Welcoming the world’s central bankers to their annual summer conclave at Jackson Hole, Wyoming, last week, Fed chairman Alan Greenspan delivered a remarkable speech. In unusually clear language, he acknowledged the existence of a bubble in the financial markets, but said it wasn’t his fault. This got me thinking.

Gold bugs and kindred spirits have maintained for years that not only is the bubble the Chairman’s fault, but that he is the very reincarnation of John Law. Doug Noland appears to have been one of the first commentators explicitly to draw the connection. See John Law and Alan Greenspan – The Great Inflationists, together with his more recent critique of the Jackson Hole speech. Adam Hamilton, Ferdinand Lips and others have also linked the two. In a prior commentary, my pal Reg Howe referred to Chairman Greenspan as “the most destructive monetary charlatan since John Law.

However, upon reviewing some scholarship in the wake of the Chairman’s speech, and mindful of the need for accuracy in the gold bugs’ position on the Greenspan legacy, I am obliged to point out that the comparison, while valid in certain respects, is inaccurate in others. What is more, it is grossly unfair overall to the memory of Mr. Law.

Washington’s Dark Secret

Some years ago I had the privilege of meeting Sir Alan, or more simply, His Worship, as he was then known. It was at a Washington reception hosted by a prominent Wall Street law firm with which my employer was doing business. One of the lawyers took me in hand and led me up to the Chairman. I was prepared for the dour countenance of the man Ayn Rand had called “the undertaker.” But I was taken aback by the singular lack of vigor in his handshake, a condition I attributed at the time to my own lack of relevance to his agenda. Years later, presidential aspirant John McCain quipped that if the Chairman were to expire during a McCain presidency, he would, taking his cue from the movie Weekend At Bernie’s, put sunglasses on the corpse and prop it up in a chair. Then it hit me: the Chairman was dead when I met him; he had in fact been dead for years. Senator McCain was floating a trial balloon in classic Beltway fashion, testing whether the public was ready for the truth. So the moral is that the Greenspan Bubble might not have happened had the Chairman been alive.

Beach Reading

Most gold bugs are somewhat familiar with the career of John Law, as presented in an old favorite, Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds (London, 1841). They are more familiar, though, with the career of the Chairman, from observing him in action, from miscellaneous sources both on-and-off line, and from Maestro: Greenspan’s Fed and the American Boom (Simon & Schuster, 2000), the pulp hagiography by Bob Woodward.

The similarities between the two men and their careers are obvious, which is what has led us into error. Both, after all, achieved preeminence in monetary policy as a result of skillful cultivation of powerful individuals, culminating in each case in a Royal appointment; both engineered the biggest stock market bubble in financial history through the medium of a central bank; both zealously promoted paper currencies with no intrinsic value; both waged a relentless and ultimately futile war on gold; and both brought their nations to financial ruin (pending, in the case of the Chairman).

But there the similarities end, according to three relatively recent biographies. The first, by Antoin E. Murphy, professor of economics at Trinity College, Dublin, is entitled John Law: Economic Theorist and Policy-Maker (Oxford, 1997). Excruciatingly detailed and written in a sober, academic style, it lays new emphasis on Law as a thinker. The second, by Janet Gleeson, an art and antiques expert, is entitled Millionaire: The Philanderer, Gambler and Duelist Who Invented Modern Finance (Simon & Schuster, 1999). Written in bodice-ripper style, it is much stronger on the sex and violence. The third, by Jerome Tuccille, a financial writer of the libertarian persuasion, is entitled Alan Shrugged: Alan Greenspan, the World’s Most Powerful Banker (John Wiley & Sons, 2002). It is better and more comprehensive than Maestro, but it too suffers from a reverential tone; one surmises the author cut the Chairman some slack on account of a presumption of shared ideology.

A review of these tomes confirms the existence of a number of important differences between the Chairman and John Law, the most noteworthy of which we now consider in turn.

Sow, Sow, Sow Your Oats

John Law Was a Lover and a Fighter. We need not dwell overlong on the personal dimension, which is somewhat off the main point. Suffice it to say that Law was, in seventeenth century terms, big, bad and beautiful. He was born in 1671, the son of a Scottish goldsmith (gold bugs, who already know how the story ends, will be alert to the Freudian thing here) who died when young John was 12. Sent to boarding school outside Edinburgh, Law apparently developed into an excellent tennis player and fencer. Although he displayed rare natural ability in mathematics, Law received no formal university training. He left Edinburgh for London in the early 1690’s. There he quickly blew through a sizable inheritance as he established himself as a rakehell and a dandy (“beau,” in those days). Pictured below at left, he was described by a contemporary (Du Hautchamp, cited in Murphy, p. 19): “Law was tall and well built…an oval face,…a tender look, an aquiline nose, a fine mouth. Without flattery one could classify him as one of the best built men.” Forced to earn a living, he became a professional gambler, utilizing his genius for mathematics in acting as the equivalent of the “house” in the games of the day.

john Law Alan Greenspan

In 1694, Law stabbed to death one Edward Wilson, a well-known high liver with no visible means of support, in a duel in Bloomsbury Square. The circumstances of this incident remain murky. The duel was purportedly over a Mrs. Lawrence, with whom Law was then living, but there is some speculation that he was in fact acting as a “hit man” for a Miss Elizabeth Villiers, the favorite mistress to King William III. It appears Miss Villiers may also have been romantically involved with Wilson, reportedly in trysts involving the use of masks. Law was subsequently convicted of murder (dueling was by then illegal) in proceedings whose outcome may have been influenced by the purchase of both judge and jury by the family of the deceased. Two days prior to the date on which the Bank of England was founded, Law was sentenced to death. He spent several months in King’s Bench Prison while the sentence was appealed, set aside, and effectively reinstated in a civil procedure. In early January 1695, he escaped with the indirect assistance of King William upon the petition of some well-connected Scottish friends.

Following his “escape,” Law fled England for the Continent. While winning and spending a fresh fortune at the gaming tables and in the fleshpots of Europe, he cultivated the acquaintance and earned the admiration of the Duc d’Orleans, another ladies’ man and avid tennis player, who would later become the powerful Regent of France following the death of Louis XIV. Law became part of the Duc’s inner circle, and also, one infers, a regular at the orgies known as “soupers” that the Duc hosted nightly at the Palais Royal (Gleeson, p. 92): “…notorious all-night revelries at which an eclectic assortment of courtesans, actresses, and his inner circle of dissolute male friends — the roués — gorged, drank to excess, and, according to Saint-Simon, ‘said vile things at the top of their voices.'”

