Right now, I am reading a fascinating book, Gold Wars, by Ferdinand Lips.  Mr. Lips is a former Rothschild banker in Switzerland who describes, in easy terms, the history of gold and its new relationship with the floating currency regime we are enduring these days.  I still haven’t finished the book, yet, but as I read it, I go to the computer to look up stuff at the Federal Reserve archives and today, looking into the Bretton Woods I period in 1948, I found an interesting memo from the Fed to the Treasury.  

First, some news from last night:


The Gold Rush: Don’t Get Burned – BusinessWeek

If you had any doubt that the prime motivation for investors has shifted from greed to fear, look at the price of gold. The spot price for the yellow metal reached $992.43 an ounce on Feb. 20, its highest level since hitting $1,002.70 on Mar. 17, 2008, the day that Bear Stearns collapsed. The spot price has climbed more than 39% from a near-term low of $712.30 on Nov. 12, 2008.  

Demand for physical gold has exploded as the deepening financial crisis and ongoing slide in stock prices has pushed nervous investors into safe-haven investments. But new investors need to be careful about who they buy from, since inexperienced people seeking to take advantage of opportunities in the market are opening coin dealerships without being aware of the financial risks or legal compliance issues involved….

During the fourth quarter of 2008, U.S. consumer demand for gold coins and bars jumped to nearly five times the amount from a year earlier, to 34.8 metric tons, according to the World Gold Council. Between Sept. 15 and early December, Blanchard sold more gold than it had in the prior three years, despite the Mint’s 45-day suspension of sales of one-ounce American gold eagle coins after the collapse of Lehman Brothers. Blanchard had to sell “whatever product we could get our hands on”—Canadian maples or South African krugerrands—until supply of American eagles resumed, says Beahm. “At that particular time, nobody really cared what they had as long as they had gold.”

To keep the premium they pay over the spot price to a minimum, Meger at Alaron recommends investors buy from one of the four authorized distributors that buy directly from the U.S. Mint. The Mint charges premiums of 3% on one-ounce gold coins, 5% on half-ounce coins, and 7% on quarter-ounce coins when it sells to authorized purchasers, which in turn mark up prices to dealers and individual investors. While Alaron can’t buy directly from the Mint, it benefits from having a partnership with a firm that is an authorized purchaser.

OK: there is a lot of debate about ‘what is gold?’  Ever since Nixon and Burns cut the golden thread tying our currency to Fort Knox, there has been an army of economics professors and government officials using ever trick in the book to convince everyone, gold isn’t connected to any currencies and therefore, was not ‘valuable’.  True, they did succeed to turn gold from the basis and foundation of our currency into a commodity.  


What makes me and anyone suspicious is, the US still has Fort Knox and still hoards more gold than virtually anyone on earth, while telling us, it isn’t worth all that much.  Eh?  On top of this, the Treasury still gets to mint coins!  The Fed makes our IOU paper dollars.  The Treasury makes coins.


Now, we can buy coins from the Treasury. But does the Treasury let us buy a $5 gold coin with $5 of paper money?  No!  Of course not!  No, the mint stamps gold coin with false information and then tells us, we must pay a commodity price PLUS the costs of minting the coins….and can’t use it as money but must sell it as jewelry, etc!  This is a way of debasing the entire concept of ‘money’ so we view coins as collector’s items and not ‘money’ to be used for trade or business.


This way, the government can still control gold markets and profit no matter what price gold is at.  If it is expensive or cheap, the profits are the point, not the value of the metal vis a vis paper money issued by the privately-owned Federal Reserve. Exclusive

Traders are starting to use the speculative contracts blamed for fueling Wall Street’s meltdown last year to measure currency strength as countries increase debt sales after pledging at least $2.4 trillion to kick-start their economies. Interest rates are becoming less useful for predicting foreign exchange as central banks slash borrowing costs to zero, narrowing differences between government debt yields.

“The credit-default swap market has taken a lot of bad press,” said Andrea Cicione, a credit strategist in London at BNP Paribas SA, in a Feb. 20 telephone interview. “The traders and the investors who have been involved in the CDS market understand that it’s operating just fine and there’s no need to throw it down a hole.”

Originally conceived to protect against corporate defaults, credit-default swaps are now being used to predict the direction of everything from the Canadian to New Zealand dollars. The swaps pay buyers the face value of a bond in exchange for the underlying securities or the cash equivalent if borrowers fail to adhere to debt agreements. Prices of the contracts, increasingly used to speculate on government bonds, rise as the perception of an issuer’s ability to pay decreases.

