Gold in Great Depressions: Then and Now

We’re back on the topic of gold, one of the very few honest currencies, and soon to be the number one reserve currency in the world. If you’ve been listening, you may have heard some market commentators like Dennis Gartman say several months ago that gold is trading like a reservable currency. This is because gold is a currency. It competes with all fiat currencies in the world. While fiat money can be printed by a government at will to solve a liquidity crisis, gold can’t. Gold is hard money. This is why governments are very chuffed to have de-linked fiat money from its real money counterpart in a systematic fashion from 1913 to the final cut in crisis ridden fashion in the 1970s. It has given them the flexibility to bend monetary rules in their favour.

This is a crucial difference between the monetary crisis of the Great Depression of the 1930s and Great Depression 2.0. If you read the president in charge of the US ship in the late 1920s and early 1930s, Herbert Hoover’s memoirs, you may begin to appreciate what I am getting at. Hoover reckons that his administration could easily have dealt with the burst stock market bubble of 1929, and that the Great Depression only began in earnest once Central European economies started going bankrupt beginning in 1931. US banks had huge exposure to the European banking system and this led to Hoover having to indirectly save US banks and economy by bailing out and assisting European governments and banks. From 1931 onward, there were various bank runs and capital flights from one European economy to another, sometimes on the back of rumours of imminent bankruptcies, other times as speculators bet against the solvency of a central bank or government. Parallels between the Great Depression and today’s 2.0 run deep. The reason Central European governments were going bust in the 1930s was because they had floated massive short-term bills with which to fund war reparations after the Treaty of Versailles. Today, governments are floating short-term bills to bail out insolvent banking systems and governments, and looming underfunded pension and healthcare liabilities.

What I’m trying to say is this: in the 1930s gold didn’t go to infinity because when loans were made between governments, real money was lent. One government took its hard earned savings, denominated in gold, and gave it to another. As a result, the US suffered a massive outflow of gold from its banking system during this period, which was deflationary. Today, real money isn’t lent between governments to fill voids left by capital flights, to avoid government bankruptcies, and to save insolvent banking systems. Paper money is printed by one government and given to another to avoid, regulate and smooth hot capital flows which destabilise foreign exchange markets. Like our Cosatu economist said recently: “Why borrow money when you can print it?” He’s got a point (albeit a bad one) but the fact remains that printing money destroys the value of a currency.

The system looks very stable until there isn’t any system left. In the meanwhile, until we reach the tipping point and global fiat currencies go to worthless in a dramatic fashion, the purchasing power of those currencies in terms of gold and other goods (including equities) continue to grind lower as central banks print increasing amounts of money. This remains very bullish for gold, and one can’t help but wonder when more guys will “get it.”