Gold's not a 'barbarous relic', central banking is

In 1931, JM Keynes referred to the gold standard as a 'barbarous relic'. Yet gold's purchasing power remains relatively unchanged. It is central banking which deserves public wrath.

How many times have you heard gold described as the 'barbarous relic'? It is a favourite phrase of gold- bashers everywhere who are trying to make gold the object of derision.

Why the gold standard is a brilliant invention

Gold is not a barbarous relic because gold communicates value today as effectively as it did 50 years ago and much better than does the United States dollar. In contrast to national fiat currencies today, gold tends to hold its value; in other words, the purchasing power of gold remains relatively unchanged. In fact, this precious attribute of gold is timeless because the above-ground stock of gold grows approximately at the same rate as world population growth and new wealth creation.

There is indeed a barbarous relic: central banking itself. Central banks are barbarous in part because they conspired to put an end to Newton's brilliant invention- the gold standard- that safeguarded sound money for 200 years. However, it is the process of central banking itself, as it has come to be practised, that deserves the greatest public wrath.

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Why central banking is 'barbarous'

1. Corruption of money as a product of the free market

Money is a fundamental building block of our society because it allows people to interact with one another in the market process. Money existed long before governments and central banks began to 'manage' it. Tragically, instead of being a neutral and unfettered tool in commerce, fair to one and all, money now has become a matter of force and decree, which is disruptive to the market process and therefore harmful to society.

2. Creation of money substitutes

Prior to the creation of the Bank of England, every exchange in the trading activity that we call the market process tendered value for value. In other words, gold was exchanged for land, silver for food, etc - assets were traded for assets. The Bank of England changed this process by creating money substitutes. Banknotes are not a tangible asset like gold or silver. Banknotes are merely money substitutes and not money itself. Money substitutes are a liability of the bank issuing that paper currency, and money substitutes create all sorts of payment risk that one does not have when using tangible assets as currency.

3. Secrecy

Because central banks act in secrecy, they are not held accountable. For example, the so-called Open Market Committee of the Federal Reserve is far from 'open'. It meets and makes decisions behind closed doors, and the minutes released one month later are thoroughly redacted, leaving outsiders in the dark about the members' deliberations. Central bankers consider themselves- and act as if they were- above the law. Moreover, this secrecy favours insiders, and it is this fundamental principle upon which central banks' marketintervention has been constructed, including, for example, their intervention in the gold market.

4. Taxation without representation

Central banks have freed governments from having to ask their citizens- through their elected representatives- for more taxes. Central banks can acquire government debt and use it to create currency out of 'thin air' for governments to spend on their latest whims. Even worse, through their policies that create inflation, central banks enable governments to steal from their citizens.

5. Disinformation

There are several tools in the central banks' arsenal, and one of them is disinformation, which they regularly practice. For example, central banks have come to make people believe that inflation is 'rising prices'. But wet streets do not cause rain. By changing the definition of inflation to one of 'rising prices' rather than what it really is monetary debasement engineered by central banks the true culprits (the central banks themselves) are masked.

6. Deception

Not only are central banks guilty of disinformation, but deception is one of their most frequently used tools. The history of banking is replete with examples that demonstrate not just a lack of disclosure but, rather, outright deception. To give just one example, consider how central banks today account for their gold loans. They carry both gold in the vault and gold out on loan as one-line item on their balance sheets. In effect, central banks are saying that they can ignore the truthful disclosure established by Generally Accepted Accounting Principles, and as a result they can report both cash and accounts receivable as one and the same thing. Accounting like that would make even the fraudsters at Enron blush.

7. Creation of command and control economies

Central banks have, in effect, turned the market into a command, ie., state-run, economy. The power to create money out of thin air brings with it the much greater power to control a nation's economy and therefore the economic destiny of millions. Central bankers today act like the former Soviet Union politburo members, who pulled strings and pushed buttons to try to make the economywhich means each and every one of us who participate in the economybend to their control. But it is not only the economic destiny of millions that is determined by central banks; subtle but potentially more disturbing issues are raised by the exercise of power by central banks.