The Chairman Is a Lover Not a Fighter. Several key differences emerge alongside the obvious similarities when we turn to examine the Chairman’s formative years. Like Law, the Chairman demonstrated an early aptitude for mathematics. And while attending George Washington High School in New York, he became an avid tennis player. Unlike Law, however, the Chairman received post-secondary school instruction. He studied at a prestigious New York music school, following which he played saxophone and clarinet in a swing orchestra for which he doubled as bookkeeper. In the fall of 1944 he gave up his career as a professional musician and enrolled at NYU, graduating summa cum laude in 1948 with a bachelor’s degree in economics. In these early years the Chairman was emphatically not a rakehell or a dandy (Tuccille, p. 32):

“He would constantly be ogling the coeds at New York University,” said Robert Kavesh, a close friend and fellow student at NYU. “And it was tough because you had all these males descending from the armed forces, and very few women. And so we would wonder about whether we would ever be able to get a date. I don’t think Alan ever burned up Washington Heights as a social butterfly.”

Following graduation from NYU, the Chairman took a job as a nerd at the Conference Board, long known as the “premier economic research institution in the world.” Working a full time day job, he got his master’s degree in economics from NYU in 1950.

It was at this time that the Chairman became acquainted with the first of the two major mentors in his life, Dr. Arthur Burns. Burns was then teaching at Columbia, so the Chairman switched schools to begin his doctoral program under him. The two became lifelong friends. As Tuccille puts it (p. 43):

They grew so close over the years that when Burns moved to Washington, D.C. in 1970 to take over as Fed Chairman from William McChesney Martin, Alan, who had established a successful consulting business by then, offered to hold the first mortgage on his house. As a young Ph.D. candidate in 1950, Alan idolized the older man and sought to emulate him in every way, even once briefly taking up the pipe, which Burns smoked incessantly.

Dr. Burns, 22 years older than the Chairman, followed a career path uncannily similar to that of his protégé. He was at that time a well-known pro-capitalist economist and a leading authority on the business cycle. He later served as Chairman of the Council of Economic Advisors during the Eisenhower administration, economic advisor to Richard Nixon, Chairman of the Federal Reserve Board from 1970-1978, then finally Ambassador to Germany. (Watch for an ambassadorial victory lap for the Chairman once he makes good his escape from Greenspan Agonistes.) Burns’s tenure at the Fed is widely acknowledged to have been a disaster; the Chairman himself later gave him a failing grade. The charge: upon attaining office he sacrificed his principles and politicized the Fed, engineering in 1971 a surge in the money supply that was transparently designed to enhance the reelection prospects of Richard Nixon. This accommodative policy resulted in turn in what was seen at the time as runaway inflation. Remember wage and price controls? Follow the money.

His budding relationship with Burns did not require the Chairman’s continued presence at Columbia. He dropped out of the doctoral program the following year, and would receive his doctorate in economics from NYU some 26 years later, without, it would seem, having had to endure the inconvenience of a dissertation.

It was also about this time that he met Ayn Rand, the second of the Chairman’s two mentors. If Burns provided the model for the Chairman’s future deeds, Rand provided the model for his words. For some reason his association with Rand, rather than his friendship with Burns, gets the press. For younger readers, Rand was a Russian émigré who preached a muscular and atheistic philosophy of rational individualism and radical laissez faire economics derived from the teachings of Ludwig von Mises, the dean of the Austrian school of economics. By the time the Chairman met her she was already well known, having recently published The Fountainhead, a novel extolling unbridled capitalism and its rugged, handsome heroes.

Rand was not initially impressed with the Chairman. He had become a Keynesian while at NYU. (This was ironic, because von Mises himself was teaching there at the time. It does not appear that the Chairman ever darkened the door of the Great One.) Worse, he was a logical positivist, which basically meant he rejected as meaningless any proposition, outside math or logic, that could not be verified from experience. This tossed out a good bit of the Western intellectual tradition, and imbued the young Chairman with a rather profound skepticism (Tuccille, p. 53):

…he was adamant about his inability to know anything with certainty. He announced that logic was empty, the senses were untrustworthy, and that degrees of probability are all that is possible. “I think I exist,” he stated, “but I can’t be certain. In fact, I can’t be certain that anything exists.”

Rand, for her part, expressed skepticism that her chief acolyte and lover, Nathaniel Branden, would ever be able to convert the Chairman to the true way ( id., p. 58):

“How you can stand talking to him?” she asked Branden in her thick Russian accent.

“I’m going to bring him around intellectually,” Branden replied confidently.

“Never! A logical positivist and a Keynesian?” said Rand. She would clearly have had higher hopes if Alan were a leper. “I’m not even certain it’s moral to deal with him at all.”

In 1954 the Chairman left the Conference Board and joined a successful bond trader named William Townsend in setting up an economic forecasting firm. During this same period he also became a regular at the weekly meetings in Rand’s apartment. He seemed to be making steady progress in his conversion to Objectivism, as Rand’s creed was known. It was as a very different young Chairman, though: something had happened to turn the shy wallflower into a sexual juggernaut. Other members of the Collective, as the Randites ironically called themselves, recalled the transformation (R.W. Bradford, “Alan Greenspan — Cultist? The Fascinating Personal History of Mr. Pinstripe,” available at www.theamericanenterprise.org/taeso97a.htm):

More than one member of the Collective marveled at his ability to attract beautiful women. “It was incredible how he always had a beautiful woman at his side,” recalls Barbara Branden. “I think it was the attraction of his intellectual power and probably his reserve. You couldn’t knock him over by batting your eyelashes at him. He certainly had a profound effect on women.” Another member speculates: “Maybe he was a good kisser, from all those years as a saxophone player.”

Several clear distinctions between the Chairman and John Law should be noted at this juncture. First, the Chairman is never described as beautiful, and rarely is he described as big in other than a metaphorical sense. Second, there was no reference in the preceding discussion to musical propensities on the part of Law. This is intentional, as he does not appear to have had any. Third, it is not established that the Chairman ever gambled with his own money. Fourth, there is no credible evidence in the Chairman’s biographical record to support an inference that he ever fenced, or, for that matter, killed a man. Fifth, the tennis game of the late 17th century was quite different from the one that the Chairman plays today. The racquets were smaller, it involved walls and long pants, etc.

A closer call is the eerie similarity between Law’s membership in the Duc d’Orleans’ inner circle and his regular attendance of the Duc’s soupers, on the one hand, and the young Chairman’s membership in the Collective and his regular attendance of sessions at Rand’s apartment, on the other. Meetings of the Collective, however, are distinguishable from the Duc’s soupers in that there is no record of vile things being yelled at any point prior to Rand’s stormy split with Branden.