Since January, the correlation between the yen and the cost of protecting against a default on Japanese government bonds swung to negative 43 percent, showing investor concerns are increasing. The yen and cost of credit-default swaps moved in tandem 88 percent of the time last year.

This story totally distresses me!  Now, the entire existence of the Derivatives Beast is to give us relative monetary value of various currencies????  This is the laughable and destructive end of the concept of a ‘floating currency’.  This floating currency is more like when we use the toilet and sh*t floats.


As everything spins out of control, the irregularities, instabilities, lack of connection, lack of any secure MEASURE to judge relative value means con men can make great wealth, placing bets on vaporous movements of various currencies vis a vis each other, across the entire planet.  This is extremely explosive.  Instead of directing attention and profit-energy towards useful things, people rush to exploit the inefficiencies, errors and weaknesses of a USELESS system of money trading.


As all currencies either shoot downwards due to a collapse of whole economies [and people dying because of this!] or shoot upwards because the currencies that will be strong will most likely be only one: the US $.  Not due to the US being strong but rather, the shark attacks killing our sovereign wealth are not done with us, not yet.  One of the biggest sharks is Japan and the other is China.  And lo and behold, the memorandum I found at the Fed is all about gold and China!  


I feel it is important to read these things very, very carefully.  I will post in red, my comments after the paragraphs.  There is a lot of astonishing things here we must understand if we want to understand history:





TO : Mr* Martin / \ DATE: March 18, 1949 

FROM : G.A. Eddy 

SUBJECT: Gold Sale to China 

I understand that Mr Walton Butterworth has telephoned you requesting the
Treasury to reconsider its willingness to sell the requested $3.5 million of
gold to China and that he gave as his reason that it was analogous to the Greek
case. Furthermore, for various reasons, Messrs Stuart, Arnold,  and
McNeill also now oppose the sale.  OFD of the State Department either favors it
or has no objection and believes it a Treasury question.


This astonishing memo opens with bureaucrats passing responsibility from one to the other.  Somehow, this mess ended up on the desk of the Federal Reserve.  A question arises: who owns the gold in Fort Knox?  This is a messy question which is never adequately answered.  Just like the riddle about what gold is…TO THE US GOVERNMENT…is open to much debate.  Back in 1949, the confiscation of gold by Roosevelt still stung sharply.  This entire memo isn’t just about sending gold to China but how to massage all of this so there is no legal uproar in the US.  


As we read this memo, it becomes increasingly clear, the US operates a double standard when it comes to possession and sale of gold bars and coins.  First, a headline from the previous year which clarifies a bit, what this memo is about:

1948: New Gold Yuan : International Herald Tribune

SHANGHAI — China launched a new economic era in which it will once more be possible to carry money in wallets instead of suitcases. Long lines formed at China’s banks as they reopened. Order is gradually being restored from the confusion caused by the announcement of the new reform. It was the announcement that the fapi, which was supported only by the cost of paper and ink, was to be replaced by the gold yuan, supported by all the government’s holdings, enterprises and foreign exchange.


I definitely favor the sale. If the principles which seem to be implied
in a rejection of this Chinese request were allowed to prevail, Treasury gold
policy would, in my opinion, be gravely and foolishly impaired. It would also
be a violent break from the policy which has been followed under the Gold Reserve
Act of 1934 and been followed by every other country for centuries.  Still further,
refusing this request under present circumstances would be an ineffective, futile


Note that the author of this memo is very concerned about OTHER COUNTRIES following the gold standard for ‘centuries’.  This is a theme throughout this memo.  Below is a segment from a book about the finances of the Kuomintang :

The Strange Connection: U.S … – Google Book Search


The money illustrating this story is the gold-issue paper put out in 1948.  Note that it is a gold certificate but unlike the old US gold certificates, it actually says, ‘Ten CUSTOMS Gold Units.’ This is a meaningless contract.  It doesn’t define what a unit is, for example.  And I guess, ‘customs’ refers to foreign gold -valued dollars.  Namely, you get US dollars and if you have connections, you can take it to a banker in Hong Kong and use it to buy US gold from Fort Knox.


The trick here is simple: the Chinese people could NOT turn this in for US gold!  ONLY CHIANG KAI -SHEK and his buddies could do this.


