Guest post from friend of Alhambra, Brian Cronin:
In 1960, Stanley Kramer made a movie based on the 1925 Scopes trial which dealt with the age-old question of whether man came about by evolution or creation and whether evolution could be taught in Tennessee schools. It starred Spencer Tracy as Henry Drummond and Fredric March as William Harrison Brady. They represented the real-life protagonists Clarence Darrow and William Jennings Bryan. The movie is worth seeing just to see to these two acting titans go up against one another.
Clarence Darrow was well known for defending Leopold and Loeb in the 1924 thrill-killing “trial of the century” and William Jennings Bryan was a leading politician from the late 1800s on, standing as candidate for the presidency of the United States three times, and serving as Woodrow Wilson’s Secretary of State. He was a devout Christian and a popular speaker on the Chautauqua circuit. “I’m more interested in the Rock of Ages than the ages of rocks” says the Bryan character in the movie.
“The Great Commoner” was equally famous for opposing the gold standard and espousing the cause of silver. As one of the “Silverites”, he was in favor of bi-metallism which promoted gold and silver with a ratio of 16 ounces of silver to one ounce of gold, roughly half the actual ratio. Those who favored gold were the industrialists and financial barons in the north-east, and those who favored silver were the mining interests in the west and the farmers in the south.
How silver and gold affected politics of the latter half of the nineteenth century makes interesting reading and the ensuing turmoil over a period of forty years led eventually to the establishment of the Federal Reserve in 1913. “Free Silver “ became associated with the Populist movement, the establishment of trade unions and the fight of the little guy against the entrenched interests of the Robber Barons and gold, the currency of the “oppressor”.
He opposed Republican William McKinley in the race for the presidency in 1896. On July 9th of that year at the Democratic Party convention he gave what came to be regarded as one of his most famous speeches. Deftly mixing political rhetoric and Christian imagery, he concluded his tirade against the gold standard thus: “Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: ‘You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.’”
He won the nomination but lost to McKinley and again 1900. In the intervening four years, gold was discovered in the Klondike and the process of gold refining became more advanced. The cause of silver did not serve Bryan in the campaign of 1900 as well as it had in 1896 and in 1900, the US adopted the gold standard.
The 1896 election is probably the only time that gold and the gold standard were center stage issues. This year, Congressman Ron Paul would also like the excesses he perceives in the management of the Federal Reserve to be a central theme of the presidential campaign though the electorate will likely have other things on its mind.
A quick trip down Memory Lane: The classical gold standard lasted up until World War One. After the war, the credibility of central banks to maintain the legal value of gold against currencies came into question. The Federal Reserve was relatively young and inexperienced and relied heavily on the Bank of England for guidance, but a run on the pound in 1931 forced abandonment of the gold standard and the pound floated freely. The dollar was next on the hit list and the speculative attack forced a run on banks as people began to mistrust the banks and gold reserves were depleted. The Federal Reserve raised rates, neglected the banking sector and the Great Depression was on.
On April 5th 1933, President Roosevelt confiscated all privately held gold in order to stabilize the banking system. The US went off the gold standard and adopted the silver standard. After the 1944 Bretton Woods agreement, gold was fixed at $35 an ounce and other countries fixed their currency to the dollar as the dollar was fixed to gold to ensure stability and keep inflation in check. Rising demand for gold in the 1960s made that difficult to maintain and led to a fall in US reserves in part because of the trade deficit it had with the rest of the world.
The “London Gold Pool” was formed at the suggestion of Robert Roosa, JFK’s Treasury Undersecretary in 1961 to keep gold at $35 oz. USA, UK, Germany, France, Italy, Switzerland and the Benelux countries all agreed but France backed out, demanding that dollars earned from their exports be converted into gold rather than US treasury debt. Under Bretton Woods, it was entitled to do so, but it ended the Gold Pool and it died in 1968. There was, too, growing French distaste for US companies buying up assets in France and elsewhere in Europe, neatly dubbed “coca-colonization”.
US trade deficits grew as demand for gold increased. So, unpleasant choices presented themselves: eliminate the trade deficits or devalue the dollar. On August 15th1971, President Nixon closed the “gold window” ending dollar convertibility into gold and devalued the dollar by 13%. Currencies floated freely and gold soared. The fixed price of gold, a fundamental tenet of reserve asset management was taken out of the equation and central banks were completely wrong-footed – all except the French.
So, gold has always been a store of value and has always creates deep emotion and high drama. The producer cost is about $500 an oz. on average so it’s still profitable to keep on looking for more and getting it out of the ground. But costs will rise as accessibility diminishes. How much further will it go?
Billionaire investor Warren Buffett says gold is an unproductive asset. It has two significant shortcomings, “being neither of much use nor procreative”. But there are people on the other side of that argument who say that one good reason to buy gold is because they don’t trust the national currency to retain its value. China is perhaps the biggest gold buyer of all. What happens if they start to get uncomfortable with US Treasury bonds and feel that the USA cannot get a handle on its finances with a debt of $15 trillion and counting? What price gold then? Buy on dips.
Brian Cronin worked in banking for 40 years, 35 of them in currency sales and trading. His last post was with ANZ Bank as VP, Markets Division where he produced a widely followed weekly commentary on currency markets. He is now retired and living in South Carolina – at least until we can coax him into joining us here at Alhambra.