de facto gold standard

What is a de facto gold standard ?

De facto is an expression of the Latin language and means " by fact". Lawyers use the term de facto when they want to refer to something that is a common practice not necessarily ordained by law.

A gold standard is a law where a country pegs all financial transactions to a fixed gold price. At this point gold is considered " commodity money".

A defacto gold standard is therefore a standard based on the price of gold but not a law that trades must be carried out on this gold standard.

The current method of printing money ( paper currency ) at will by several different countries and unions is the antithesis to a gold standard.

Meanwhile people, retail traders and professional financial assets managers look to gold has a safety in gold acquisition knowing full well that a piece of paper is nothing more than a future contract with no expiry date. A dollar bought or received today buys more or less in tomorrows market. A paper currency is tradeable.


Here's an article by The Market Oracle which is called "Gold $1200 Means Defacto Resurrection of the Gold Standard".

What it says is that investors look to the US dollar as a measure of security in a world where financial security is hanging by a thread. It's a world where money lenders need to create an illusion of wealth by printing massive amounts of fiat paper currency in order to have the consumer feel rich enough to starts borrowing and spending again in order to continue the illusion of strong economies. The success of such an illusion is measured in inflation. More government paper money in the system.

With money, investors buy gold. It's the commodity of choice should the markets collapse to levels such has were witnessed in 1929.



Meanwhile gold at 1200 is a resurrection of a gold standard states the article.

" The parabolic rally in the gold market might in fact, be representing a historic flight from paper currencies of all nationalities, which are becoming increasing worthless. Replacing the paper currency system is resurrection of the Gold standard. That is to say, the proper way to value bond and stock markets, would be through the prism of gold, rather than in the host country's currency."

Characteristics of a Gold Standard

There are eight characteristics of a gold standard. The Reference for Business encyclopedia of Business list them the following way.

1. The value of the principle unit of a currency of a country on a gold standard is measured in relation to a fixed and predetermined quantity of gold
2. Paper money and gold can be equally exchanged for each other at a legal predetermined rate. This is known as inter-convertibility
3. Metal coins ( other that gold) can be used only as token money. That is, the nominal face value of the coin must be greater than the intrinsic value of the metal in the coin
4. Monetary authorities will accept gold bullion on demand and coin it or convert the domestic currency into gold. A nominal service fee ( or seigniorage) is charged to cover minting costs while providing the government with revenue. The monetary authorities will also exchange paper currency and nongold coins for gold on demand. This is referred to as convertibility.
5. International reserves are mostly held in gold.
6. Individuals in the country are free to hold any amount of gold in bullion or coin.
7. Individuals are free to import and export gold in any amount.
8. The creation of paper money is linked to the amount of gold reserves held by the central banking system.

Gold standards generally hold inflation in check and hold currency rates stable.

A gold standard doesn't allow a country or government to increase money supplies easily and it doesn't allow a country to intervene where they would move the international currency rate.

There is a difference between a true gold standard, an official gold standard, and a de facto gold standard.

Great Gold Robbery

It's called the Emergency Banking Act of 1933 but some people have dubbed it the Great Gold Robbery of 1933.

In 1917, the Trading with the Enemy Act had been approved by legislators in the United States. The intention of this piece of legislature was to make it a criminal act for Americans citizens to trade or conduct economic transaction with foreigners considered enemies of the US. In 1917 the nations of the world were in the midst of a global war.

Part of the Trading with the Enemy Act stated that the American President, at this time, Woodrow Wilson, had the legal right to alt the trading of precious metals, foreign currency, and other financial assets carried out by any US citizen. An amendment to the act in 1918 increased Wilson's power to include the right to investigate the hoarding of gold practices of US citizens, and to regulate and prohibit such activity. This Trading with the Enemy Act was supposed to carry through to two years beyond the resolution of WW1.

But the Act remained in power well beyond these two years and in the 1930's it would come back to haunt the very citizens it was promoted to protect. The enemy had nearly become the American citizen.

In 1933 Roosevelt was presiding in the US after Harding, Coolidge, and Hoover had seen the country through the wild financial post WW1 swing which brought on the Great Depression which followed the market crash of 1929.

In 1933 Roosevelt and his administration were working on the Roosevelt's banking bill. The bill was in draft and to some representatives it was a bill that offered complete control over the banking system by a few individuals. The legislature was passed quickly through the house and was signed by Roosevelt as the Emergency Banking Act of 1933.

But the coup did not end with this new act. During these same precedings the 1917 Trading with the Enemy Act was amended and where the words "during times of war" once read, now the act stated that in times of national emergency considered capable of causing civil unrest inside the country, the President could exercise the right of alting the trading or hoarding of gold and other financial assets.

Discussion on the passing of the bill was minimal which by many records was part of the larger plan. ( Watch an hour of Bloomberg when the markets are volatile and you get the general idea of how pumping news and dumping assets while the public is confused is something that the big money players have long ago mastered ).

Within a month after signing the Emergency Banking Act and amending the Trading with the Enemy Act, Roosevelt called in his gold bullion.

Corporations and individuals in America were enforced by law to turn over their gold holdings to the feds. The individuals and corporations were give paper currency as a forced trade.