General Stillwell, during WWII, complained bitterly about how the Chinese leaders were more interested in playing currency games with US dollar aid, trying to hoard gold rather than fight anyone.  Kuomintang

Full-scale civil war between the Communists and KMT resumed after the defeat of Japan. The Communist armies, previously a minor faction, grew rapidly in influence and power due to several errors on the KMT’s part: first, the KMT reduced troop levels precipitously after the Japanese surrender, leaving large numbers of able-bodied, trained fighting men who became unemployed and disgruntled with the KMT as prime recruits for the Communists. Second, the KMT government proved thoroughly unable to manage the economy, allowing hyperinflation to result. Among the most despised and ineffective efforts it undertook to contain inflation was the conversion to the gold standard for the national treasury and the Gold Standard Script (traditional Chinese金圓券pinyin: jīn yuán quàn) in August 1948, outlawing private ownership of gold, silver, and foreign exchange, collecting all such precious metals and foreign exchange from the people and issuing the Gold Standard Script in exchange. The new script became worthless in only ten months and greatly reinforced the nationwide perception of KMT as a corrupt or at best inept entity. 

The financial failure of the Koumintang led to their defeat by Mao’s forces.  The McCarthy hearings were all about ‘who lost China’ and the blame was placed all over the map except where it belonged: in General Chiang Kai-shek’s lap.  Note that he imitated the US government in outlawing private ownership of gold, silver AND US $.  This sort of control was being exercised by all nations in the wake of the Great Depression global banking failures and then, WWII.


 ScienceDirect – China Economic Review : Exporting hyperinflation: The long arm of Chiang Kai-shek

As mainland China’s inflationary spiral accelerated in 1947–1949 there was a massive outflow of funds to the island of Taiwan. The exporting of China’s hyperinflation was augmented by the fixed, overvalued, exchange rate for the mainland Chinese currency against the Taiwanese currency that was adopted in August 1948. Empirical tests offer support for the importance of the 1948 monetary policy reform and suggest a substantial role for capital inflows and excess money growth in mainland China in accounting for Taiwan’s own hyperinflation. We find no independent role for Taiwanese money growth in the inflation process.

One last item here:  In January, 1949, the last major city held by the Nationalists fell to Mao’s forces.  The People’s Republic of China, which is the modern China today, was founded in October of 1949.

A cable from Bern last week reported that President Keller of the Swiss
National Bank, in addressing the general meeting of the bank, said that it is
of the utmost importance that the United States dollar, which is the universal
currency at the present time, should remain stable in relation to gold.


‘UTMOST importance’!  Why is this?  Of course, it is the business of being ‘stable’ that is important.  This concept is lost today from what I can see.  Back then, everyone understood that stability rest not on interest rates of the LIBOR system, it was all about relative value, not balancing INTERNATIONAL trade and financial obligations and loans!  

The economic predominance of the United States and its preeminence in gold holdings,
he continued, impose upon this country an international responsibility which
it has not hitherto had. He went on to elaborate the importance of the stability
of the dollar and the price of gold as a prerequisite for monetary adjustments
throughout the world.


Britain fell apart and no longer was the fulcrum for global gold exchange values.  The US was now in this position and frankly, the fear, confusion and lack of understanding how we were going to run the global gold markets, is very obvious in all the letters, memos and speeches from 1930-1974.  We finally dealt with this burden by tossing it off, like naughty children tired of tending to their chores.

The delay of over two weeks in acting on this Chinese request is regrettable,
and both continuation of the delay and, worse, rejection of the request may well
be grounds for doubt about the convertibility of dollars into gold at the request
of a great many countries.

The standard policy of the Treasury since 1934 in selling monetary gold has
been to sell gold bars to foreign governments and central banks who offered
dollars without any regard to whether or not they were selling gold in their
domestic markets either at premium or parity prices.


Basically, it was illegal to sell gold which came via US people, to the people.  But it was OK to sell it to foreign powers who could then redistribute this same gold, gotten with US dollars from gold miners or on international markets or via trade or war borrowings, etc, and especially, via confiscation of US gold holders…this gold could be resold but only to aliens, not here.  

There have been scores and scores and probably hundreds and hundreds of such sales since 1934, totalling over a billion dollars and extending right down to the present. There is only
one case of rejection of such a sale so far as the Treasury staff now recalls
and that incident was highly informal, confused, complicated by several extraneous
factors, and decided in a hit-or-miss way.


Neither the fact that the United States is giving some dollar aid to a
country ( which in the case of China is approaching the vanishing point at the
moment) nor the fact that a country may be selling some gold in the domestic open
market, even at premium prices, nor a combination of both of these conditions is,
in my opinion, proper or sufficient grounds for making dollars in the hands of
those countries inconvertible into gold at the United States Treasury.


