1-800-869-5115 We welcome your inquiry.

Home How to Buy Gold Live Gold Price Daily Market Report Gold IRA Charts Stats Essays Trading & Storage High Net Worth Gold Coin Prices Gold Primer Q&A Breaking Gold News Mobile Gold Price Gold Coin Catalog About Us-Contact Search Video Round Tables

The Lure of the Abstract

by Otto Scott

Ed. Note: You are about to embark on an intellectual journey. Otto Scott starts this essay as a critique on the arrogance of academia, Washington's political elite and Wall Street. The discussion proceeds with an elegant defense of gold, the gold standard and gold money, and ends with an indictment of the American electoral system -- all appropriately offered at The Gilded Opinion the week of the Congressional election of 1998. "We have been ruled, for far too long," says Mr. Scott, "by persons who have lost their way, and have led us far astray. If they cannot extricate us, then we believe we should change our electoral system and release ourselves from the trap of only two national political parties - one completely corrupt and the other completely intimidated - and create new parties who know the difference between the lure of the abstract and reality." Otto Scott is one of the elder statesmen and certainly among the most articulate spokesmen for the hard money movement and the values it engenders. We strongly recommend his newsletter, Otto Scott's Compass. Please contact The Compass at www.the-compass.com

Two students are walking in Yellowstone Park when they come across a grizzly bear. The first, an Ivy League student from the top drawer of academic achievement, calculates that the bear can reach them in 17 seconds."We can't outpace him," he tells his companion, who is pulling on his running shoes. The other boy, who struggled to get a degree in one of the minor colleges, says to his friend: "I don't need to outpace the grizzly. I just need to outpace you."

A version of the story is used by Robert Sternberg, professor of psychology and education at Yale University to illustrate his ideas on intelligence. "Both the boys were smart," he says. "But while the Yale student was intelligent in the conventional analytical way used to define excellence in universities, the second was intelligent to the extent that you define intelligence as the ability to adapt to the environment." Speaking to the Oxford Forum for Assessment and Development meeting in London, Professor Sternberg outlined three definitions of intelligence - analytical, practical and creative. The first type, he says, seems to be understood and emphasized by academic institutions. But the second two, he fears, have been neglected and ignored. "You need more than IQ skills to get through life," he says.

"In U.S. society if you're good at IQ-like skills," he said "- the type of things that get you an A in school - you are extremely highly rewarded by the system. These systems promoted you from an early age so there is no incentive to acquire creative or practical skills. "People," he argues, "need an understanding of all three abilities." "Many people have good ideas that never go anywhere because they lack the practical persuasive skills to convince anyone of their worth," he says. "So why does society reward some attributes and not others? Professor Sternberg has identified the existence of what he calls 'closed systems' - self-selecting societies that shut out certain features."1

In the 19th century people of the United States were once distinguished among nations as people of practical shrewdness, commercial aptitudes and enormous creativity. The radio, telephone, phonograph, airplanes, oil wells, and typewriters all appeared here first. Our businessmen and inventors were fabulously rewarded, but their names 2 today are rarely well-known. Up through the twenties writers and athletes - occupations seldom attached to university English or athletic departments - were admired for their talents, and their incomes were seldom publicized. We were, you might say, a realistic but decidedly individualistic people. Today we respect the abstract more than individuals.

That is not to say that the abstract is not useful. The concept of zero, for instance, created inside the civilization of Islam, stands for nothing. But when used mathematically and placed beside a one, zero becomes a ten. Add two zeroes and we have 100, three mean a thousand, and so on. The Romans had no zero, and their computations soon became cumbersome. The abstraction "zero" enabled modern engineers, using computers that calculate faster and farther than the minds of men, to plot a spacecraft to the Moon.

But when used by money-market traders, bankers, governmental economists, and financial institutions to computerize numbers attached to strings of zeros beyond human comprehension, the abstract enabled the global economy to escape reality. In this sector, the abstract has been like the magic formula for the sorcerer's apprentice who unleashed forces he could not control. Global investments and credits today have risen to heights that probably total more legal tender than the world contains. That means that financial abstractions have outdistanced reality.

It is commonplace to see abstractions overwhelm the ability to observe, to think in fresh terms and to draw sensible conclusions. Professor Sternberg's conclusion that we are barring creative and practical people from higher education, and holding back the naturally talented by the bias of educators, means that we are allowing academics to thwart instead of helping humanity to advance. It's ironic that when this is pointed out, it is cited mainly because a professor points it out.

Of course, we did not need a professor to tell us this. The history of every society proves that academics are not the most intelligent group: they suffered the silent disdain of the practical and the creative throughout most of history. But their prestige in modern America and in Wilhelmine Germany have been exceptions. Americans, lacking respect for hereditary aristocracy, decided in the Nineteenth Century that schools are the most logical vehicles of advancement. Degrees became, decades ago, what the dissident professor Thorsten Veblen termed "Certificates of Gentility." Thus the abstraction that education is good has been so thoroughly imbedded that we are voting for more schools, more pupils at increasing costs and continually diluted courses every year. The abstraction has smothered the realities of our schools, which have become havens for both mediocre teachers and pupils. An increasingly widespread inability to separate the ability to deal in abstractions from a respect for realities is neither new nor useful to the world.

