(Dec 9, 2012)

“Gold is money. Everything else is credit” – JP Morgan, testifying before Congress, 1912 

The world’s most powerful banker understood that gold sits at the bottom of the inverted “liquidity pyramid”. The graphic below (courtesy of Demonocracy) shows multiple stacks of $100 bills totaling some one-quadrillion dollars, representing the notional value of what lies in the top portion of this pyramid: over-the-counter derivatives held by the world’s nine largest banks. Bear in mind that this represents just one-fifth of the world’s derivative market. 

As we discovered with the Long Term Capital Management implosion in 1998 and the Bear Stearns, AIG and WaMu failures a decade later, no bank or insurer can withstand the chain reaction of margin calls that occur when the unexpected happens in markets on which these derivative contracts are based. No government – least of all the US one – has the funds to bailout the system. This means in the event of another banking crisis, they will rely on central banks to print more imaginary money, that is – to quote Gerald Celente – “not worth the paper it is not printed on.”

The ensuing debate about the nature of money will renew people’s interest in gold’s use as money. Many will not be able to afford gold, and will instead look to silver as an alternate. But is silver also “money”?

“Silver was the primary commercial money for most of the world’s people from earliest recorded history until the past century.” – David Morgan

In order to understand the demonetization of silver and later gold, one needs to explore the events in America of the period 1890-1913, which were dominated by Morgan, Rockefeller, Kuhn and Loeb interests. They wished to be able to charge interest on an exponentially increasing monetary supply – for obvious reasons.

During this time they went about setting the agenda for switching to a paper based monetary system by appealing to and bribing opinion leaders in politics, business and academia. Bound together by common interest, the elite went on to cheat the public. First they dealt with silver in the USA with the Gold Act of 1900. Then they joined their British and European counterparts to create the Commission for International Exchange, to convince the Third World that silver was not money, and that they should instead accept paper money backed by imaginary gold instead.

This heist was a particularly impressive achievement given that the word for money in Spanish, French, Burmese and a few Indian languages is silver. Indeed, the Mandarin Chinese word for bank is “silver house”.

Then with silver out of the picture, their attention turned to gold. The establishment of the Federal Reserve in 1913 was the beginning of the end for gold’s use as currency. Soon, politicians realized the opportunity for a much-expanded state without the inconvenience of having to raise the necessary revenue via unpopular taxation. Their intellectual pin up boy was John Maynard Keynes. When asked about the inevitable collapse that would result from ever increasing deficit spending in the long run, he famously replied:

“In the long run, we are all dead.”

While that might have provided some comfort to the political and financial elites of the 1930s, the unpalatable truth for the current generation of politicians is that this is the long run.

In times of comfort, people are easily convinced by those in positions of authority. However, no amount of political summits, financial announcements or academic essays using bizarre mathematical formulas to demonstrate that inflation is in fact good for you were able to gain any traction among a desperate crowd in St Petersburg in the bitter winter of 1917 during a food riot. Nor will these elites have any luck with these obviously nonsensical arguments in the chaos of a New York heat wave in the scorching summer during an oil shock in 2017.

We have already witnessed the Arab Spring, Occupy Wall Street Protests, the London Riots and the general break down of law and order in Southern Europe. People no longer feel the need to accept the wisdom of the established elite. If they do not accept the promises of those in governmental power then this de facto means a rejection of government paper money, as it is a governmental paper promise by definition. Neither will banks be able to set the agenda. When governments and central banks are no longer able to decide for the people whether or not gold is money, they will also no longer be in a position to convince the markets that silver is not money.

Given that the following fact is underwritten by 4,000 years of human history, we can state it with some confidence:

Gold is money, but silver is money too.”

Despite now being five-times rarer than gold in terms of investment grade silver, it is unbelievably around one-50th of the price of gold. For a sense of perspective, the Historical Mint Ratio of the Bank of England was 16:1 and Alexander the Great set the ratio at natural occurrence rate of 10:1. As the global debate concerning the question of “what is money?” accelerates, many of the facts included in this essay will become the general knowledge that they used to be.

James Cox

James Cox

Chief Executive Officer at Taipan Trading & Investments Pte Ltd

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