Isn’t that rich?  China was ‘vanishing’ when this memo was written.  It was going communist, rapidly.  Despite this, the government of Nationalist China could convert dollars into gold while US citizens were denied this right.  Even as the incompetent and corrupt Koumintang were sucking down gold, the US was fretting about how to balance things so we could have a functional currency.  It just amazes me to see the US officials discussing how to move gold to various people ‘to stop communism’ even though the confiscation of gold in the US proper, was ‘communistic.’

Mr. Butterworth has mentioned an analogy to Greece. I am not informed on how
closely he argued there was a parallel. In any case, for reasons stated below that
analogy seems false. There are a number of important differences between the Greek
case and the Chinese. Far worse than that, however, is the apparent corollary that
if China is refused the right to exchange dollars for gold, so should a great many
of the other countries of the world. Among the countries which seem to parallel
Greece and China in one way or another are all ERP countries and perhaps a good many
in Latin America, notably Mexico, Chile, Brazil, etc., which are receiving or
applying for dollar loans. If the suggestion of Messrs. Butterworth, Stuart, Arnold,
and McNeill is adopted and that position is then applied consistently to other
countries, it would seem to involve a drastic narrowing of Treasury gold selling
policy and making the dollar inconvertible into gold in the U. S. for most of the
leading countries.

Leverage at work!  These nations knew the US was now exceedingly paranoid due to the Soviet Union’s great military power, Mao’s revolution and the forces of communist take-overs had us in a panic.  So US officials thought, ‘Why not BUY the loyalty of other leaders and use gold to buy them as if they are mercenaries?’  And so the money had to be turned into gold or the mercenary war lords and popular leaders would go running off to the Soviet bloc for political power and support.

Sales of monetary gold bars for dollars to central banks or governments is and
should be both virtually automatic and also administered by the Treasury. Monetary
gold sales should not be political favors requiring negotiation with State Depart-
ment political desk personnel, particularly with respect to the general monetary
principles involved.


HAHAHA.  Circumventing the State Department!  I couldn’t find out who Mr. Eddy, the author of this memo, is.  I hope someone can find out!  The Federal Reserve shows its ability to jump over the State Department and get the Treasury to do something.  It all depends on who the political appointee to the Treasury is…and if the bankers want to stir up trouble or cooperate.

The established precedent is all in favor of selling the gold


Prior to 1933 there was of course no conception of not selling gold to foreign
countries if they were selling gold to the public. Similarly, in the years 1934-46
the Treasury sold gold without any thought of whether the buying country was selling
gold in its domestic market. In the period from 1934 to 1939 most of the countries
to which the Treasury sold gold were selling gold to their public. In fact many of
the Treasury sales in those years were directly to private buyers abroad. It would
have been regarded as a serious interference with other countries’ sovereignty,
discretion and responsibility for the U. S. to have taken the position that any
country which sold gold to the public would not be allowed to buy gold from the U.S.


In the 1930’s, if the US openly allowed and enabled foreigners to raid Fort Knox while treating US citizens as aliens who were not in charge of it, there would have been serious political consequences.  But thanks to the new Cold War that was developing, the government hoped to appeal to fears of commies to use Fort Knox as a mercenary pay center.  


The obvious question here is, why is the US so careful about ‘sovereignty’ when we had none here at home?  Of course, the memo writer couldn’t talk openly about that.  On top of this, I can’t remember any time during the Cold War and today where the US has troubled itself about ‘sovereignty’ when it wants to meddle in some country’s affairs!

It would also have vitiated the main purpose of our buying and selling gold, namely,
to hold the dollar to parity in terms of the par values of other currencies or in
the case of countries with floating exchange rates, hold the dollar up to the float-
ing value of gold in the foreign currencies. There were and are enough countries
and enough people in the world which have entirely different problems regarding gold
and paper money to make it vital to any satisfactory gold policy for the U. S. not to
try to interfere with those countries’ buying gold.


This is so weird: there was never a ‘golden age’ when currencies of all trade nations were stable.  But there were periods when the primary empire with the greatest fleets, greatest political and industrial power, had a balanced currency vis a vis gold.  As the locus of stability, all other trade circled the strong currency based on gold.  


Currency traders could play games on the fringes and in between the cracks like they do today. But with one big difference: there was a stable center point where there was little to no flux at all.

