Learn about Banking 17: What happened to the gold? Video

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Learn about Banking 17: What happened to the gold?

I think now might be a good time to address to another question. This probably circulating in your head and that is what happen to the gold? Remember when we started this reserve bank? All of these national banks or whatever we want to call them, they had gold as reserve. And at some point they said well you know why each holding gold are. Why don’t we just all concentrate our gold in one reserve bank and then that reserve bank can issue and it was the only person that could issue, it could issue bank notes that could be tradable into gold. And then we said we know overtime people just got used to the notion of using the bank notes themselves unless too thick, using the bank notes themselves as reserves. And that’s what the reserve ratios were all based on the bank notes itself. And we talked about that if the fed or the reserve bank wanted to increase some money supply, it could essentially just print new notes, print new notes and it would have all setting notes, outstanding liabilities. And it can could use those to perform open market transactions that it will essentially allows it to grow the monetary base with the economy or with the needs of different projects out there. So that those projects happen and in that whole discussion, you might have noticed that this yellow stuff was just sitting here. It had nothing to do with the economy. It was just sitting there and if you really want it to force me to say what it was doing. Well it was giving a little bit of confidence behind what this thing was. It gives you a little bit of confidence because at first at least when we said you know it was backed by the gold. There's maybe a similar amount of gold as there was there. Maybe a little bit later, we said oh you know this could be exchanged for gold at some rate. Maybe I don’t know $35.00 per ounce. I think that’s would it was when we were last on the gold standard, $35.00 per ounce. But if you think about it, it’s a couple of weird things here. First of all almost from the get go when we did this, the whole purpose of having these flexible money supplies, so you can grow and contract money with the needs of the economy. And for the most part have notes outstanding because this was the fractional reserve system. We would have note outstanding more than the actual amount of gold and this is been the case even when we were on the gold standard. You had more dollars than you actually had gold. We have to keep a little bit of gold there just so in case people wanted to call your buff. In case you know X percentage of people wanted their gold back, so they would come back to the central bank as their get us our gold. But the gold fundamentally it had no other function. It wasn’t in the economy. It wasn’t helping transactions happen. It wasn’t doing anything. It was just sitting in Fort Knox or wherever it happens to be sitting and to some degree it’s a more of a pain than any kind of real value because you have to keep up this notion that these things, these dollars bills could be translated into gold. It kind of force to reserve ratio requirement on the central bank itself and then it reserve ratio requirement, if you think about its kind of arbitrage depending on how much gold is found in the world. In order to increase the money supply with the GDP because you know people are inventing computers and railroads and cars and highways are being built and we’re all becoming more efficient. In order to keep the money supply up with that extra economic activity, if we stay on the gold standard and if we want to keep kind of these ratios between the money and gold. We have to grow our gold with the economy and you know that’s kind of arbitrary. You know maybe we find a big bunch of gold and maybe we find no gold and that really should have no barring on our technological progress and how hard were working. It makes a lot sense, if you could imagine our world were all of a sudden you know when astroid made of gold lands, you know in the middle of the US. Does that all of a sudden you know because gold is less valuable, should that make the dollar less cheap or in another world where for whatever reason we can't find anymore gold. Should that all of a sudden decrease our ability to circulate money around? And it would have becomes, and I said it a three videos ago that these dollars bills aren’t just the liabilities or the obligations of the central bank. They’re actually obligations of the US government. So let me ask you a question. Would you rather have something backed to buy gold or backed to buy the US government? And I know many of you, your gut reaction will say gold. The gold is real value. The US government what would they good for? There are bunch of crooks. They you know, they lie, cheat and steal. They you know, they misallocate wealth all of the time but think about it. Gold as we said before, gold really isn't wealth. It can be used to represent wealth only because it’s pretty. Only because at some period and it doesn’t corrode. At some period in the past some will say, oh I'm willing to plow your field if you give me that cool rock that you found. That’s the only gold valuable has. It