German Gold Repatriation

By: MISES

The greatest threat to worldwide prosperity is the collapse of what remains of free-market capitalism. Not depletion of scarce natural resources. Not environmental degradation. Not global warming (or is it "climate change" now?) No, the greatest threat to worldwide prosperity is the complete collapse of what little remains of free-market capitalism. Throughout the world, and not just in totalitarian countries, the state has been advancing at the expense of economic liberty. The indispensible tool that enables the modern state to usurp our liberties is its access to unlimited amounts of fiat money controlled by central banks — i.e., the unholy alliance of the state with the central bank.

Fiat-money expansion has made the advance of statism possible through its ability to thwart the wishes of the people as the final arbiters of state spending. The state can obtain an almost limitless amount of fiat money from its central bank. It need not increase taxes or borrow honestly in the bond market, so it need not fear a tax revolt or high interest rates respectively. All it needs to do is convince the central bank to buy its debt. The state then takes control over more and more resources, squandering them on war and welfare, depriving the free-market economy of its capital base. Once the capital base has been depleted, the economy will go into a steady decline.

The poster child of this phenomenon is the (former) Soviet Union. Yes, total collapse is a real possibility — for us too. The Russian people may have believed that economic decline would reach a plateau, stop, and then reverse. As explained in stark terms by Dr. Yuri Maltsev, former economic advisor to Mikhail Gorbachev, in Requiem for Marx, the Soviet economy deteriorated into one of subsistence. The capital base of Russia had been destroyed, and collapse soon followed.

The monetary printing press is seen as an alternative to saving and investing as the means to grow the capital base. Monetary stimulus attempts to generate economic recovery mainly through exports.

If a nation can increase its exports, so the logic goes, it can increase employment, pay off debts, etc. So, rather than properly reforming the economy, monetary authorities engage in a destructive "race to the bottom" through competitive debasement of their currencies. First one country then another intervenes into its own currency markets to cheapen its currency against all others. But currency devaluation will not work, as explained in "Value in Devaluation?"

What is desperately needed is for one country to break from this failing and ultimately disastrous model of fiat-money expansion and its horrific effects. This one country must be in a special position whereby it is readily apparent that it is being harmed by currency debasement over which it has no control. Fortunately for the world there exists such a country: Germany.

The Intolerable Monetary Position of Germany Creates a Unique Opportunity

Germany is the fourth-largest economy in the world, behind only the United States, China, and Japan. Amazingly, it does not control its own money supply, because it is a member of the European Monetary Union (EMU), composed of 17 nations using a common currency — the euro. Each member, regardless of size, has an equal vote over monetary policy, administered by the European Central Bank (ECB). Increasingly Germany's is the lone voice for monetary restraint — recently it was outvoted 16 to 1 over an ECB plan to print euros in greater numbers in order to bail out bankrupt members of the EMU. This is a situation that would be intolerable for any other country; however, due to Germany's history, it is reluctant to be seen as "anti-Europe" and instead has tried to work within the EMU framework to force bankrupt countries to reform their economies. But this is a hopeless exercise, as explained by Dr. Philipp Bagus of King Juan Carlos University, Madrid, in his brilliant book Tragedy of the Euro. All the benefits flow to the irresponsible countries, so there is little incentive and no enforcement mechanism for meaningful reform. Therefore, in a previous article ("A Golden Opportunity "), your authors have called for Germany to leave the EMU, reinstate the deutsche mark, and anchor it to gold.

Most recently there have been calls within Germany to repatriate substantial gold reserves held overseas. The Bundestag — federal Germany's legislature and, as such, representing all diverse elements and factions in the country — is the impetuous behind this movement. The Bundesbank, Germany's still-extant central bank, has agreed to repatriate about one-tenth of its vast overseas gold deposits over the next three years.

But this is inadequate for the real task at hand. Germany must repatriate ALL of its gold. There is only one reason that a central bank would wish to repatriate its gold: to serve as reserves in a gold backed monetary system. The market must be assured that the gold actually exists, that it is under the total control of its rightful owner, and that it is not leased or part of a swap arrangement. Furthermore, the central bank must be willing to honor demands to deliver gold in the quantity specified in exchange for its paper money certificates and the commercial-bank book-entry deposits.

Delivery of Gold upon Demand Is Crucial

If Germany is to back the deutsche mark with its own gold, markets must be certain that the Bundesbank can and will deliver the gold upon demand. For under a gold-backed system the gold is the money. The pieces of paper that people carry in their wallets and keep in cookie jars and the book-entry receipts at commercial banks are not money per se; these are money substitutes that can be exchanged for real money — gold. The central bank can meet this requirement only if it has absolute control over its gold.

The Bundesbank has significant portions of its overseas gold deposits at the Federal Reserve Bank in New York and the Bank of England in London. At one time it may have made sense to deposit gold in these countries in order to protect it from the possibility that the Red Army would overrun Germany. Fortunately that threat is no more. But the Federal Reserve Bank has been very circumspect about displaying Germany's gold to its rightful owners. Now, I ask you, is this not very suspicious behavior? Why would the Fed refuse to show the actual gold to Germany or any other nation with gold deposits? The reason usually given is one of security, but what does the Fed think is going to happen? Does it think that armed robbers will be able to abscond with some bars? This is preposterous! The gold is the property of Germany. Germany should insist on viewing its gold, counting its gold, testing its gold for fineness, and making quick arrangements for moving its gold to its own vaults in Germany.

Let Justice Be Done

Either the gold is all there, and rumors to the contrary are baseless, or some portion of the gold is not there or is encumbered in some way. If the former, all is well. If the latter, then let's learn about it now, so that we can stop any further theft and so that we can establish a financial-crimes tribunal to try all who had a part in the theft. If that means prosecuting central-bank officials in the United States or the United Kingdom, so be it. If that means that the exchange rates for the dollar or the pound sterling fall in relation to other currencies, so be it.

Let's learn the truth, whatever that may be, so we can get on with the important work of placing the world's finances on the solid foundation of sound money and not on promises of confidence men. Let us adopt the Latin legal concept fiat justitia ruat caelum, "Let justice be done though the heavens fall," and not lose sight of the goal of saving what remains of free-market capitalism and beginning the difficult process of restoring our liberties.

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Godfrey Bloom is a financial economist by profession and winner of international fund management awards. He is a member of the European Parliament Economic and Monetary Affairs Committee and chairman of the Parliamentary Mises Book Club. Send him mail. See Godfrey Bloom's article archives.

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