Last year the OEEC recommended that 3 billion dollars worth of gold be fur-
nished to member countries to start reconstituting their monetary systems. Whether
or not the United States complies with that recommendation is an intricate and
delicate matter for U. S. Foreign Aid and Monetary policy to determine. But for us
to go to the opposite extreme and say that if a country is receiving dollar aid or
is selling gold to the public then they will get no gold from us, would, I believe,
be an irresponsible and doctrinaire mistake.


It is increasingly obvious, there was considerable debate about beggaring the US gold supplies so private individuals in Taiwan or Greece, not to mention France or Brazil, could buy and hoard gold coins and bars.  The OEEC wanted to hand out hard gold for paper IOUs from nations with very poor records of repayment.  This is the old business of savers handing over real goods to dead beats in the hopes the dead beats will finally live within their means and pay back the loans, with interest.

The Treasury rightly has had no compunction against selling gold to Switzerland
or Mexico during the war and postwar years when they were freely selling gold to the
public. Mexico still is and Switzerland has only recently stopped for special reasons.


I would love to know the ‘special reasons’ why Switzerland stopped.  Switzerland is very much in the news right now because the US is desperate and is now pressuring Switzerland about helping tax evaders.


During the war the U.S. abetted Chinese gold sales dinning tho WOP even to the extent
of ferrying gold over the Hump at enormous cost. More than half of the earnings of
the Stabilization Fund arose from war-time sales of gold in India and the Middle
East directly to the public at high premiums, and assisted the British Government
in their part of the joint program. As a matter of interest though not as proof,
it may be noted that a letter written in 1944 by Ray Mikesell and initialled by
E.M. Bernstein, Harry White, Harold Glasser and Bill Heffelfinger states, for
example, “Moreover, these gold sales have been beneficial to (Iran) in helping to
combat inflation.


Why does this memo quote such obvious lies?  The gold demanded by the Chinese Nationalist warlord was for himself. The US hoped he would use it to fight the Japanese.  Instead, it was used to bribe other warlords.  Every ounce was a total waste and this is why General Stillwell was so furious.  And why Roosevelt removed the General and forbade him to talk to the press, in 1944.

The purpose here is not to argue in favor of public gold sales as a device
against inflation. Much less is it an advocacy of the United States lending or
giving the gold to permit such sales. This paper is entirely non-committal on
those two points. The only contention here is that in the selfish interests of
the United States and in consideration for the rights and responsibilities of other
countries and for the U.S. role regarding gold policy, the Treasury should not refuse
to sell gold to a country offering dollars for gold, if our ohly grounds for doing so
is that they are selling gold to their domestic market.


Here, the memo hammers more openly on the topic of the Treasury not interfering with gold flowing out of the public possession and into private FOREIGN hands.  This reminds us that the Federal Reserve banks are partially owned and controlled by foreigners.  Also, the utter failure of all that gold carried, with great trouble [and in lieu of much-needed medical equipment and weapons!] to the Koumintang, the failure to stop inflation is obvious.  It didn’t even work, slightly!

U.S. foreign aid policy should certainly consider how far it should go in financing or tolerating public gold sales by Governments receiving aid.  The writer happens to believe that the recent
Treasury arguments against all such sales is in some cases superficial and short-
sighted. But the point being urged here is that Treasury gold policy should not make
the convertibility of dollars into gold a thoroughly doubtful matter dependent on
uncertain administrative discretion.


The differences between the Greek and Chinese cases

1. Whereas the United States Government is doing everything in its power to
control Greek finances and to get the Greek Government to follow U. S. advice in all
financial policies, in China the State Department policy for at least several years
has been uniformly to avoid assuming any responsibility for Chinese financial
policies. If we refuse to sell this gold for any reason, the Chinese would rightly
ask us what we want thea to do instead and expect us to be responsible for the
success or failure of our alternative program.

2. No request from Greece to buy gold has been refused as yet. There are some
people who have limited responsibility for Greek affairs and who are comfortably
living 6,000 miles away who speak with scorn of the gold selling program there, des-
pite the fact that every American economist who has worked there for any length of
time in the last two years, plus a majority of the foreign economists, in Greece,
believes it to be unavoiaable. If it can be avoided under present conditions in
Greece with any semblance of preventing inflation, it will be because of the huge
import program financed by the U. S., because the U.S. is financing a large part of
their military program, and because the U.S. Mission there really takes over the management of Greek finances. The first two conditions are not now true of China to a remotely comparable degree, and the third has already been cited above as being a sharp distinction*


3. Greece buys gold from us only in the form of sovereigns exclusively for
sale to the public, and could not get sovereigns at the $35 price for gold from any other source, so far as we know, China, on the other hand, is asking only to buy standard gold bars. This is what we stand ready to sell to every government and central bank” for legitimate monetary purposes”. We have specifically not declined to sell gold to a country merely because it is releasing some gold to its internal market. In this case, the Chinese Central Bank has said that the gold will not be exported at premium prices. This is not a hollow statement, because the flow of gold is inward to China and not outward from it.


