Author: Claudio Grass, Managing Director Global Gold Switzerland. Keywords: Monetary History, Gold Standard, Fiat Money, Free Money, Austrian Economics, Debt Crisis, Inflation, Currency Devaluation, Central Banks, Physical Gold, Ferdinand Lips. “History has proven that the free market has chosen gold and silver as money. Money cannot be based on faith and promises by government. Only money based on what people freely choose as being trustworthy: gold!” – Ferdinand Lips

In Gold Wars, Ferdinand Lips reveals how the world economy has swayed off the right path of a safe and prosperous economic system. How so? By launching a vicious and determinant war against gold. The 21st century is marked as a century of hyperinflations, economic instability and massive debt. Lips traces the root of these problems to the departure from the gold standard in favor of creating the fiat system as early as World War I. Lips highlights the relationship between gold and freedom. By tracking the importance of gold throughout history, Lips shows how the gold standard ensured a stable and prosperous economy. This stability freed all individuals from inflating prices, debt and loss of purchasing power. The gold standard protected economies and individuals from governments whose ‘greed’ could drive them to create and print paper money at their own will. This is the situation we find ourselves in today. The system of the gold standard functioned, and functioned very well, while the fiat system proved to be dangerous and a fallacy. By adopting the fiat system, which is based on virtually nothing, printing money is an easy call to make and the result is a financial disaster. A few words on Ferdinand Lips: He was a renowned Swiss Banker born in 1931, and established his own bank in Switzerland, Bank Lips AG in 1987. Aside from banking, he was also active in finance and a respected authority on gold and gold markets. His long experience gives great weight and value to the insight he provides in Gold Wars. He was also a vocal critic of the sale of Swiss Gold Reserves, and dedicated a chapter on this matter in the book. In his forward of the book, he says about himself: “I am not an economist. For most of my fifty professional years, I was a practicing banker. The experience gained and thirty years of studying history, particularly monetary history, led me to recognize that the present monetary system is in disarray. It is a slap in the face of law and order, civilization and civility; but, most importantly, it is a threat to our freedom. Let us hope it will not last much longer.” Gold Wars is a great source of information on monetary history, the part of monetary history that is no longer taught, the part that is overlooked. Very few universities offer this information – in fact the

majority adopt the mainstream Keynesian line of thought, the one that views the gold standard as a “barbarous relic” and inefficient. Because of this ignorance on gold and the past successes in goldbased markets, fiat money has taken the world by storm. Unfortunately little is written on the history of the gold standard and the departure from it, which was the main drive for writing this book. To fill this big blank spot, Lips provides numerous statements and quotations of key players in that system, whether pro or anti-gold, thereby offering a thorough and comprehensive documentation of the gold wars in the 21st Century. This book provides the historical background of gold, and the success thereof up to the early 21st Century – when governments launched their gold wars. In this war, governments, primarily the United States, tricked and manipulated the system to endorse its dollar over gold, trying to give their dollar a higher value - a value it did not have. For the purpose of this summary we follow Lips’ chronological explanation of the gold wars in the 21st Century up to the 1990s, and illustrate how the anti-gold policy developed over time, and how gold won the war in the end. We will only briefly touch upon the final chapter “Betrayal of Switzerland”, as an important battle in the war against gold, but not go deep into its discussions.

Gold in History
Ancient Civilizations Rose and Prospered With Gold The rise and fall of ancient civilizations goes back to the stability of gold in their markets. Cultures flourished on wealth and stability – this prosperity was secured by gold. The Egyptians were the first ancient civilization to mint and use gold as a currency, then Mesopotamia, followed by the Greeks, the Persians and the Romans. After a prosperous and stable economy under Caesar and Augustus, the Romans developed into the first Keynesians, tempted to cheat one another with weights, diluting the coins, ultimately debasing it – which Lips says can explain why they suffered from long periods of instability and civil war. Many factors could be blamed for the fall of the Roman Empire, but the manipulation of gold was certainly a critical one. According to Lips, the Romans “proved that no economy could prosper under conditions amounting to perpetual embezzlement by those who enjoy special privileges, e.g. monetary authorities. Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague. With money so unreliable and debased, speculation in commodities became far more attractive than producing them.” Rome did not recover until Constantine, founder of the Eastern Empire, took over and started minting gold – the Byzantine Empire flourished for many years to come owing to its stable financial structure based on gold. By providing a number of historic examples, Lips supports the argument that any tampering with gold, caused devaluation in the currency, which in turn drove speculation and instability – it was this that drove Europe into the Dark Ages, and it was the reestablishment of gold that drove it out of darkness into the Renaissance. 19th Century: The Gold Standard at its Best There are more modern success stories with gold, such as Napoleon (the gold standard survived until 1914). In fact by 1900, Lips accounts for about 50 countries adopting the gold standard, including all industrialized nations – the United States was no exception. “The gold standard of the nineteenth century represented the highest monetary achievement of the civilized world and seems like a miracle now.” Why did gold triumph in the 19th Century? According to Lips, the Franc enjoyed 100 years of stability, the Pound 98 years – the smallest time frame belonged to Italy at 31 years. Well, because it works independently from government intervention, it safeguards from any form of manipulation and any intention to inflate the economy.