can't do work. It can't be eaten. It doesn’t make us more motivated. It doesn’t make us happier. Its not real wealth, not real wealth. Now what about the US government, well it has the right the authority to tax and I know tax is our bad words, and I don’t like them myself. But it essentially, it can extract these rents from the US economy, tax US economy. And US Economy, that’s real wealth. That’s labor, ideas, land, resources everything that make us ticks. Our labor, our goods and services, our ability to educate ourselves and innovate and come up with technology and become more productive that’s real wealth. So if you really think about it, I know I'm getting a little abstract here but I want to, I really want to hit this point home because a lot of people I think are still on the notion that somehow of something is somehow tradable for gold that it is of a sound or currency. While if its obligation of a government with the very dynamic economy but not gold or somehow backed by less wealth but I argue that this is actually a more profound amount of wealth. I mean we’ve had currencies in ancient history that were backed to by gold but in a lot of cases, you still have inflation when you know the Spanish currency in the 15th century was backed by gold but all of a sudden they discover that you know central America lot of gold and you had a ton of inflation and that gold really didn’t give any real wealth to the Spaniards at the time. It just made everything more expensive for them. It did allow them to buy a little bit more from other countries but it really didn’t create any innovation or any; it didn’t really make their pie that bigger except they did steal some pie pieces from other parts of the world but well leave that aside from now. But this is real wealth, a currency backed by a whole nations ability to generate wealth in some ways is a lot more valuable but gold was a stepping stone and it was necessary because in order to get this whole thing started in order for people to really have trust in this currency and just the way people are trained to think. You had to originally sell them on gold right. So if you think about it gold and plenary rolls when in 1971 when Richard Nixon decides to go off of the gold standard. If and this is a big if, if you trust the governments ability to manage, to manage the money supply effectively that they’re not going to print so much money that we have hyperinflation or they’re not going to print so little money that we end up with you know a deflationary spiral. If you trust the government’s ability to do that it really doesn’t matter that we went off of the gold standard, and it really just kind of gets rid of a little nuisance. And if you actually look at the Federal Reserve’s balance sheet today, there’s still is some gold sitting on their balance sheet because you know its really not obvious what they need to do with this .So they just kept it. Well anyway, we’ll talk a lot about this you know what is wealth and what isn't wealth in the future. One example I often tell people is if you were; let say you’re plane is going down, you know you’re the pilot of a plane and its going down. Its burning and you see two islands in the horizon. And you have to ditch your plane on one of those islands. So one of those islands, it has a big pile of gold on it, it has a big pile of gold and then another island, you can see with your telescope from the plane it has cows on it. It has cows on it. It has I don’t know all this random fruit trees on it with these luscious fruits. You see I don’t know it has a big random pool and I can't draw oil because oil is black on our blackboard. It has a pool of oil that has big nice silica fresh water that’s away from the oil, so it doesn’t get contaminated and it has, and you can even see from your telescope that it has a bunch of hardworking innovative smart people on it. Who can, I don’t know do all sort of interesting things and you say and they have roads and they have horses. And they have all sorts of stuff. Which island would you ditch your plane on assuming that you’ll never be able to get back to you know civilization? Well what would the obvious answer is you’d rather ditch your plane on that island because that island has more wealth. And so when we went off of the gold center I know it seems like this big horrible thing in the whole scheme of the world and gold has become more a lot more expensive. It’s no longer $35.00 an ounce. Its; you know whatever, $700.00 or $800.00 an ounce now. So you might think all this had been on this inflation. It would have been great if were on the gold standard but think about what happened since 1971. Other than some of this excess credit that was given out maybe of the last 10 or 15 years, other than these bubbles, we’ve seen it tremendous amount of innovation and we haven’t seen hyperinflation, and that’s all in the world of, you can call a fiat currency. A currency that’s not backed by any kind of hard asset, it’s backed by people’s trust and the ability for the US economy to support debt to pay off the value of this currency. We’ll talk more about that in the future, I don’t know want to get too circular in my conversations but I'll see you in the next video. I just want to touch on that point that we are now off the gold standard.

