaker dollar makes gold more affordable for international buyers, boosting its appeal. Analysts predict that gold prices will likely rise in response as the dollar continues to soften.

Market Consensus and Predictions

Analysts have varying predictions for gold prices in 2025, with estimates ranging from $2,600 to $3,300 per ounce. J.P. Morgan forecasts an average price of $2,600 per ounce, while ANZ Research offers a more optimistic outlook of $2,805 per ounce. Trading Economics predicts gold prices could reach $2,711 per ounce in early 2025, continuing a bullish trajectory. While gold is not expected to have the same level of growth that it had during 2024, the bullish atmosphere on gold has not gone away. It is hard to predict exactly what the future holds, but what is certain is gold’s position as a hedge on the US dollar and a stable store of wealth.

Investment Opportunities

For investors, 2025 could present significant opportunities to capitalize on gold’s bullish momentum. Structural factors, including inflation hedging, geopolitical tensions, and monetary easing, make gold a reliable store of value in uncertain times.

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The Federal Reserve’s recent interest rate cuts by 25 basis points has sent ripples through the financial markets. While this move initially caused a dip in gold prices, the long-term outlook for precious metals remains strong. Let’s explore why gold will continue to grow in price.

Market Reaction to Interest Rate Cuts

Following the rate cut, gold and silver prices experienced a short-term decline. Typically, a drop in interest rates would lead to an increase in the price of gold. This unexpected reaction was influenced by the Fed’s hawkish tone regarding future rate cuts. Even though there was an interest rate cut, the Fed implied there would be less interest rate cuts in 2025. However, these short-term fluctuations do not affect the underlying strength of gold as an investment.

The Long-Term Bullish Case for Precious Metals

Despite the Fed’s cautious outlook and attempts to control inflation, several key factors suggest that gold will continue its upward trajectory in the coming years:

Economic Uncertainty: The global economic landscape remains uncertain. Geopolitical tensions, potential recessions, and ongoing financial instability create a favorable environment for gold as investors seek safe-haven assets to protect their wealth.

Inflation Concerns: Inflation is driven by fiat currency. This issue is not going away. Gold has historically performed well as a hedge against inflation.

Monetary Policy and Debt Levels: While the Fed’s current stance is less dovish, the long-term reality of high national debt and the need for supportive monetary policy will lead to further rate cuts. These measures tend to weaken the dollar and boost gold prices.

Gold as a Long-Term Investment

It’s crucial to remember that gold is a long-term asset. Although its value may fluctuate in the short term due to market reactions and economic policies, its historical performance showcases its ability to preserve wealth over time. Unlike other investments that can be more volatile and dependent on market cycles, gold offers a stable and enduring store of value.

Short-term price movements should not sway investors; instead, they should focus on the broader economic and geopolitical factors that underline gold’s intrinsic worth. Holding gold as a long-term investment can provide financial security and diversification benefits, protecting your wealth.

Conclusion

While the Fed’s recent rate cut actually led to an initial dip in gold prices, the long-term outlook for gold remains positive. Economic, inflationary, and global uncertainty create a strong foundation for gold’s continued growth. Gold should be viewed as a long-term asset, capable of preserving wealth and providing stability.

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Every current and prospective precious metals investor should read this evergreen article by Alan Greenspan title, “Gold and Economic Freedom”.  Here, you will hear directly from the prior Chairman of the Federal Reserve, exactly why you should hold Gold, as indirectly, other precious metals such as Silver.

By Alan Greenspan – As reprinted from the book “Capitalism, the Unknown Ideal”  – by Ayn Rand with additional articles by Alan Greenspan

Gold: The Foundation of Economic Freedom

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire, that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

The Role of Money in Economic Transactions

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

Why Gold is the Ideal Medium of Exchange

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible.

More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

The Natural Selection of Gold as Money

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, sea shells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has always been considered a luxury good. It is durable, portable, homogeneous, divisible, and, therefore, has significant advantages over all other media of exchange. Since the beginning of Would War I, it has been virtually the sole international standard of exchange.

The Gold Standard and Banking

If all goods and services were to be paid for in gold, large payments would be difficult to execute, and this would tend to limit the extent of a society’s division of labor and specialization. Thus a logical extension of the creation of a medium of exchange, is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

Free Banking System

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security for his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

Bank Loans

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.

Gold and Global Economic Integration

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one–so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries.

For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

The Decline of the Gold Standard

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold, and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post- World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

The Beginning of the Problem

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline- argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely–it was claimed–there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.

It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (paper reserves) could serve as legal tender to pay depositors.

The Federal Reserve and the Great Depression

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates.

The Results

The “Fed” succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.)

Gold Versus the Welfare State

But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.

Abandoning the Gold Standard

The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.

The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

Inflation and the Confiscation of Wealth

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

Conclusion: Gold and Property Rights

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

We also recommend that you take a moment and view the 2011 video in which Ron Paul questions Federal Reserve Chairman Ben Bernanke on “Is Gold Money?”

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