Lear Capital: When Gold and Silver Owners Got Rich

 
on August 27 2013 8:06 AM

Los Angeles – (David M. Engstrom, August 26, 2013)  As I watch the parade of anti-gold experts go past my screen during my early day’s viewing, one expert drew my ire.  It was claimed that the existence of the gold standard, throughout history, has caused recession and depression.  So, I decided to give myself a history lesson to find out what he could possibly have been referring to.  Here’s what I came up with as one possible reference to his claim and an answer to my question:  Was it the Gold Standard that brought on recession or was it adherence to the Gold Standard that saved the economy?

 In 1832, President Andrew Jackson, vetoed a bill to renew the charter of the Second Bank of the United States.  He believed, because shares of the bank were owned in part by foreign interests, that too much of American citizens’ wealth was being sucked out of the country and into the economies or pocketbooks of foreign investors.  By 1836, this central bank charter expired and the bank ceased to exist.  America functioned without a central bank until 1913 with the creation of the Federal Reserve. 

To this point in history, it was the purpose of the First Bank of the United States and then the Second, to regulate the money supply and keep stable the amount of gold and silver reserves necessary to back paper assets.  Absent now, the presence of a central bank, large banks, primarily those in New York and “back east” were left with the power to affect monetary policy. 

By 1837, the “Panic of 1837” struck.  Recession set in and would last until 1845.  The increasing supply of silver from Mexico and China were blamed, at least in part, for the rapid decline in perceived silver value and the resultant hoarding of gold.  So short was the supply of gold that New York banks, now positioned with the power to affect monetary policy, suspended redemption of commercial paper in “specie” otherwise known as gold and silver.  You see, he who held the gold made the rule and because American citizens had begun to hold gold in favor of silver, the big banks found themselves at risk of losing all their gold should citizens now decide to convert holdings of commercial paper to “specie.”

 As commercial paper, such as a promissory note or bond, became worth less, liquidity dried up – credit dried up!  Banks who held commercial paper failed, businesses collapsed, unemployment rose as high as 25% and high wages, once fueled by the creation of credit, dropped.  The value of paper money, absent the backing of gold and silver, was falling.  He who held the gold made all the rules, and the big banks along with the most savvy of investors, were determined to hold all they could of what was left of the world gold supply. 

While some analysts today, blame the Panic of 1837 on the presence of the Gold Standard, saying it inhibited economic growth, others defend the standard claiming that in its absence, the power to create wealth via the uninhibited creation of paper assets, would have destroyed the economy and the country.  As it was, the limited supply of gold prevented a giant credit bubble from expanding, only to wreck even greater havoc when it finally burst.  In effect then, while painful at the time, the acts of large banks to discredit paper wealth served to reset the economy and put it back on a sustainable track of growth. 

Because the people could not be duped out of their own gold holdings and were able to hold gold and silver as an equal to the bank, the banks power to print more debt was constrained.  Imagine the depths of poverty experienced by those who did not own gold and silver when the banks made this Declaration of Financial Independence.  Then imagine the boost in wealth of those who continued to hold gold and silver as a store of wealth.        

In the period 1840 – 1845, a worldwide shortage of gold prevailed.  Recession was in full swing due to the banks’ Declaration of Financial Independence and the ensuing wipe out of paper wealth.  The recession was said to have ended in 1845 in spite of the growing gold shortage.  The economy had been reset to the gold and silver standard as the ability of banks to create wealth, via the printing of paper assets, was confined to the ability of gold and silver to back them in adequate fashion.

As a student of the history of gold and silver, my own observation of the events of the time, tell me the rest of the story.  While paper wealth was destroyed by banks, who one day blindsided the financial world and refused to redeem commercial paper in specie, a simultaneous boom in wealth took place.  In effect, for each dollar of paper wealth lost in the “Panic of 1837” another dollar of true wealth took its place.

 I liken it to one of nature’s greatest ironies.  The Monterey Pine Tree is only able to reproduce if first destroyed by fire.  When one tree burns a thousand pine cones burst to life and rejuvenate the forest.  While the pine tree was alive, the pine cones were a hidden store of wealth worth many times the value of just one tree. I call in the Monetary Pine. 

So it was in the eight years of recession that followed the “Panic of 1837.”  The gold and silver stores of those who would continue to honor the system of real money, blossomed into great wealth as the value of paper assets crashed and burned.  You see, in the Panic of 1837, wealth was not destroyed, it was transferred.  It was transferred from those who held printed paper wealth to those who held the hard assets that were intended to back the paper.

As those who held gold and silver began to realize their new-found fortunes, it was that wealth that began to disperse throughout the economy.  There wasn’t less money after the banks’ Declaration of Financial Independence – just less debt.  The money supply, (gold and silver being the money) remained constant. 

Today, our monetary system has deteriorated to a point where paper money backs paper debt.  Should this trend continue, it is only a matter of time before these paper assets suffer the same fate as did paper assets in the Panic of 1837.  If paper could not adequately back paper then, why is the belief so prevalent today that printing more and more money can somehow save the U.S. and world economies?  Is the dollar on pace to suffer the same loss of value?  Are Treasuries, now backed almost entirely by printed money, about to collapse?  I suspect time will tell what time has already proven.

If the history of gold and silver does not bore you, follow me @DaveTheGoldDr for more lessons and insights.  

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