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I think now might be a good time to address to another question. This probably circulating in your head and that is what happen to the gold? Remember when we started this reserve bank? All of these national banks or whatever we want to call them, they had gold as reserve. And at some point they said well you know why each holding gold are. Why don’t we just all concentrate our gold in one reserve bank and then that reserve bank can issue and it was the only person that could issue, it could issue bank notes that could be tradable into gold. And then we said we know overtime people just got used to the notion of using the bank notes themselves unless too thick, using the bank notes themselves as reserves. And that’s what the reserve ratios were all based on the bank notes itself. And we talked about that if the fed or the reserve bank wanted to increase some money supply, it could essentially just print new notes, print new notes and it would have all setting notes, outstanding liabilities. And it can could use those to perform open market transactions that it will essentially allows it to grow the monetary base with the economy or with the needs of different projects out there.

So that those projects happen and in that whole discussion, you might have noticed that this yellow stuff was just sitting here. It had nothing to do with the economy. It was just sitting there and if you really want it to force me to say what it was doing. Well it was giving a little bit of confidence behind what this thing was. It gives you a little bit of confidence because at first at least when we said you know it was backed by the gold. There's maybe a similar amount of gold as there was there. Maybe a little bit later, we said oh you know this could be exchanged for gold at some rate. Maybe I don’t know $35.00 per ounce. I think that’s would it was when we were last on the gold standard, $35.00 per ounce. But if you think about it, it’s a couple of weird things here. First of all almost from the get go when we did this, the whole purpose of having these flexible money supplies, so you can grow and contract money with the needs of the economy. And for the most part have notes outstanding because this was the fractional reserve system.

We would have note outstanding more than the actual amount of gold and this is been the case even when we were on the gold standard. You had more dollars than you actually had gold. We have to keep a little bit of gold there just so in case people wanted to call your buff. In case you know X percentage of people wanted their gold back, so they would come back to the central bank as their get us our gold. But the gold fundamentally it had no other function. It wasn’t in the economy. It wasn’t helping transactions happen. It wasn’t doing anything. It was just sitting in Fort Knox or wherever it happens to be sitting and to some degree it’s a more of a pain than any kind of real value because you have to keep up this notion that these things, these dollars bills could be translated into gold. It kind of force to reserve ratio requirement on the central bank itself and then it reserve ratio requirement, if you think about its kind of arbitrage depending on how much gold is found in the world.

In order to increase the money supply with the GDP because you know people are inventing computers and railroads and cars and highways are being built and we’re all becoming more efficient. In order to keep the money supply up with that extra economic activity, if we stay on the gold standard and if we want to keep kind of these ratios between the money and gold. We have to grow our gold with the economy and you know that’s kind of arbitrary. You know maybe we find a big bunch of gold and maybe we find no gold and that really should have no barring on our technological progress and how hard were working. It makes a lot sense, if you could imagine our world were all of a sudden you know when astroid made of gold lands, you know in the middle of the US. Does that all of a sudden you know because gold is less valuable, should that make the dollar less cheap or in another world where for whatever reason we can't find anymore gold. Should that all of a sudden decrease our ability to circulate money around? And it would have becomes, and I said it a three videos ago that these dollars bills aren’t just the liabilities or the obligations of the central bank.

They’re actually obligations of the US government. So let me ask you a question. Would you rather have something backed to buy gold or backed to buy the US government? And I know many of you, your gut reaction will say gold. The gold is real value. The US government what would they good for? There are bunch of crooks. They you know, they lie, cheat and steal. They you know, they misallocate wealth all of the time but think about it. Gold as we said before, gold really isn't wealth. It can be used to represent wealth only because it’s pretty. Only because at some period and it doesn’t corrode. At some period in the past some will say, oh I'm willing to plow your field if you give me that cool rock that you found. That’s the only gold valuable has. It can't do work. It can't be eaten. It doesn’t make us more motivated. It doesn’t make us happier. Its not real wealth, not real wealth. Now what about the US government, well it has the right the authority to tax and I know tax is our bad words, and I don’t like them myself. But it essentially, it can extract these rents from the US economy, tax US economy.