According to most accounts, including Alan Shrugged, the Chairman’s career in public policy began as the result of a chance encounter in 1966 with Leonard Garment, formerly the Chairman’s band manager and at that time Richard Nixon’s law partner at Mudge, Rose. This seems unlikely, as the Chairman had in Burns a much more direct route into the corridors of power. Indeed, Tuccille informs us that it was Burns, then Fed chairman, who made the phone call summoning the Chairman to Washington in the summer of 1974 after Watergate had heated up. Nixon, whose power was ebbing fast, nominated the Chairman to lead the Council of Economic Advisors following the resignation of Herb Stein. RN could not stay for the party, however, and sailed off into the sunset before the appointment could be confirmed. His successor, Gerald Ford, duly approved the nomination and the Chairman survived a hearing before the Senate Banking Committee in which he affirmed his libertarian beliefs. Rand was invited to attend the swearing-in ceremony in September 1974, where she remarked to a reporter (Tuccille, p. 116): “Alan is my disciple. He’s my man in Washington.” So she thought.

Dueling Dismal Scientists

John Law Was an Accomplished Monetary Economist. Even as he rolled back the frontiers of debauchery in the early years of his Continental peregrinations, Law was busy developing and marketing innovative theories in the fledgling social science of economics. Lacking the guideposts we take for granted today (Adam Smith was born in 1723; von Mises in 1881), Law grappled with the core issue then and now: what is money, and why must it be something hard and shiny, given that precious metals are so scarce and people’s need for money so great? In so doing, he made a number of serious, and astonishingly “contemporary,” intellectual breakthroughs. He advocated creation of a “land bank” to turn illiquid real estate into money. (It must be conceded that in this he was following, rather than leading, an intellectual current of the time.) Most strikingly, he envisioned a monetary system in which paper, unbacked by anything other than confidence (or, failing that, events would show, coercion) is the medium of exchange.

Law was a prolific and original writer on economics. His works included:

Essay on a Land Bank (c. 1704), an early treatise on monetary economics. According to Murphy, the Essay contained a number of original insights and introduced a number of original concepts, including the term “demand for money.”

Money and Trade (1705), described by Murphy as “…a majestic work towering over the contemporary writings of the early eighteenth century.” Its focus was the substitution of a new type of money for gold and silver, “…a species which is not in our power, but in the power of our enemies, when we have a species of our own every way more qualified.” He referred to paper.

Unpublished manuscript (1711), written for Victor Amadeus II, Duke of Savoy, advocating the establishment of a “credit-creating bank issuing banknotes at Turin.”

Numerous other Pamphlets, Proposals and Presentations (1712-1716), promoting establishment of a bank capable of expanding the money supply, submitted to various heads of state and finance ministers.

The Chairman Is an Accomplished Musician. By contrast, the Chairman’s economics ouvre is rather thin. He published several articles in The Objectivist Newsletter, the Randite periodical, including one entitled “Antitrust” in 1961. It seems fair to observe that only one of his essays is likely to be viewed as significant by students of monetary economics three hundred years hence. That sole exception is a galling irony to gold bugs the world over: “Gold and Economic Freedom,” an essay published in the Randite anthology Capitalism, the Unknown Ideal in 1964. One of the best essays ever written on the meaning and role of gold in the modern state, the following oft-quoted excerpt suggests its force:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

Some 17 years later, during his intermission from public service, he wrote again on gold, this time in an op-ed piece for The Wall Street Journal (reprinted at www.gold-eagle.com/greenspan011098.html). It was a careful, measured essay, dealing with technical issues raised by consideration of a return to the gold standard, a topic then under study by a committee set up by President Reagan. It is interesting to note that even then, at a time when the Chairman was out of public life and had political cover from none other than the President himself, he was cautionary, detached and impartial. Gone were the passion and commitment of the Randite essay:

Those who advocate a return to a gold standard should be aware that returning our monetary system to gold convertibility is no mere technical, financial restructuring. It is a basic change in our economic processes. However, considering where the policies of the last 50 years have eventually led us, perhaps there are lessons to be learned from our more distant gold standard past.

The musings on gold aside, it is not easy to pin down the Chairman’s guiding principles in monetary economics. The awkward truth is he does not appear to have any, or rather, any that make any sense when put in any sort of juxtaposition. As Tuccille admiringly puts it (p. 265):

King Alan was an unconventional economist by any measure. Part gold bug, part Austrian school free-market economist, part monetarist, with perhaps a residual dash of Keynesianism added for good measure, Alan had created his own school of economic theory that was fully understood only by himself. When Alan shrugged, the financial markets trembled, and sometimes they panicked. He was going to be a difficult, if not impossible act to follow. It would take his successor a considerable time to establish the confidence in the U.S. financial system that he had built up over the years.

Bob Woodward makes the same observation in his own way (Maestro, p. 227): “Unlike many economists, he has never been rule driven or theory driven. The data drive.”

The Chairman’s conceptual jumble has a name. Political philosopher John Rawls, in his redistributionist masterpiece, A Theory of Justice (Harvard, 1971), pp. 34-40, calls this sort of mishmash in which everything is equally relevant “intuitionism.” Woodward shows us what intuitionism means in the formulation of monetary policy. Mid-way through Maestro, we observe it in action (p. 120):

“I’ve been in the economic forecasting business since 1948, and I am telling you I have a pain in the pit of my stomach.” He noted that in the past he had listened to his instincts and that they had been right.

This pain in the stomach was a physical awareness Greenspan had experienced many times. He felt he had a deeper understanding of the issue — a whole body of knowledge in his head and a whole value system — than he was capable of stating at that moment.

To gold bugs, the dissonance among some of his words is beggared by the dissonance between his words and his deeds, a dualism prefigured in his choice of mentors years before. Despite having presided over the creation of more new U.S. paper currency than had been issued during the entire preceding 200-odd years, he claims still to favor a gold standard. When periodically asked about his views on gold, he generally takes the opportunity to pay a wistful lip service to the concept while noting that he is all alone and therefore it’s just wishful thinking.

To judge from the tenor of certain postings in the leading chat rooms, a quixotic urge to reconcile the Chairman’s words and his deeds has led to the nervous breakdown of more than one gold bug. It has also led to the periodic emergence of a far out “deep cover ” theory: the Chairman is really with us, and is intentionally blowing up the global financial system in order to clear the way for the return of the Yellow Dog. The theory derives its plausibility from the character Francisco D’Anconia in Atlas Shrugged, Rand’s magnum opus. D’Anconia is a virtuous capitalist who turns into a statist leech to the consternation of his friends, who learn only later that it was all an act. The Chairman is certainly familiar with the character. He read the book while it was still in draft form, and shortly following its publication he made his maiden appearance in public print with a letter of reproach to a hostile critic.