Culturally, China is like Switzerland or France were like before this last decade: they prefer it if gold and silver flows in and NOT out.  The Federal Reserve’s richest bank sector, the Bank of New York, does this, too.  It holds a huge hoard of gold, for free, so long as it is controlled by the bank in Manhattan, NY.  


4. Our refusing to sell this gold to China for dollars may accomplish little
or nothing other than to create a small nuisance. China, if it wanted to, could
sell the dollars in its domestic market and thereby dissipate foreign exchange for
domestic purposes just as fast as by sales of gold to the domestic market. Moreover,
China could buy gold bars at $35 per ounce from many other sources. Accordingly,
our refusal to sell China this gold for dollars would probably not prevent the
Chinese from carrying out any operation which they choose.


This is an outright lie.  The Koumintang no longer had ‘China.’  They were now a rump semi-nation.  They pretended they were the legitimate government of China and this fight was finally put to rest when China was finally recognized by the US thanks to Nixon needing to be bailed out of the Vietnam mess.  Certainly, the market for gold in exchange for Chinese paper was non-existent in 1949.  Only if the US gave the Nationalist party cash, could they buy gold and only in the US itself.  Obviously.
5. Whereas the U.S. Treasury’s sale of British sovereign coins to Greece
beginning in December 1947 was unprecedented, the Chinese representative has made it
quite clear that they know that the United states sells gold virtually automatically
in regular transactions between central banks and governments. There has in fact
been no refusal for a good many years, with the exception of a tentative feeler from
China two years ago during a time of extensive U.S. aid and when they were
systematically selling gold at a specific premium in what may have been then an
illegal market.


Arguments in the Stuart-Arnold Memorandum:

1. The Premium Price

The spokesman for the Legal Division on gold and Fund matters was in favor of
the sale to China and helped persuade me to favor it until he learned that the
Central Bank of China had amplified its original cabled request for gold “with a
view to replenishing our reserve in gold.” The amplification consisted of a cable
to a Chinese official confirming that the Bank sometimes intervened in the now free
and legal market, where gold of course sells above a crossrate $35 per ounce.
Even though we had had previous reports that the Chinese were doing this, this
legal opinion apparently was reversed when the Chinese told us something more
specific along those lines than the phrase that the gold was to replenish their


This entire memo assumes, there is some sort of ‘central bank’ as the Nationalists were now in full retreat.  
I believe U.S. Treasury gold policy is going to be in continual danger of
cutting its own throat and permanently injuring the world-wide conception of the
relationship between dollars and gold until the economic policy-makers of the
Treasury assert that a country’s selling gold internally at “premium prices” is
not an act of such iniquity that the U.S. Treasury should commit the far more
important violation of basic gold-policy principles of denying convertibility
into gold bars of dollars held by those foreign governments and central banks.


The above paragraph is infuriating.  We didn’t strengthen the dollar’s ability to play the role of stable point, by giving our gold to the unstable, in fast retreat, Koumintang!  This weakened the dollar, not strengthened it!  If the armies we were supporting with this gold were winning, this would strengthen the dollar.

The International Monetary Fund itself has issued no policy statement of
any kind which would even suggest that the United States should refuse to sell gold to China under these circumstances, and it is my confident expectation that if the Fund Staff or even the Board of Directors were asked whether the United States should turn down this request, they would say there was no Monetary Fund reason for the rejection and a general Fund presumption in favor of it.


The contention of the Legal Division spokesman and this memorandum from
Messrs Stuart and Arnold extends a Monetary Fund dogma into entirely new
territory.  The Fund’s 1947 statement on premium gold transactions does not
touch upon this gold transaction or what China itself proposes to do with its
gold. The Fund statement reads, “For these reasons, the Fund strongly deprecates
international transactions in gold at premium prices and recommends that all of
its members take effective action to prevent such transactions in gold with other
countries or with the nationals of other countries”.