8. Propagation of control and restrictions

Central bankers and their comrades in government know that the command economy power that they have claimed forces them to walk a fine line between prosperity and economic collapse, given the inherent fragility of the credit-based monetary system they operate. To try to reduce this ever-growing fragility- in a vain attempt to make it easier for central banks to control the command economy effectively and totally- governments take away peoples' freedom. Central banks usher in controls like the reporting of bank accounts and funds transfers and policies such as the 'too big to fail' doctrine that underwrites bad decisions at banks with taxpayers' money. Controls perpetuate a central bank's stranglehold on power regardless of whether they are doing a good or a bad job- and it is usually bad- in commanding the economy.

9. Debt over savings

The command economy that central banks operate encourages the growth of debt, rather than savings. Banks want to expand their balance sheets- ie, to make more loans - in order to earn greater profits, and governments want central banks to accommodate this objective. The resulting credit expansion provides the public with opportunities to acquire new things, which creates an illusion of prosperity that makes people believe their wealth is rising. The result of this debt-induced pseudo-prosperity is a complacent populace, the net effect of which tends to perpetuate governmental power and politicians' perquisites.

Instead of following a sound and time-tested 'pay as you go' policy, consumers, businesses, and governments have adopted a new creed 'buy now and pay later'. The mountain of debt that exists in the United States today and the excessive consumption that continues to enlarge that mountain are the direct results of central banks' activity and their need to grow more debt to avoid the inevitable bust that would follow if the debt growth were to stop. Newsletter writer Richard Russell explains it very simply in just three words: 'Inflate or die'. That reality explains why Ben Bernanke has said in effect that he would drop $100 bills from helicopters if necessary to inflate the economy.

10. Fostering economic fragility worldwide

What central banks do domestically, they also do to the international monetary system. Thus, the inherent fragility and the huge structural imbalances arising from cross-border trading exist today because of central banks' actions. The automaticity of the classical gold standard ensured that imbalances such as trade deficits were relatively short lived. In contrast, present central bank policies have perpetuated the long-running US trade deficits, which are now several decades old and still growing. The debt being created to finance these deficits has an impact on the monetary environment of each US trading partner. Thus, central bank-engineered imbalances are not just domestic problems; they also have global implications.

Central banking: relic of empire, nationalism and war

Central banking has been around for more than 300 years. In that time, an institution becomes either a venerable object or an obsolete relic. If central banks once served a useful purpose, it was when they were governed by the discipline of the classical gold standard. Having abandoned Newton's rules, central banks now are abusive to free markets and antithetical to sound money. The reasons that make central banks barbarous also make them an unwanted relic. Central banks are a relic of empire, nationalism, and war.

Having existed now for hundreds of years, central banks have survived not because they advance commerce or contribute to raising mankind's standard of living but, rather, solely because they are disingenuous, slavish parasites, dutifully serving the omnipotent state, no matter how mindless or harmful the state's bidding might be. Central banks pursue reckless policies that erode- and in some cases destroy- the value of their currencies. Because of that recklessness, central banking is not only a barbarous relic, it has become dangerous as well.

The dangers posed by central banks

When confronted with attempts by anti-gold propagandists to bash gold, we now know how to respond. The barbarous relic is central banking, and any central bank that prevents the restoration of sound money increases the danger that the relic poses to the public interest. Not far in the future, when the US dollar collapses as just one in a long list of fiat currencies that have collapsed before it, people will look back and ask themselves how it was possible that barbarous institutions like central banks could have hoodwinked so many people into thinking they were good institutions acting in the public interest.

The answer is that central banks have created the illusion of prosperity. Because people think that they are well off, they have no reason to question basic tenets that they are led to believe. For this reason, people are easily cozened into believing that gold is the barbarous relic, that central banks are doing a good job, that officially measured inflation is low, and that their financial future is secure. However, nothing could be farther from the truth.

This article was written by Doug Casey for The Daily Reckoning. Best-selling author and legendary mining- stock speculator, Doug Casey is chairman of Casey Research, publishers of the International Speculator - one of America's longest-running and most respected advisories.