Gold at War
World War I: Defying the Standard All the above was relinquished with the onset of World War I: to finance the war, governments gave up the gold standard in favor of debt financing and fiat currency. In fact, Lips was of the opinion that World War I wouldn’t have lasted more than a few months if the gold standard had been maintained – simply because governments would have run out of gold to pay. Instead they opted for paper currency, which caused devaluation and drove up debt. But instead of going back to the original gold standard after the war they adopted the alternative “gold exchange standard”, i.e. the dollar and the pound were as valuable as gold and were to be held as reserve currencies. How could they be as good as gold if they had lost value and purchasing power during the war? This was the first trick and manipulation – allowing the reserve countries (the US and UK) to run deficits ‘comfortably’; well, the dollar and pound were as good as gold after all, right? This was the beginning of a painful spiral of credit expansion and hyperinflation, setting the stage for the Great Depression in 1929. Gold was now being attacked again! The Road to Bretton Woods The 1920s and 30s were dominated by the Keynesian school of thought until gold lost another battle in 1933. In the United States, the public was prohibited from holding gold except for licensed and commercial purposes (until 1975). Moreover, the Treasury confiscated gold and gold certificates and promoted debt financing. In effect, gold was confiscated, and holding gold became a felony. There was only one more step left: in 1934, the dollar was devalued and set at a new gold equivalent fixed at USD35 per ounce. This fixed price remained for a very long time, and maintaining this equilibrium was the challenge that the US Treasury could not handle. “A deluge of misleading anti-gold propaganda spread by the powerful paper money interests accompanied this anti-gold policy. To this day they are trying to convey the illusion that the US does not need bullion behind its bank note issue.” In 1944, the Western economies established its new monetary system as envisioned by Keynes: the Bretton Woods establishment. It was another step further away from the gold exchange standard. It is not often you get to read a critique on Bretton Woods in terms of its monetary policy, which was hailed as the optimal solution for the countries after a devastating war. With its institutions, the World Bank and the IMF, Europe embarked on a long road of rebuilding and reconstruction. On a monetary level – the US seized more power, as currencies across the world were now pegged to gold or any currency convertible to gold, in other words: the dollar. By becoming the primary reserve currency, the US alone could dictate the price of gold, while all other nations had to adjust accordingly by selling their gold in favor of the dollar. “It was nothing more than an American dictate resulting in off icial recognition of the supremacy of the dollar, the only currency convertible into gold by foreign central banks.” The benefit was obvious: credit expansion whenever needed. This was particularly important after the US made a pledge to its citizens of maximizing employment, production and purchasing power – this took its toll on government spending and budget, which to a large extent characterized the 1950s. In 1958 alone, the Treasury sold USD2.25 billion worth of gold. In retrospect, investors saw the deficits and rising inflation as a sign to seek a hedging instrument. Gold became attractive again, as gold mining shares began to rally.