This is a beguiling theory. It does not, however, appear consonant with reality. An equally plausible theory would hold that the Chairman was in fact an establishment plant in the Collective. Indeed, it seems more likely that Rand herself had it right when she wondered whether “Alan might basically be a social climber ” (Tuccille, p. 69).

The Theory and Practice of Central Banking

John Law Designed and Built a House of Ill Repute. After some 12 years of pestering powerful people with his proposals to set up a credit-creating bank to expand the money supply, the Father of the Modern Central Bank finally got his break in May 1716. His old friend the Duc d’Orleans was now the Regent of France following the passage of the Crown to a five-year-old. The Duc got Law the necessary letters patent despite opposition from the bankers of the day, a powerful group of about 40 so-called financiers who fronted for the nobility, the source of most of the wealth in the kingdom. This group and its principals had a headlock on the finances of the Ancien Régime, whose profligacy and incessant wars kept it in a perpetual state of hock. The Crown’s financial situation was unusually dire at the time Law’s bank was finally authorized, as the Sun King had left France bankrupt. Under normal circumstances the financiers, who had an extremely lucrative piece of the action in the crazy quilt of corruption and special privilege that made up the 18th century French economy, would have been able to crush an arriviste who threatened their franchise. However, they were temporarily indisposed, as there happened to be in full cry one of the periodic witch hunts known as Chambres de Justice, by means of which the Crown reared up and shook down its creditors for engaging in shocking misconduct of one sort or another during a prior period.

Law’s Banque Generale started off modestly. It was not the state bank he had requested but just another private bank, initially run out of his house. It was greeted with derision. It had promised 100% backing of its notes by specie, but in practice appears to have maintained a 25% backing. Over time, the Bank flourished with conspicuous Royal patronage and special breaks of various kinds. He ran it solo, never vouchsafing an accounting to anyone. As he himself put it in a letter to the Regent, which was in the nature of a plea to “nationalize me before I sin again” (Murphy, p. 161):

Up to now the secret operations of the bank were directed by one individual. Operations of the second type, dealing with the order and daily accounts of the activities of the bank, were not known even by the commissioners working for the director. Shareholders had no knowledge of the balance sheet producing the dividend, no member of the bank’s council had verified the sections dealing with the profit and loss account or the general expenses. The books of the bank were never presented to the shareholders, nor did they appoint anyone to examine and verify the balance sheet.

Law got his wish in December 1718, when the Banque Generale was declared to be the Banque Royale. This was a seminal event in financial history. While there were already in existence a number of banknote-issuing and credit-creating national banks, including the Bank of England and the Bank of Scotland, these were relatively conservative, fractional reserve banking operations in which the proprietors had a traditional sense of the distinction between money and credit. Money was gold; credit was everything else. Fractional reserve banking was a system under which a bank could issue some notes that were not backed by real money, the only question being how many in relation to the underlying monetary reserves. Hence the “fraction.” If France’s new Royal Bank had been run along these lines, it might still be with us. After all, fractional reserve banking was right down Law’s alley, as it is basically a gamble on the part of the house that claims on no more than a fraction of the deposits will be presented for payment at any one time, matched by a gamble on the part of the depositor that he’ll be able to get his money out before the bank folds. Law was nothing if not a superb oddsmaker. Indeed, he had demonstrated an ability successfully to manage such a bank, with a little help from his friends, during the years of the General Bank. The problem was he viewed this as just a warmup, and his emergent concept of money was so broad as to qualify him for the chairmanship of today’s Fed. Not only did he draw no distinction between money and credit, he drew no distinction between credit and equity. Money is whatever we say it is. The rest, as they say, is history.

The Chairman Plays with Fire in a House of Cards. It is well established that the Chairman is innocent of any direct involvement in the creation of the Federal Reserve System. This dark event occurred in late December 1913, some 13 years before his birth, while decent folks were at home with their families. Today by far the most powerful branch of government, the Fed is not even a branch of government. Wrap your head around that one, Mr. Sixpack. Instead, in contrast to Law’s Banque Royale, which was founded over the opposition of the bankers, the Fed is the Mother of All Trade Associations: of the banks, by the banks and for the banks. The sordid process through which a bankers’ cabal foisted this fraud on a slumbering nation is detailed in several works that are staples of the gold bug library. See, e.g., Murray Rothbard, “The Origins of the Federal Reserve,” published in The Quarterly Journal of Austrian Economics, vol. 2, no. 3 (Fall 1999), pp 3-51. In any event, the Chairman had nothing to do with the creation of the Fed. He was not even in the vicinity.

Nor was the Chairman directly implicated in the creation of the modern global financial system in which the Fed plays the leading role. Historians are in broad agreement that the perps were a Brit, a Fabian socialist named John Maynard (“Lord John”) Keynes, and his American sidekick, a communist mole in the Treasury Department named Harry Dexter (“Harry the Weasel”) White. They devised a system, known to financial historians as “Bretton Woods,” in which all currencies were convertible into the U.S. dollar, and the dollar alone was convertible into gold. The deed was done in 1944, at a time when Anglo-American forces were on the ground in the major countries of the world, the United States was holding all their gold, and the Chairman, according to eyewitness accounts, was on tour with the Henry Jerome Orchestra.

Nor is there any credible evidence placing the Chairman in the White House on or about August 15, 1971, the date on which President Nixon severed the last flimsy connection of the dollar to gold by repudiating Bretton Woods. However, here at least the trail is getting warm. Recall that his mentor Dr. Burns was then the Fed Chairman, and he, at least, doubtless exercised no small influence on the development of a policy of this magnitude. This was so particularly given that Treasury Secretary John Connally had expressed his convictions on the subject (Tuccille, p. 100): “I can play it round or I can play it flat. Just tell me how to play it.” But the record is bereft of any indication that the Chairman himself had a hand in things.

So unlike Law, the Chairman did not invent his central bank or devise the system within which it operates. He just signed on to run it. Having said that, it must be conceded that the Chairman has shown he’s the right man for the job. For one thing, intuitionism is exactly the right philosophy for the head of a system in which, once again, money is what we say it is, a system with no anchor other than the need to preserve its own power. For another, the Chairman, as a former gold bug, knows what he has to do. He understands that in the post-Bretton Woods era, the main job of the Fed is to conduct the Mother of All Confidence Games: persuading not just U.S. citizens, but the entire world, that its unbacked promissory notes, not gold, are money.

