By James R. Gorrie on July 20, 2012

Part 4 of the interview series ended with Craig R. Smith suggesting that our whole system of credit could come down with a crash, just as in Roman times. Part 5 in the series is below.

Also, be sure to watch this week's video, The Good, the Bad, and the Gorrie,  about the assault on the US dollar. 

James:  Now let’s talk a little bit of recent history. You recommend gold and silver as hedges against the devaluation of the dollar and the coming inflation, and yet, given the history of confiscation in the 1930s, is this reasonable? Even more recently, there has been federal prosecution of some gold currency advocates for “threatening the democracy of the United States.”  There is a real conflict there between (and in) the government and American citizens.  Remember what Fed Chairman Ben  Bernanke told Congressman Ron Paul in congressional hearing when Paul asked him, held up a coin, “Is this silver coin (or gold, it was one of the two) money?” Bernanke just said, “No, it’s not.”

But at the same time, you have states saying, “We’re going to recognize these hard currencies as currencies.” There seems to be a very big conflict about what you can use as money.  Will we be even allowed to hold it, to transfer it, to use it as currency?

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Craig: Mr. Bernanke doesn’t understand the definition of money. Money to be money has to be portable and divisible; it has to represent a stored value. It has to be scarce. The US dollar is portable. A hundred dollar bill is pretty easy to carry around.

It’s divisible. You can turn a hundred dollar bill into ten $10 bills. It has a stored value, true; but that value has been dropping for 40 years. Is it scarce? As long as God has trees and ink, you can make plenty of money.

Therefore, our money doesn’t fit the definition of money. Our money is credit. That’s why your notes say, “This bill is legal tender for all debts, public and private.” At the same time, I know there’s a big discussion about confiscation of gold right now.

There are forms of gold that are non-confiscatable if the laws hold up. You know how I feel about that, James. I look at it like this: if your guns are bigger than my gun and you want my gold, I guess you’re going to end up taking my gold.

But is there a motivation for the government to confiscate gold? Let’s look at why Roosevelt recalled the gold in 1933. In 1933, we were on a gold standard. You could not print money unless you had corresponding gold on deposit at Fort Knox or at the Federal Reserve.

In 1933, Roosevelt calls a banking holiday. He confiscated gold at $20.67 an ounce and made it illegal to own gold. Then he revalued gold at $35 an ounce, thus allowing him to create 75% more money off the gold he’s confiscated, basically giving the American people a 75% haircut on their money.

Then he printed that money to pay for the WPA projects, and all the work projects that they did to allegedly get us out of the depression. You know the analysis of that time period shows us that that is not what got us out of the depression.

It was the Second World War that got us out depression. But nevertheless, today, we have a different economy. Back in ’33, we were a nation of savers and producers.

Today, in 2012, we are a nation of consumers and borrowers. The government has no need to recall gold because they don’t need gold to print money. They can print money, as much as they want, without anything on deposit.

I see no benefit for the government to get gold unless – unless! – we go back to the beginning of this conversation where China issues a gold backed Yuan. If they do, then that (gold confiscation) comes back into play because they will need the gold to be able to compete in that currency arena.

James:  They’re going to have to. Even if China doesn’t issue a gold backed Yuan, if interest rates go up, which they will, inflation comes up, then Gresham’s law of species kicks in and bad money pushes out good money.

People will want gold. They won’t want to hold dollars. You don’t need China to have a gold standard if the rest of the world, especially if Europe comes back, recovers a little bit, a lot of the money goes away from the treasury.

Now you’re looking at the dollar being not wanted abroad, and probably here as well. I don’t even think China has to have a gold backed currency to make the dollar unwanted here and abroad, and therefore making gold the top currency.

Therefore, the government will say, “Look, we have to protect our dollar here. You can’t trade gold or silver.” I can see that scenario.

Craig: Anything is possible. Keep in mind, we have 536 people back in Washington, D.C. that control the military and the guns so they can do whatever the heck they want but we have to look at the practical application of it.

You made a point that I want to elaborate on, though, because I think it’s a very good one. That is that if people start losing confidence in a currency and they want to buy gold, we’re seeing that happen right now.

I can tell you, James, in my business at Swiss America, we have never seen more big money players now cashing out huge – and I’m talking several million dollars at a clip, of using their money to buy gold.

You would think, “Wait a minute, gold is $1,600 an ounce or whatever it is on any given day. Why didn’t they do it back at $800?” I can’t tell you how many big money people I know that are totally convinced right now that the US dollar is a dying currency and that it’s only a matter of time before that currency dies off.

Can the government do something to save the currency? Short of what Ron Paul calls for--and I’m not a supporter of Ron Paul, but I like some of the things he says--short of a complete audit of the Federal Reserve to bring confidence back into the system and flush out the distortions and getting off the essential bank and fractionalized banking system, I don’t think there’s anything that can save the dollar.

If we want to go through the very painful and laborious process of doing away with the Federal Reserve and bringing us back to a true free market economy, I think the strongest days for the dollar could be ahead, but today we are violating the basic laws that support a sound currency.

You brought up Gresham’s Law. It says, “Bad money forces out good money.” That’s right. More bad money, more paper money comes into the system. It forces the good money like the gold or other commodities like oil and natural resources out of the system into private hands.

I think you’re starting to see that happen. Look, James, I wish that with the right president, this thing would turn out all right. Everyone has this false hope that if Romney becomes our president, everything will be better.

It’s going to take more than that. We have fundamental flaws in our system that showed so glaringly in 2008, and yet we did nothing to address them. We did nothing to address the underlying problems of credit.

In my book, there’s a quote that we put from John Adams: “All the perplexities, confusions, and distresses in America arise not from defects in the constitution or from confederation, nor for want of honor or virtue as much as from the downright ignorance of the nature of coin, credit, and circulation.”

Boy, he couldn’t be any more truthful. The perplexities and problems we face in this nation have nothing to do with flaws in our constitution or nothing to do with us wanting to play by the rules and do things right. But it’s because we don’t understand how money, credit, and circulation work.

In the public school systems, we teach reading, writing, and arithmetic. We teach kids how to put condoms on bananas but do we teach them the proper use of credit? Do we teach them how to balance a checkbook? Do we teach them how to be invested for their future?

We don’t do that. Until we educate the American public--that’s why what you’re doing is so important--until people are educated and understand these things, they won’t make the right decisions going forward.

Quite frankly, we the people are going to have to stand on our own because if we believe the Federal Government is here and they are going to protect us, we are dreaming.

What did Ronald Reagan say are the nine worst words in the American language?  “We’re from the government and we’re here to help.”   Well, he was right.

About James R. Gorrie

James R. Gorrie spent over eighteen years in financial services as an industry recognized investment financial advisor, advising clients on investment planning, trusts, business succession … Read Full Bio »