And US Economy, that’s real wealth. That’s labor, ideas, land, resources everything that make us ticks. Our labor, our goods and services, our ability to educate ourselves and innovate and come up with technology and become more productive that’s real wealth. So if you really think about it, I know I'm getting a little abstract here but I want to, I really want to hit this point home because a lot of people I think are still on the notion that somehow of something is somehow tradable for gold that it is of a sound or currency. While if its obligation of a government with the very dynamic economy but not gold or somehow backed by less wealth but I argue that this is actually a more profound amount of wealth. I mean we’ve had currencies in ancient history that were backed to by gold but in a lot of cases, you still have inflation when you know the Spanish currency in the 15th century was backed by gold but all of a sudden they discover that you know central America lot of gold and you had a ton of inflation and that gold really didn’t give any real wealth to the Spaniards at the time. It just made everything more expensive for them.

It did allow them to buy a little bit more from other countries but it really didn’t create any innovation or any; it didn’t really make their pie that bigger except they did steal some pie pieces from other parts of the world but well leave that aside from now. But this is real wealth, a currency backed by a whole nations ability to generate wealth in some ways is a lot more valuable but gold was a stepping stone and it was necessary because in order to get this whole thing started in order for people to really have trust in this currency and just the way people are trained to think. You had to originally sell them on gold right. So if you think about it gold and plenary rolls when in 1971 when Richard Nixon decides to go off of the gold standard. If and this is a big if, if you trust the governments ability to manage, to manage the money supply effectively that they’re not going to print so much money that we have hyperinflation or they’re not going to print so little money that we end up with you know a deflationary spiral. If you trust the government’s ability to do that it really doesn’t matter that we went off of the gold standard, and it really just kind of gets rid of a little nuisance. And if you actually look at the Federal Reserve’s balance sheet today, there’s still is some gold sitting on their balance sheet because you know its really not obvious what they need to do with this .So they just kept it.

Well anyway, we’ll talk a lot about this you know what is wealth and what isn't wealth in the future. One example I often tell people is if you were; let say you’re plane is going down, you know you’re the pilot of a plane and its going down. Its burning and you see two islands in the horizon. And you have to ditch your plane on one of those islands. So one of those islands, it has a big pile of gold on it, it has a big pile of gold and then another island, you can see with your telescope from the plane it has cows on it. It has cows on it. It has I don’t know all this random fruit trees on it with these luscious fruits. You see I don’t know it has a big random pool and I can't draw oil because oil is black on our blackboard. It has a pool of oil that has big nice silica fresh water that’s away from the oil, so it doesn’t get contaminated and it has, and you can even see from your telescope that it has a bunch of hardworking innovative smart people on it. Who can, I don’t know do all sort of interesting things and you say and they have roads and they have horses. And they have all sorts of stuff. Which island would you ditch your plane on assuming that you’ll never be able to get back to you know civilization?

Well what would the obvious answer is you’d rather ditch your plane on that island because that island has more wealth. And so when we went off of the gold center I know it seems like this big horrible thing in the whole scheme of the world and gold has become more a lot more expensive. It’s no longer $35.00 an ounce. Its; you know whatever, $700.00 or $800.00 an ounce now. So you might think all this had been on this inflation. It would have been great if were on the gold standard but think about what happened since 1971. Other than some of this excess credit that was given out maybe of the last 10 or 15 years, other than these bubbles, we’ve seen it tremendous amount of innovation and we haven’t seen hyperinflation, and that’s all in the world of, you can call a fiat currency. A currency that’s not backed by any kind of hard asset, it’s backed by people’s trust and the ability for the US economy to support debt to pay off the value of this currency. We’ll talk more about that in the future, I don’t know want to get too circular in my conversations but I'll see you in the next video. I just want to touch on that point that we are now off the gold standard.

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