That’s a tall order for a currency that has lost well over 90% of its value since the Fed was put in charge. It was made more difficult still by three factors that constrained the Fed’s ability to discharge its mandate. First, the main weapons in the Fed’s arsenal were very blunt instruments: it could create new money by injecting reserves into the banking system through its open market operations, and it could price money at the short end of the yield curve by setting overnight lending and discount rates. (The long end remains the preserve of gimlet-eyed traders in a vast international bond market, subject to whatever influence can brought to bear via derivatives; see below.) Sledgehammers both, not scalpels. Second, the banks through which the Fed exercised its regulatory power represented a shrinking share of capital markets activity. The investment banking business had been taken away from the banks in Depression era legislation known as Glass-Steagall, leaving them with only the traditional commercial banking franchise. Growth and innovation in the fixed income and equities markets in recent years had reduced substantially the role of commercial banks in the modern capital markets. Third, the Fed’s monopoly over money creation had been seriously eroded. As the Chairman conceded in a revealing colloquy with Rep. Ron Paul in February 2000, money can no longer be defined, let alone managed. Nevertheless, it is perfectly clear that others, not just the Fed, can create it, from Fannie Mae to Merrill Lynch: land banks, securitizers and super-money-creating stock promoters as far as the eye can see, all under the approving gaze of the shade of Mr. Law.

The Chairman, whatever his shortcomings as a monetary economist, understands power. To his indisputable credit as standard-bearer for his institution, he addressed the foregoing constraints head on:

First, he enthusiastically embraced the new technology of financial derivatives to serve as the Fed’s lever, through its banks, to make the world safe for its notes. One speculates that he developed an appreciation for what derivatives can do when shortly after he took office purchases of just over 800 MMI (Major Market Index) futures contracts on the Chicago Board of Trade appeared to halt the 1987 stock market crash in its tracks. See Tim Metz, Black Monday (William Morrow and Co., 1988). The Chairman’s strenuous lobbying efforts have been and continue to be instrumental in quashing any “outside” regulation of so-called over-the-counter derivatives, the private label financial instruments whose capacity to pose systemic risk was highlighted by the notorious 1998 Fed-engineered bailout of Long Term Capital Management. This was a private hedge fund in which a number of the world’s largest banks and other leveraged speculators were the major investors. It had about $1 trillion notional amount of derivatives on its books. The Fed told Congress at the time that had it not pushed the banks into a bailout, there was a very real risk that the global financial system would fail. Today, JPMorgan Chase, the “Fed’s bank,” has some $26 trillion notional amount of derivatives on its books. This, for anyone nodding off out there, is a VERY BIG NUMBER. It represents just over one-half of the total derivative positions held by all U.S. commercial banks. Now it cannot be said with certainty that some or all of this monster represents the Fed’s own trading account. But neither can it be credibly maintained that either the existence, the size or the composition of this position is at variance with the preferences of the Fed.

Second, once jurisdictional issues were resolved to his satisfaction, the Chairman supported the scrapping of the Glass-Steagall legislation, fostering the creation of new financial behemoths like JPMorgan Chase and CitiGroup. As a result, today’s banks more closely resemble the banks of 1913 in their ability to perform both investment banking and commercial banking functions. As a further result, the Fed can more directly project its power throughout the entire financial system rather than just the commercial banking sector.

Third, and most visibly, he set out aggressively to market the Fed and manage perceptions, now all-important in a world with no standards, in order to persuade the world that someone is in charge of the asylum. While he was powerless to rein in the Fed’s competitors in the money creation business, he could at least rush to the head of the mob. To sense how far he has gone here, recall that prior to 1994, FOMC meetings were secret. Compare that with CNBC’s FedWatch circus today. Try to recall the last time the Chairman or one of his minions was not in your face with some pronouncement or other, the underlying import of which is that the Fed is on the case.

At the end of the day, however, these are technical refinements rather than strategic contributions. The difference between a great man and a great politician may be seen in the Chairman’s greatest sin of omission, namely the historic opportunity missed to push for the reform of the global monetary system after the fall of the Soviet Union in 1991. The times called for bold vision on the part of those occupying the commanding heights of the monetary establishment. It was time for D’Anconia to drop the pretense. Sadly, the vision was lacking and no steps were taken to avert an unstructured unraveling of the system at a later date. One has no doubt that John Law, chastened by his own disastrous experience with funny money and benefiting from three hundred years of additional theory and practice, would not have let the moment pass.

A Tale of Two Bubbles

John Law Threw a Party. A central bank was only half of Law’s conception. The other half was a holding company that would combine in one conglomerate a broad array of commercial and financial activities, a one-stop-shop for the reinvigoration of trade, commerce and finance. Law’s Company of the West, or the Mississippi Company as it came to be known, was chartered in August 1717, over a year prior to the nationalization of his Banque Generale. Law served from the outset as managing director of both. Like his bank, his holding company started out modestly. It was initially established as an emerging markets development company licensed to exploit a vast swath of unexplored territory in North America extending from the Gulf Coast to Canada.

The Mississippi Company was capitalized in a series of share emissions, the first of which was a debt-for-equity swap in which outstanding government bills were sopped up in exchange for shares. The IPO was launched in September 1717. The total emission was 200,000 shares at a par value of 500 livres each. The effective price per share was about 150 livres, due to the 70% discount at which the government bills, accepted at face value in exchange for shares, were then trading. Despite the attractive pricing, the deal was a dog. Law had to devote a substantial amount of his time to marketing the opportunity in one-on-one investor presentations. The entire issue had not been fully subscribed even by September 1718. Law and the Regent ended up subscribing for about 80% of the issue.

The shares languished below par in sluggish trading through the spring of 1719. Then the first of a series of bold acquisitions and clever marketing strategies began to stir investor interest. Between June and October 1719, the Company issued an additional 424,000 shares in a series of new emissions. Now, however, subscribers had to pay cash rather than tender government bills.

Each of the subsequent tranches was a progressively easier sell. Historians believe this was due in part to some creative gimmicks: reliance on rights offerings in the early emissions, which had the effect of restricting liquidity and creating a loyal following; use of installment purchase options, which enabled subscribers to limit their out of pocket cost; use of bearer rather than registered shares, which ensured anonymity; use of share support schemes, with Company offices making a market in the shares; declaration of fat dividends, not generally supported by earnings; use of derivatives, including options and forward contracts; maintenance of 50% margin requirements, a feature which proved particularly attractive to novice retail investors; and periodic release of exciting news regarding major acquisitions, which kept the buzz going.