HAHAHA.  After they got rid of General Stillwell, they wanted only stooges and got them, stooges who let the Nationalists loot US aid.  Many, many dictators have done this, it is quite common.  So common, I suppose, there is a school, ‘PhD degree programs for looting US Treasury wealth.’  

The Fund has not overlooked
the problems arising in connection with domestic transactions in gold at prices
above parity.  The conclusion was reached that the Fund would not object at
this time to such transactions unless they have the effect of establishing new
rates of exchange or undermining existing rates of other members, or unless they
result in a significant weakening of the international financial position of a
member which might affect its utilization of the Fund’s resources.”

In this case, the international transaction will occur at the U.S. parity
price.  The proposed intervention in the Chinese domestic market is excluded
from the Fund’s objections. Furthermore, since China has not certified a parity
rate to the Fund, the Fund does not consider that its transactions in gold
domestically are above parity. There is no chance of China’s utilizing the
Fund’s resources so long as it has not certified a parity.

Although I hesitate to try to prove anything by the Articles of Agreement,
I feel sure that the general implication of the Articles is all in favor of
the United States selling gold to China for dollars at the parity price. Surely
the general purport of the agreement is that members should sell gold to
each other at the parity price. Secondly, the only way by which the United
States qualifies as fulfilling the undertaking of Article IV, Section 4b to
maintain exchange transactions within the prescribed margins, is by our readi-
ness to “in fact freely buy and sell gold within the limits prescribed by the
Fund.” There is certainly no hint that we should not freely sell gold if a
country is selling gold domestically for its own currency at premium prices.


Thirdly, according to the terras of Article VIII, Section 4, it
would appear that the United under obligation to settle this
Chinese dollar holding either in gold or by tendering Chinese money.


Now, the memo tries to show that the government had to hand over the gold, or else.  When the US became a global empire, the systems were all reset so they faced outwards, not inwards.  This is quite obvious throughout this memo.  ‘If only we can give all these dictators gold, they will join us in fighting communism!’ was the thinking and frankly, still is.  Only, it is Muslim radicals we now fear.  In all cases, this ends up draining our Treasury and destroying our own economy, as we play these games.

The only way that we could refuse to buy back the Chinese holdings of
dollars under that Article, so far as I can see, would be for the United
States to declare that it is not permitting transactions involving
capital exports to be made and that the Chinese holdings of dollars are
the product of capital transactions. We could not prove that the dollars
were the result of capital transactions in the first place and, in the
second place, it would be a prohibited form of discrimination to say that
capital transfers to China were not being settled currently, whereas
everybody knows we have no reason to refuse settlement of capital trans-
actions to any other country.
In summary of this point, I believe that the Legal Division has
taken a false interpretation of the Monetary Fund doctrine against
international gold sales at premium prices, and that the Legal Division
has even misapplied its misinterpretation. The Fund would say that
it was more important for us to sell gold at the parity price than to
try to police its policy against premium gold sales by refusing to sell
gold at the parity price, and the Fund would say actually that the pro-
posed Chinese transactions are not in violation of the Fundfs international
premium price policy.
As a matter of fact the Chinese authorities might easily be per-
suaded to sell gold at $35 an ounce for dollars, if that will satisfy
the United States. It would be a mistake to do so in my opinion, but
it would be interesting to learn the Chinese response if this “premium
price11 argument is given weight in a Treasury rejection of the request.


First, there was no way in hell the Koumintang were going to let go of this privatized gold that came via US military aid, nor would they hand back the gold and accept dollars.  Obviously!  They could see how easy it was to debase the yuan!  They were doing it at a record pace!  But gold held its power.  


I have read many memos and speeches by the Federal Reserve from WWII until modern times.  And a common note I hear is one of pure panic as they struggle to deal with bleeding: gold is bleeding out of the country, trade finances are out of whack, and above all, consistently, there is worry about inflation, never deflation.  Even as property or stocks deflate, inflation rages in all other areas, insidiously.  When this memo was written, already, the dollar was losing value via gold.  This is why the memo mentions the Chinese selling gold for more than they buy it here in the US.


Gold wasn’t changing its price, the dollar was changing.  And the US government, to hide inflation, encouraged the Federal Reserve to continue pretending the dollar’s relation with gold was the same as in 1934. But it obviously wasn’t.