The Great Gold War 1960-1971 Lips described the 1960s as the beginning of the end of the gold dollar standard and the Bretton Woods system, owing to the increase in inflationary credit expansion and a USD35/ounce dollar peg to gold that could not be sustained as the gold stock in the US Treasury continued to shrink. The US was pressured to keep the promises it made domestically and externally in form of foreign aid programs (highlighting the cold war era). It could no longer afford this drain, and so it launched its anti-gold campaign. The largest was the creation of the Gold Pool in 1961, designed to stabilize gold price in the London bullion market. After its failure, the US devised Special Drawing Rights, another fiat instrument that fostered the illusion that there was not enough gold. These measures failed to contain the growing attractiveness of gold. China, Russia and the Middle East opted for buying gold. De Gaulle openly challenged the dollar and called for the return to the gold standard. By the 1970s Switzerland grew into one of the largest gold trading centers in the world. The Gold Rush of the 70s Eventually the US had to give in and accept the reality, and so Nixon closed the Gold Window, which meant the Treasury refused to redeem dollars for gold. According to Lips, this was critical, as by doing so it meant the US had publically defaulted on its debt. In a global economy that is becoming more and more inflated, and the dollar is losing more value, we saw a flight from a bankrupt dollar into gold. “The 1970s was the decade in which the US government, the Treasury and the Fed tried to defeat gold. It was a bitter war and unnecessary fight. The damage will one day be described in history books. But, it ended with a victory for gold.” Central Banks refused to go with the tide and introduced more and more financial instruments that carried more risk, and caused more distortions in currencies: “The ultimate consequence of abandoning gold was the birth of a market madness, which the world had never seen before. It may end one day in a financial collapse that is unparalleled in history.”, Lips described. Going back to gold was not an option for them. In the meantime, the gold price experienced a rally, particularly at the end of 1974 when the 40-year ban on holding gold ended. Lips described it as follows: “In January 1980, the price of gold reached an historic high of around USD850! The public had become fearful about what governments were doing to their money. It took people many years to wake up, and, when they finally did, no force could stop the power of gold.” Nevertheless, that rally was not sustainable, and gold entered a long bear market in the 1980s, which was stable yet “not so golden” anymore. The US Treasury on the other hand was not doing so well, as it became the largest debtor worldwide and ran massive deficits during that time. This created the prelude to the gold war of the 1990s. The 1990s – The Last Stretch of the War: Losing Switzerland The 1990s were not that much different from the 1980s, but with no obvious reason. Lips dedicated his chapter to the following question: “How is it possible that the gold price weakens year after year when there is a strong and growing demand for the metal?” Annual mine production figures were high. He traced this to the following reasons: a deflationary economic environment and a booming stock market (adding both together is not the recipe for a healthy demand for gold), portfolio divestment (with little to no gold), a demographic shift in gold ownership (gold passed on to the next generation is often dumped) and finally huge selling/leasing of gold by central banks. Lips exerted effort to help explain the latter point. He arrived to the conclusion that central banks were not the only players and beneficiaries of a low gold price. Other actors included bullion banks, hedge fund and investment banks were also on the receiving end. These participants became the new active

players in the 1990s. According to Lips these big bullion dealers and investment banks, Goldman Sachs, JP Morgan, Chase, Deutsche Bank, Credit Suisse, to name a few “were engineering a most profitable new business by acting as intermediaries between naïve central banks, who were receiving negligible interest in return for not only depressing their only asset of value, but also for risking to lose part or all of it.” Hedge funds played their part too to undermine the price of gold by building positions not based on fundamentals, according to Lips. After an extensive discussion on the roles played by these different parties, Lips determines the winners and losers of the 1990s: Gold buyers were the long-term beneficiaries as they bought at attractive prices. Second in line were the investment banks and hedge funds, as he explained “when the price finally explodes, these same houses, which have profited from the fiat money arrangement, are most likely to own most of the gold and, possibly, the gold mines”. It is the gold mining companies that lost the wars explained by loss in revenue and earnings as the outcome of the depressed price levels. But what startled Lips the most was the turning point in the gold war, when Switzerland became the target. In 1992, Switzerland joined the IMF. By becoming a member, it became part of the international community, which called for the endorsement of the fiat money system. It was not that much later that Switzerland changed its gold policy too. For Lips, this was a nightmare. Lips dedicated a full chapter to this event that transformed monetary history, tracing its causes and implications. By forsaking gold, the Swiss franc, which was backed by gold, was now backed by virtually nothing. It was the most valuable currency of all. Switzerland fell for the trap and gave up its superiority and independence. But domestically the economy was not doing all that well either, and unemployment was rising. According to Lips, this was the lynchpin that made the SNB take the step and delink the franc from gold. This link that entailed a 40% reserve requirement “was one of the cornerstones for the worldwide respect given the Swiss franc and the Swiss banking center”.

Lips described the anti-gold campaigns of the 21st Century as the Third World War, and the most destructive. World War I wouldn’t have lasted more than a few months if gold hadn’t been abandoned. Instead it lasted for years thanks to debt financing, which caused governments to suppress gold and expand credit with no limit. From then on, Lips traced all socio-economic problems within this century to the departure from gold. If the world hadn’t ignored gold … financials markets would have operated smoothly, savings would have been translated into productive investments, more employment opportunities would have been created, to cite a few. After experiencing a century of fiat economies, it is proven that the departure from gold was a great and grave mistake. Gold is a source of value, confidence, stability, financials as well as political independence. In fact, it proved to be anything but the “barbarous relic”, as Keynes put it. It is ironic that those who claim to be free market economies are doing their absolute best to beat the inevitable: gold. History supports that free markets favor metals. Be it as a store of value, be it for protection against inflation, mobility and liquidity – all these are positives of gold investments, and these were proven true in all the gold wars since World War I. Gold has won them all. Gold can be equated to credibility and trust. Gold equals freedom and independence. But because of greed, humanity has sought ‘better’ options, but instead found itself in a cycle of inflation and loss of purchasing power, debt – all factors supporting the flight back to gold. In contrast, there is no honesty in the fiat system, as experience shows governments sought to print out more money than what they actually had. Essentially they made a promise they could not keep, and the gold exchange could not be followed through. As such, the value of paper money was and still is an illusion. Download the book in digital format from Rapperswil, December 2013

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