But the Chairman’s Jackson Hole address notwithstanding, a bubble is always and everywhere a monetary phenomenon. The real reason for the radical improvement in the tone of the market was that Law, as managing director of what was now the Banque Royale, was inflating the living daylights out of the money supply. A few statistics tell the tale. At the time it was nationalized in December 1718, the Banque Generale had in circulation approximately 39 million livres in banknotes. By December 1719, the Banque Royale had issued one billion livres in banknotes.

The shares duly embarked on a parabolic path, ascending from a trading range just under par (500 livres) in June 1719 to a peak of over 10 thousand livres per share in December 1719. The market capitalization of the Mississippi Company had gone from approximately 35 million livres at its IPO to approximately 5 billion livres a little over two years later. It had become, in the meantime, the Eggplant That Ate Paris. More than a proxy for the market, it was the market. It ultimately acquired, through purchase or merger: (a) all the French trading companies, including the Company of the East Indies and the China Company; (b) the Banque Royale itself; (c) the mint; (d) the national debt; (e) the tobacco monopoly; and (f) the “tax farms,” privatized tax collection services formerly operated by the financiers.

The Mississippi bubble was a democratic and therefore a revolutionary phenomenon in the context of the Ancien Régime. Butchers, bakers and candlestick makers jostled their social betters in the narrow Rue de Quincampoix where the shares were traded. A once-in-a-generation frenzy of speculation took root and an infectious greed came over the people. Nouveau riche speculators known as “Mississippians” began to out-pomp the old money. Anecdotes of ridiculous behavior by knave and nobleman alike abound in the literature. A hunchback rented out his back to serve as a table for share trading activities in the crowded street. Law himself became a demigod whose advice and counsel, as well as trading tips, were sought by all.

The bubble’s peak was marked, almost to the day, by Law’s appointment as Controller-General of Finances in early January 1720. Concerned by the bloat in the money supply and the irrational exuberance of the speculators, Law utilized his new powers to implement a variety of prudent measures to prick the bubble and engineer a soft landing. There had already been some slippage in confidence in the prior months as the smart money had begun scaling out. Investor confidence was probably not enhanced by rumors of shaky fundamentals in the core business. Reports, unenthusiastic in tone, were dribbling back from the few surviving suckers originally lured out to the fetid swamps of Louisiana, and were circulating to sometimes riotous effect among the thousands of criminals, vagabonds, prostitutes, orphans and unemployed who were being routinely press-ganged for transport West.

Investor confidence began to evaporate. The symbolic final blow to the bubble came with Law’s edict of May 21, 1720, which announced a bold deflationary measure, a phased reduction of the prices of shares and banknotes by almost half over a six-month period. Greeted with public outrage, this measure was quickly revoked, but the damage to investor psychology was irreversible. Law was placed under temporary house arrest. The shares tanked.

Confidence in Law’s system was further weakened by yet another measure that required shareholders to make substantial loans to the Company or suffer dilution. The shares continued their fall, trading in the mid 2000’s by December 1720. The Bank gradually fell apart, finally shutting its doors in late November 1720, all of its by then 2.7 billion livres in outstanding banknotes having been burned, canceled or converted into other instruments. Meanwhile, there was occasional mob violence in which Law and his family were in danger of physical attack by enraged investors. His position became untenable, and he left France, never to return, in December 1720.

As bubbles go, Law’s was not particularly injurious at the macro level. For one thing, it was limited to France, although it inspired some copycat activity across the English Channel. For another, the net effect was to leave the Crown, as the biggest debtor, in better shape than it was when Law first arrived: much of its debt was eliminated by means of the bubble. The financiers and the nobles, as the biggest creditors, took the hit. Finally, the social and economic readjustment was relatively straightforward. Law was banished, and the establishment forces Law had upset simply closed ranks and picked up the pieces. They launched investigations, punished successful speculators, and generally returned things to normal in a reactionary swing of the pendulum. The Ancien Régime was able to survive another couple of generations, to a time when it was swept aside and an even more radical experiment with paper money was to end in broken hearts and severed heads.

The Chairman Provides the Entertainment. Readers are no doubt familiar with the contours of the Chairman’s bubble. Its broad outlines are captured in any chart of financial or monetary activity that spans the mid-1990’s: after tracing some unexceptional baseline pattern, whatever it is you’re looking at (as long as it’s not gold) suddenly explodes to the upside (see, e.g., U.S. Money Growth: Words Unnecessary).

The popular conception is that the Chairman’s bubble was about the stock market. The Chairman himself is widely reported to focus intently on stock prices. However, it appears the action was really on the credit side. Here, where we ordinary mortals typically venture not, the numbers get very big indeed. Sean Corrigan (www.capital-insight.com) and Doug Noland (www.PrudentBear.com) have followed the credit side closely throughout.

A number of obvious distinctions separate the Greenspan bubble from Law’s Mississippi bubble. First, it is not clear why it was sprung on us in the first place. Whereas Law was trying to get the country moving again after Louis XIV had left it prostrate, no such domestic crisis confronted the Chairman in the mid-nineties when the party got going. There were, of course, a couple of international crises of the sort that roll off the line with mind-numbing regularity in the post-Bretton Woods era, but these would seemingly call for defensive, rather than offensive, play.

Second, it is not clear how much of it was his idea. On the one hand, the Chairman and the President-elect met in Little Rock in December 1992 and thereafter effectively struck a deal: $140 billion in deficit reduction in return for low interest rates, which the Chairman maintained would in turn deliver lower long rates and a rising stock market. On the other, some credit must surely go to the wily trader from Goldman Sachs and his faithful companion, the abrasive professor from Harvard, both inspired by the moral leadership of the man from Hope. The three amigos collaborated in the development of the “strong dollar” policy.

Third, whatever his direct responsibility for thinking up the bubble, the main charge against the Chairman appears to be more prosaic: his job was to kill this thing in its infancy, even at the cost of his popularity, and he didn’t do his job. Was he simply too committed to his deal with the President, too invested in his own forecast and therefore too reluctant to move to halt the rise even after things got so obviously out of hand? Only he can say. In any event, under the terms of the governing institutional arrangements, Fed chairmen are supposed to make the tough calls; that’s why they get the free tuna sandwiches at the commissary. Instead, the Chairman chose to ride the wave and bask in the adulation of the rabble. Now he has the grim task of playing out the bitter end of a chess game out of Bergman’s “Seventh Seal,” in which he’s down by seven pieces.

Fourth, whereas Law’s bubble was subversive of the established order in displacing the financiers and opening the channels of speculation to greed from all classes, the Chairman’s bubble is strictly an establishment phenomenon: of the banks, by the banks and for the banks. True, the great unwashed were invited in, but only to play their traditional role as mullets for the big boys.