2. The position of the Chinese Central Bank

The Stuart-Arnold memo then indicates a second line of defense:
There is something “inexplicable” about the Chinese desire to buy this
amount of gold when they nominally have much larger holdings of gold
(3.95 to 6 million ounces as against 100,000 ounces requested for pur-
chase in this transaction). The purpose of referring the transaction
to the political desk of the State Department at all was to give the
opportunity to the political officers to assert that the applying bank
was no longer recognized by the United States as an official central
bank of a recognized government.  This the political desk did not say
and in all probability will not say, since the United States still re-
cognizes both the National Government and the Central Bank of China
as the Government’s central bank, instead, the political desk replied
with an economic principle which is outside its jurisdiction, subject
to serious dispute on both economic and factual grounds, and an improper
intrusion into Treasury gold policy.


Yes, the ‘central bank’ was now in the hands of Mao, not the Nationalists.  And the Nationalists took care to run off with China’s gold.  The US, to keep China in check, supported all of this, for years and years.  Like most of our alliances, we were very anxious to expand Taiwan’s industrial base and banking even though our own was going straight to hell.  This warped thinking is not only continuing, it is worse than ever.
The suggestion that something is awry with the Central Bank of
China would be a valid reason for rejecting this request to purchase gold mainly if the State Department wishes to reject the right of the Central Bank of China to carry on any transaction with the United States.


In that case, the receipt of dollars from the Central Bank is as much
an offense as selling gold to it, since the receiver cf the dollars
would lay himself open to suit for having accepted assets which the
payer had no right to transfer. Until the State Department political
desk wishes to assert this position formally, they should not be given
a dominant vote in this Treasury matter.


HAHAHA.  More infighting.  Seems, the Fed doesn’t like the State Department, eh?  


3.  Gold sales as a stabilization measure

The Stuart-Arnold memorandum then mentions a third line of defense:
namely, that the present geld sales program is “unavailing as a price
stabilization measure.” The contention of this paper is that that is
not an adequate reason to upset the basic convertibility of dollars
into gold. The writer has doubts about the accuracy of the assertion
that the gold sales program is as unavailing as Messrs. Stuart and
Arnold assert. The evidence cited, of a large increase in prices, is
irrelevant to the Chinese contention that market intervention keeps
things from going bad faster than they now are going. But it seems
necessary not to let this gold sale argument be diverted into a debate
on the effectiveness of internal gold sales as a stabilization measure.
The Chinese officials, who alone have responsibility for the problem,
assert that they want to carry on such a gold-selling program. It is
an improper intrusion into their sovereignty and responsibility for the
U.S. to make a unique violation of its standard practice on gold in
order to tell the Chinese that there are some people in the U.S. Gov-
ernment who think the Chinese are mistaken about the usefulness of the


This memo stands as a marker, a monument to the new US empire: sovereignty of petty warlords is to be maintained at all costs while simple civil rights of US citizens is banished!  The US confiscated private wealth during the Great Depression, then ran a campaign against ‘hoarders’ who were actually savers struggling to protect their savings from fiat confiscation due to a sudden devaluation of the currency. 


Repeatedly, this devaluation was done with no warning, each time.  Only, after 1974, US citizens got the sovereign rights that foreign natives had to buy US gold.   But with a MAJOR difference!


This is most important: Chinese warlords could raid Fort Knox and replace gold with paper money while NO AMERICAN CAN DO THIS!  We cannot go to Fort Knox and demand gold.  We can buy US gold coins but we pay a premium, in other words, we give lots and lots of money to the government and then, they release some small, token amounts of gold to us.  Remember: this is OUR gold!  Collectively, it belongs to us.


The value of this gold varies according to how much of it is released by the government.  They release VERY LITTLE.  This pushes up the price of gold.  Which is inflation, not growth.  I hope people understand this!  Rising gold prices means BOTH gold AND paper money are suffering from inflation.  To buy the gold, you have to assemble more and more dollars.  A wheel barrel of dollars will eventually buy a $5 gold coin.  And even with wheel barrows of dollars, the government will still be holding the vast majority of the gold.  


We will be allowed to sell this hyper-expensive gold to each other while the government gets to use the asset value-rise of gold it holds as a basis for lending!  Isn’t that astonishing?  And what if the Chinese today decide to ask for $1.9 trillion in gold?  They can’t!  The dollar is NOT the key to Fort Knox.  We are locked out and so are the OPEC kings and the Chinese communists.  They can only go on the open market and buy whatever gold our government chooses to release.  


And this is why the business of ‘is gold money or is it a commodity’ is so complex and hard to grasp.  For it is NEITHER.  It is a fulcrum being used to leverage systems, even today, in a most bizarre and dangerous way.






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