Keynes, the closet gold bug

Posted MAY 4 2012 by JAN SKOYLES in 

In his 1923 book ‘A Tract on Monetary Reform’, John Maynard Keynes famously wrote ‘In truth, the gold standard is already a barbarous relic.’

Many gold bugs have come to take this quote as a belief that Keynes applied this line of thought, by implication, to gold as well.

However, according to a new paper, ‘Keynes the Stock Market Investor’ it seems the British economist was a bigger fan of gold and gold mining stocks than we have been led to believe.

The paper aims to show the relevance of Keynes’ asset management approach to today’s investors. It praises him for his alternative approach to investing which paved the way for, ‘institutional investors in making a substantial allocation to the new asset class, equities.’

However, it seems that the most successful areas of his portfolio were thanks to his contacts with people in significantly high places.

As the Wall Street Journal wrote, in light of the new paper, Keynes ‘made titanic bets on industries he thought were cheap; by 1936, he had 66% of his portfolio in mining stocks and not a farthing in bank or energy shares. South African gold companies, he correctly foresaw, would benefit from falling currency values.’

How clever of him. To use his contacts that is. Not to appreciate the importance of gold ownership.

Gold price climbs

According to Robert Wenzel; Keynes, along with Bernard Baruch, heavily influenced Roosevelt’s decisions in regard to gold confiscation and the fixing of the gold price.

In 1933, President Roosevelt’s administration cut the United States’ ties to the gold standard, two years after the United Kingdom. Not only this, but Roosevelt went on to confiscate all physical gold and gold certificates, in exchange for fiat money. It was even prohibited for gold to be used as a reference for value in contracts.

Gold confiscation occurred in April 1933, later that year the New York Times published an open letterfrom the economist to the US president. The letter urged President Roosevelt to, ‘control the dollar exchange by buying and selling gold and foreign currencies so as to avoid wide or meaningless fluctuations, with a right to shift the parities at any time but with a declared intention only so to do either to correct a serious want of balance in America’s international receipts and payments or to meet a shift in your domestic price level relatively to price-levels abroad.

John Maynard Keynes, by urging the US government to prop up the price of gold, was able to invest in gold mining stocks (those of Union Corporation) safe in the knowledge that the cost of gold was guaranteed to increase at the behest of the President of the United States.

In 1933, when it is assumed Keynes bought the majority of his gold mining stocks, the gold price was fixed at $20.67.

Gold miners knew therefore, that they would be able to receive $20.67 regardless of their cost of production. Looking at the CPI and unemployment rates during the 1930s (as Paul Kasriel demonstrates) production costs were most likely going down yet the price of gold was still guaranteed. Whilst other non-gold producing companies may also have been experiencing lower production costs, they were unable to receive a guaranteed price for their product.

Devalue the dollar with gold

President Roosevelt’s aim was to boost depressed commodity prices by devaluing the dollar through the increase in the gold price. Through a series of legislations the dollar was removed from the gold standard. On May 12 1933, the President was given powers to decrease the gold content of the dollar by up to 50%.

In October 1933, during one of his ‘fireside chats’ he told the American public of his plans with gold. FDR Operative Jesse Jones explains:

He reiterated that the “definite policy of the Government has been to restore commodity price levels.” He said that when these had been restored “we shall act to establish and maintain a dollar which will not change its purchasing and debt paying power during the succeeding generation.”

Then he said “It becomes increasingly important to develop and apply further measures which may be necessary from time to time to control the gold value of our own dollar at home.” And he added that “the United States must take firmly in its own hands the control of the gold value of our dollar.”

…Mr. Roosevelt went on to announce the establishment of a government market for gold in the United States. He said he was authorizing the RFC to buy gold newly mined in the United States at prices to be determined from time to time after we had consulted with him and the Secretary of Treasury.

“Whenever necessary to the end in view,” he added, “we shall also buy or sell gold in the world market…Government credit will be maintained and a sound currency will accompany a rise in the American commodity price level.”

Thus he began to haul in the anchor to which the dollar had been tied for thirty-four years.

The gold price climbed 69% to $35 per ounce by January 1934. The US had, as Kasriel writes, ‘established a dollar-gold convertibility for foreign entities and, presumably for domestic gold producers, of $35 per ounce of gold… Moreover, the Treasury stood ready to purchase as much gold as was presented to it at $35 an ounce.’

As Mr Jones explains, by the time the gold-buying program was completed on January 17 1934, ‘[T]he RFC had bought 695,027.423 ounces of domestic gold for $23,363,754.56 and 3,418,993.045 ounces of foreign gold in the London and Paris markets for $111,037,195.78, a total of $134,400,950.34.

The average cost to us for the foreign gold had been $32.48 per ounce, and for the newly mined domestic gold, $33.62 per ounce. At the start the RFC had decided to issue $50,000,000 of notes with which to buy gold. This was increased by our board a few weeks later to $100,000,000 and then to $150,000,000.

Therefore, it is little wonder that Keynes’ portfolio performed so spectacularly for its time. There is little chance other mining stocks experienced government lead price increases of 69%.

Learn from Keynes

Keynes’ behaviour in buying up gold mining stocks just goes further to prove that citizens are unable to trust governments when it comes to maintaining the value of the currency and therefore your wealth.

The economist may have had insider knowledge of the plans to push the gold price up, investors today are lucky that they do not need to resort to the same immoral and (now) illegal practices. The European, British and US Central banks have spray painted the message on the wall; ‘CURRENCIES ARE BEING DEVALUED’. The message gets bolder with every round of quantitative easing and debt auction.

At present we are witnessing a delay in the markets catching up to the implications of currency devaluation. Perhaps, for once, we need to take a page out of Keynes’ book and invest in gold. But do one better and buy the real stuff, rather than his favoured paper.

Keynes chose his gold investment in light of the currency devaluation which lead us into this current crisis, surely the fundamental reasons to buy gold are now even stronger?

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Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.


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About the Author

Jan SkoylesJan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working at Cheviot Asset Management in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from university Jan joined The Real Asset Co research desk and now contributes to the Cobden Centre, The Commentator, The Renegade Economist and Market Oracle.View all posts by Jan Skoyles →