The differences don’t stop there. While there is an obvious similarity between Law’s investor presentations to promote the Mississippi Company and the Chairman’s frequent paeans to the brilliance of Wall Street analysts, the wisdom of the stock market, and the marvel of productivity, the Chairman was not, for example, running WorldCom at the same time. Jack Grubman was.

Also, the Chairman’s bubble clearly outshines Law’s in three key dimensions: length, breadth and stakes. Whereas the Mississippi bubble was mercifully brief, no more than two years in duration at most, the Chairman’s is still with us 8 years later. It is now a zombie sustained only by the constant application of all the modern medical tricks at his command. It is also more pervasive than Law’s bubble, a tsunami of debt-based liquidity surging from one asset class into another, leaving destruction and economic dislocation in its wake. Last but not least, the stakes are vastly bigger. There are two aspects to this: domestic and international. Domestically, the Chairman’s bubble was not the hare-brained scheme of a foreign adventurer but the spawn of our most respected institutions. Nor is it likely, when all is said and done, simply to have disadvantaged some to the benefit of others. It’s much bigger than that. The political and social fallout from the final collapse can’t be predicted, but it won’t be pretty. The sensitivity of the issue may explain why mainstream media criticism of the Chairman remains so muted, and why the Congressional fawning continues unabated. By contrast, when Law’s bubble began to burst, his star faded quickly.

The Chairman’s bubble is most ominous in its international aspect. Federal Reserve notes are the sinews of the American Empire, more important by far than all its warships and its cruise missiles. Any reader who doubts this proposition is invited to contemplate the example of the late great Soviet Union. Dollar assets represent approximately three-quarters of the total reserves of the world’s central banks. One measure of their utility to the United States is the trade deficit, which at about $400 billion provides a rough proxy, depending on where one sits, for the annual “dues” currently assessed by the United States on the rest of the world for the burden of policing it, or for the tribute demanded of the world by the U.S. hegemon. In any event, a bubble whose collapse destroys global confidence in the Fed’s notes could well take down the entire system. The consequences would be on a scale that could not have been dreamed of by John Law, who had but one country to give for his bubble.

Down, down, damned spot!

Gratuitous Overview. As every gold bug knows, gold is the mortal enemy of unbacked paper money. Any government or group of governments that desires to operate a financial system based on unbacked paper, or “fiat currency” as it is called, must somehow suppress gold. Gold bugs also know that gold always triumphs over paper in the end. The historical record is unequivocal: every fiat monetary system has failed. The only variable is duration; the end will come much sooner if gold is not aggressively sidelined in the meantime. Technicians charged with running a fiat system have but four main weapons to accomplish this objective:

(1) Psychological Warfare. The means by which people are taught not to want gold, by treating it in the media and the academy as a barbarous relic with no contemporary significance, by making it unfashionable, portraying its defenders as Neanderthals or kooks, etc.

(2) Market Manipulation. Similar to psy-war, the means by which people are taught not to want gold as a function of the way it behaves in a market context. Big guys are warned off and/or induced to sell gold down, and little guys are kept away by poor price action.

(3) Indirect Coercion. The means by which official and unofficial burdens are placed on gold, making it too difficult or impractical for widespread use or acceptance.

(4) Direct Coercion. The outright prohibition on owning, acquiring or otherwise dealing in gold. Clumsy and ineffective, direct coercion is typically a last rather than a first resort.

The wars on gold waged by Messrs. Law and Greenspan involved the use of several of these techniques to good, albeit temporary, effect. For an in-depth treatment of the war on gold, readers are referred the recent release by the dean of the gold bugs, Ferdinand Lips: Gold Wars (FAME, 2002).

John Law Waged His War on Gold in the Open. Law’s system was, from its earliest conception, antithetical to gold. The whole point of it was to free the sovereign from the constraints of a scarce and inelastic currency. But people were accustomed to thinking of gold and silver as money. It would not have been effective to attempt to force them to use paper. Instead, Law first had to win their confidence by demonstrating its superiority. This he did through the bubble, which may be seen as a means to the end of weaning people off gold. Early on it worked, conferring easy profits on believers and teaching people to prefer paper to gold. As the bubble picked up steam, he turned to indirect coercion, and took a few steps to make gold more difficult to use in settlement of transactions. Given the constraints of 18th century technology, however, he could not manipulate the market, and so when these techniques failed he was forced to resort to direct coercion.

In the late stages of the bubble, as confidence in Law’s system began to wane, peoples’ thoughts turned naturally to real money. Hoarding, the primitive practice known outside mainstream channels as financial self-preservation; export, otherwise known as refusal of foreigners to take worthless paper; and all manner of related ills began to rear their ugly heads. Law followed the logic of the situation and issued, in rapid succession, a series of edicts prohibiting the use of gold and silver. The following edicts were issued as of the dates indicated in early 1720 (as cited in Murphy, p. 220):

28 January: Export of bullion and specie out of France prohibited.

31 January: Reinforcement of the regulation of 28 January.

4 February: Prohibition on the wearing of diamonds and precious jewels.

18 February: Prohibitions on the production, sale or export of gold or silver objects.

27 February: Specie holdings limited to 500 livres per person. All payments above 100 livres to be made in banknotes.

11 March: Gold and silver demonetized in phases over time.

These measures, increasingly shrill and desperate, were backed by severe penalties and supported by substantial snitch fees. Nevertheless, they proved ineffective, and were gradually revoked in a series of further edicts issued from early June on. In the final edict of the series, banknotes were declared no longer to be legal tender. Gold was boss.

The Chairman’s War Is a Covert Operation. For those readers who just joined us from the Planet Mars or the World Gold Council, I have a stunning revelation: today’s gold market is rigged. Yes, really! And it’s done by a bunch of banks with the backing of — get this — the Fed and the U.S. Treasury! Their shenanigans were so irksome even two years ago to Reg Howe that he up and sued them, right in federal court. You can read all about it here: BIS – GOLD PRICE FIXING CASE. Of course the case was tossed out, as it is well established in American jurisprudence that persons operating under authority of the Fed’s lettres de cachet are above the law.