A short time later the feds entered the Bretton Woods Agreement and set a new gold standard quote 15 dollars higher than the market price. From 20.67 the price of gold moved to 35 dollars and remained pegged there inside the USA until 1971.

The great depression had turned into the great gold robbery.

Legal Tender had become whatever the government made it out to be and for now it was the fiat dollar of the US.

What is a Gold Standard ?

"We have gold because we cannot trust governments". Herbert Hoover

By the same reasoning governments can also force people to rid themselves of their gold and give them paper money or another currency in exchange. This happened in the US with the Emergency Banking Act of 1933 when Roosevelt was looking to edge the country by stabilizing the banking industry.

What is a gold standard ?

Paper money is so well accepted as an exchange medium that few people consider what a paper dollar is. It's a contract. It is a means of trading one good or service at a price today and holding the paper dollar contract for a period until another trade is to be implemented. The value of that paper dollar is worth more or less in the future. That is true in a free market where the paper dollar is not pegged to the price of an underlying commodity such as gold.

When a countries currency is pegged to a standard it continues to fluctuate in value but only to the extent of the underlyings value. When a gold standard is adopted by a country then that countries currency is worth as much as gold.

Paper money is fiat. It is worth nothing but the ink and paper that are used to make it or it is worth has much as the underlying financial asset which it is pegged to. If it is backed by nothing then it has no underlying fundamental value. In such a case the price of a fiat is based on the investors trust that the paper money will continue to be used in the future and that someone will trust that it is tradeable for a value that is close in price to what it was acquired at.

But paper money tends to make people nervous and when people lose confidence in a fiat they dump it like there was no tomorrow. The worst case scenario for a fiat is a period of hyper inflation as was seen in Germany in the early 1900's. Consider that within a year a person was paying the price of a house for a piece of bread and you begin to understand the weakness of fiat.

Back when England was the superpower and the British pound was the main currency of the world, paper money became a major problem. This had to do with creating debt with fiat as the underlying saviour. By 1821 England responded by imposing a gold standard. For some time all trades were carried out under the gold standard. Stockpiling gold became a means of measuring wealth and massive amounts of gold was mined and stocked in vaults for future use.

In 1871 Germany followed suit and soon most nations were playing the trading game by the rules of a gold standard. The US lagged in their decision to join the movement towards a gold standard. They were the last major country to play along.

In 1821 the Industrial Revolution was in it's infancy. Steam engines and iron led the way for railroads, automobiles, and airplanes. Factories were the new way of mass producing goods that were shipped worldwide and traded at a standard gold quote.

1914 comes along and the world is in mass disagreement. Americas role in the industrial revolution has made them rich and powerful and they have become as great an influence on world economic balance as their former overlords from the old World. The first world war breaks out and the gold standard contract is also about to be broken.

Countries of the world look to the US and England for financial security and the fiat of both these nations becomes the reserve currencies of the world. Buying currency with gold means that the US and the Brit gold vaults are getting fat, as are those of other leading nations, including France. Most smaller countries give up their gold for paper currency.

War is costly however. England pays a great price and lose much of their wealth. The US dollar eventually remains the only reserve currency.

In 1918 the first world war ends and people think that no war could ever be so atrocious. There is a global sentiment that the worst is behind them and the 1920's is a period of high rolling and high risk, over leveraged speculation. It is a period where people overdose on buying debt.

1929 comes along and a sudden shock of reality instills itself in the minds of those gamblers who are holding debt held on an underlying paper currency. Suddenly everyone is rushing to trade their paper money for gold bullion as they watch the stock markets plunge into the abyss.

England uses its gold reserves to pay off war debts leaving the US and France as major gold holding countries.

In 1931 England breaks away from the gold standard.

1933 comes along and the Roosevelt administration forces the gold out of their pockets by enforcing a new legislation where gold is to be converted to paper money. This is a rule and not a request.

In 1934 Gold in the US is revalued to 35 dollars and ounce from 20.67 which means that the American citizen who was given fiat for their gold, and who looked to buy new gold would have taken a nearly 2 to 1 depreciation on their trade.

In 1939 the US had a lock on gold reserves. They held a vast majority of the gold supply already mined and enough gold to back the printing of untold volumes of fiat which was being bought by global players of the economic game. In 1939 Hitler was forming his Aryan nation on the presumption that he would lead the Germans away from a system of hyper inflation which they'd witnessed when the Deutsch Mark was rendered worthless. Amongst his many promises he convinced his followers that they would move towards a Utopian society.

But the world would have no such thing.

The second world war ended in 1945 after the US joined the Brits and Churchill. As it was ending the international bankers were signing on to the Bretton Woods Agreement which was a new gold standard where the American dollar was sold on the gold reserves held in the American vaults.

However by the mid 1960's much of the gold from the US pegged at 35 dollars an ounce was being challenged by international gold which was being traded on a fluctuating or floating price market. The debt bought on paper currency ( US dollars ) was no longer finding a fair underlying value and the American Bretton Woods gold standard was being revamped.

In 1971 central banks worldwide were no longer seeking gold as an underlying commodity to appraise the value of fiat paper money.

The gold standard was no more.