Like Law’s war on gold, the Chairman’s is systemic and institutional rather than personal. But unlike Law’s war, the Chairman’s had been ongoing for many years before the Chairman formally enlisted. Following World War I, the classical gold standard was replaced by the weaker gold exchange standard, which itself collapsed during the Great Depression as Franklin D. Roosevelt confiscated the gold of U.S. citizens. After World War II, despite the extraordinary efforts of the London Gold Pool from 1961 to 1968, the even weaker Bretton Woods gold/dollar exchange system fell apart when Richard Nixon pulled the plug. Nixon’s repudiation of Bretton Woods marked the first time since the French Revolution that gold was explicitly declared not to be money. So August 15, 1971 marks the true beginning of the modern war on gold.

That it was the Americans who purported to demonetize gold is a cosmic irony. Our Constitution, the sacred document that stands as our only bulwark against the moral and political squalor of the Brits, was drafted largely by gold bugs. Expressly reflecting their distrust of fiat money confirmed by the inflationary disasters of their day, it is not an accommodating charter for a war on gold. Fortunately for today’s anti-gold warriors, the U.S. judiciary has risen to the challenge of rewriting it.

The initial attacks on gold following the American declaration of war in August 1971 occurred four years later. Why the sitzkrieg? Recall that in 1971, gold was still off limits to American citizens pursuant to the 1934 confiscation. The government’s assertion that gold no longer mattered meant that continuation of the ban on ownership by U.S. citizens could no longer be justified. So in another irony, the commencement of modern hostilities resulted in the passage of legislation which restored Americans’ right of financial self-defense for the first time since 1934. This legislation (Pub. L. 93-110, 87 Stat. 352, as amended by Pub. L. 93-373, 88 Stat. 445), largely the result of tireless advocacy by the late James Blanchard, finally came into effect on December 31, 1974.

The opening salvo raked the infant U.S. gold market. On January 8, 1975, the Treasury Department under Secretary William E. Simon dumped 750 thousand ounces of gold on the market in an auction designed not to maximize proceeds, but rather to demonstrate contempt for gold and depress the market for it. Part psy-war, part market manipulation, the Treasury’s auction had the desired effect: that morning, the London fix was $173 an ounce; the afternoon fix was about $168. See Anthony C. Sutton, The War on Gold (’76 Press, 1977).

The rationale for these and subsequent efforts to discredit and depress gold was, in the words of a Treasury aide quoted in the July 1975 edition of U.S. News and World Report (Sutton, p. 177): “You have to go through with this sale to show gold is demonetized. You have to put your money where your mouth is. The U.S. is selling gold to show that it doesn’t hurt us, that it’s good for us, that we enjoy it.”

The Treasury continued to dump gold throughout the 1970’s. It also acted through the IMF, which sold another 50 million ounces over a four-year period. On October 16, 1979, the Treasury Department cried uncle and announced that its “regular auctions would be replaced by ‘surprise auctions’ whenever the experts in Washington felt there was a need for ‘orderly markets'” (Lips, p. 105).

The years went by. After leaving Washington following the election of Jimmy Carter, the Chairman returned in triumph as the new Fed chairman in 1987. As with the central bank itself, the Chairman’s principal contributions to the modern war on gold appear to be of a technical and tactical nature. They number two, and they are closely related: (1) use of stealth; and (2) application of modern technology. Stealth, the steady denial that a war is being waged at all, is a striking feature of the war as waged on the Chairman’s watch. Despite the obvious illogic of this claim given the nature of the Fed’s post-Bretton Woods mission, and its equally obvious lack of credibility given the mound of circumstantial evidence amassed by gold bugs, the ongoing denial by an individual with widely publicized pro-gold leanings may be the key factor in the program’s success to date. Markets aren’t known for historical perspective and have a hard time coping with undisclosed official intervention. Speculators could overwhelm the London Gold Pool because they had a disclosed peg to shoot at; it is much more difficult to target a peg whose existence is denied by everyone but a bunch of Neanderthals and kooks.

The technological innovation is our old friend the derivatives contract. The Chairman’s war makes extensive use of both kinds: the private, over-the-counter contract of the type found mainly on the books of the banks; and the public contract traded on the COMEX. The COMEX in particular appears to play an outsize role in modern price suppression. The trading prices of its gold futures contracts have a profound influence on the accepted pricing of the physical metal throughout the world. This is despite the fact that only a small fraction of those contracts are ever settled by physical delivery; instead, they are rolled over, month after month, year after year. And it is despite the fact that the amount of physical gold on hand in COMEX depositaries to meet a demand for physical delivery is only a small fraction of the total net claims outstanding on that gold.

The escalation of the war on gold that erupted in the mid 1990’s is merely the flip side of the bubble. Here the Chairman’s sin is one of commission. Rather than not doing his job, he did his job all too well, and sanctioned (or tolerated; future historians can sort it out) the stealthy, high tech throttling of Old Yeller, whose barking might otherwise have alerted market denizens to the fact that there was something strange in the neighborhood. The unanticipated residue of this bear raid is a massive short position on the books of the banks that carried it out. To kill gold they had to borrow it from the central banks and sell it short at prices that will prove to have been a fraction of the true market-clearing price. Their problem now is that they owe the gold, but they don’t own it, and there’s no way they’re going to get it back, probably at any price. So somebody’s going to take a big hit. Initially, this will be a matter of negotiation between the banks and their central bank clients. We may already be observing forgiveness/bailout of some of these positions in some of the more loudly trumpeted sales by central banks. (How many more times is Welteke going to announce the sale of the same gold?) But my money is on Mr. Sixpack. The taxpayer will be called upon once again to socialize losses arising from the cupidity of the banks and the arrogance of the central banks. The only certainty is that the poor slob won’t know what hit him, as the truth will be buried in a dense thicket of disinformation.

The ultimate outcome in the current war on gold is not in doubt. It is far too late to avert the collapse of the Chairman’s bubble on the one hand, or the victory of gold on the other. The two are linked, but their end games may play out on different schedules. So how far off is the day when gold defeats this latest impudent attempt to suppress it? Who can say. We are in an age of total war, not the limited war of the 18th century. There is no quarter asked or given. The stakes could not be higher: the same ghastly consequences that will be set in train by the final collapse of the Chairman’s bubble will likely attend the final victory of gold.


So we see in our two protagonists some rather noteworthy differences, along with the acknowledged similarities. To sum up, we have in Mr. Law a bold visionary who set out to change the world. In the Chairman we have a technocrat who wanted to be powerful and well liked. Both succeeded for a time. Both, history will record, brought down the curtain on a fiat monetary system. But as between the two, history will pass a harsher judgment on the Chairman. That’s because he knew better. He betrayed the teachings of the mentor who had it right. Rand, who died in 1982, was talking directly to the man the Chairman later became when in Atlas Shrugged she had D’Anconia say:

Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: “account overdrawn.”

When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder for the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, “Who is destroying the world?” You are.

August 2002