In 1830 or so the brilliant English historian Macaulay wrote "There can be no stronger proof of the degree in which the human mind has been misdirected [by an overestimation of intellectuals] than the history of the two greatest events which took place during the Middle Ages. We speak of the invention of gunpowder and the invention of printing. The date of both are unknown. The authors of both are unknown. Nor was this because men were too rude and ignorant to value intellectual superiority. The invention of gunpowder appears to have been contemporary with Petrarch and Boccaccio. The inventor of printing was certainly contemporary with Nicholas the Fifth, with Cosimo de' Medici, and a crowd of distinguished scholars . . . [who] would certainly not easily have been brought to believe that the inventor of the printing press did more than themselves. . . ."

A more immediate example is, however, the Long Term Capital Management Fund headed by John Meriwether, the onetime trading star of Salomon Brothers. Meriwether appeared invincible for a number of years during the boom. Experience seemed to convince him - among many others - that capital markets would continue to soar forever. That abstraction had many followers. It buoyed the administration of President Clinton, fattened many an upper family income and flew straight into the National Bed of Wishes. Not that everybody enjoyed it.

"Despite impressive economic growth," wrote Peter Brimelow in Forbes on October 5th of this year [1998], "a higher proportion of the U.S. population lives in poverty today than did three decades ago. A rising tide lifts all boats - or used to. The three-decade downtrend in the proportion of the U.S. population that lives in poverty ended abruptly in the late 1960s - ironically, after President Lyndon B. Johnson declared War on Poverty. Since then - and despite economic growth - the poverty rate has crept up. Now it's at 13.7 percent up from a low point of 11.1 percent in 1973.

"The Bush-Clinton boom did see some improvement in one area that has historically been a focus of concern. The proportion of the U.S. population that consists of blacks in poverty declined from 3.6 percent in 1992 to 3.0 percent in 1996, but that's still about where it was in 1973. The proportion of poor whites in the population has risen from 6.7 percent in 1973 to 7.6 percent in 1996. So where did the new poor come from? Two other minority groups, fed by immigration, have contributed to the poverty ranks: Hispanics, with a poverty rate of 29.4 percent and, surprisingly, Asians, with 14.5 percent. (The white poverty rate is 11.2 percent. The black rate is 28.4 percent.) . . ."

A factor that Brimelow did not mention is, however, the steady meltdown of our once-vaunted heavy industries. Steel is in peril, thanks to a flood of imports, to which the government has been indifferent. Most of our governmental bureaucrats appear to have never heard of American Friedrich List who wrote in three languages and helped Germany become an industrial titan in the 19th century. List argued that certain industries (like steel and agriculture) are essential to the survival of a nation and should never be allowed to fail through low tariff access by international competitors. Unfortunately that sort of common sense fell before the great Free Trade Abstraction. This benevolent sounding suicide has diminished virtually all the industries mockingly called "smokestacks" that are hated by the powerful environmental lobby. That lobby, by the way, appears to have no enemies among bureaucrats, educators and politicians, no matter how fanatically it tramples on the rights of human beings. Yet most of these have only a hazy grasp of the incredible intricacies of the natural forces of life. It's the environment in the abstract that they worship. Unaware that it is civilization and not primitivism that defeats plagues, poisons and animal damage, mistitled educators portray industry as a menace and teach schoolchildren to regard mining, logging, fishing, and oil drilling as menaces to health. Much of American industry has, therefore, faded away, taking skills and jobs with it. Free Trade has sent American women into the marketplace to repair some of this immense damage to blue collar families while American men are in decline. The abstractions defeat the realities.

Meanwhile, the onetime glory of the world's largest hedge fund, known as the Long Term Capital Management deserves special notice as a perfect abstraction. When John Meriwether left Salomon Brothers he took two of their top traders: Lawrence Hilibrand and Eric Rosenfeld and also recruited topflight academics to carry out mathematical analyses. Several other partners were trained at MIT or the Harvard School of Business. The most luminous of these were Robert Merton and Myron Scholes, winners of the Nobel Prize in 1997 for their work on option pricing.

LTCM was unique from the start. In essence it was a reinsurance fund for investments too risky for banks to handle and wished to lay off. How the banks then persuaded themselves to invest in the fund themselves defies logic, but they did. The terms for the investors were as steep as their optimism: $10 million down for three years, and no questions. For the time of the boom the fund performed brilliantly. For a time they were well rewarded. An analysis of LTCM's investing record by Institutional Investor magazine in November 1986 found that Long Term achieved an annualized 48.3 percent return to investors in its first 31 months of operations. But The Global Credit Bubble (an essay Compass published in April of this year, just when the bubble began to crack in Asia) caught up with LTCM this September. A consortium of banks came to the fund's rescue with $3.2 billion or so, but took control away from Meriwether and his genius partners. It then issued a statement to the effect that all the investor's money would be retained indefinitely (is this legal?) unconsciously proving Professor Sternberg's conclusions about the limits of scholarly talents. Abstractions about perpetual success cannot maintain balance in a world where nothing always goes up, except hot air.

LTCM was not alone in believing in a permanent boom. Numbers are not available, but people who illogically increased their equity in American industry when it was visibly melting at home drove the stock exchanges to new highs faster than ever before. This contradiction was not reasonable, and it is not surprising that as it continued to spread, it produced new illogicalities. This is how mutual funds appeared. Noting that small investors seldom have the background and commercial acumen to direct their own investments and are often fearful of professional brokers, the managers of mutual funds sought small investors who would allow them to handle all their funds "mutually" in a single large pool that would make their market choices for them. Just as a rising tide lifts all boats, the mutual funds began to return impressive earnings to their investors. In time the mutuals became more numerous than all the companies listed on Wall Street's Big Board. This impelled more mutual funds to enter the scene, and to branch away from stocks into bets on whether mortgages would rise or fall, or how the Big Board would fluctuate and other highly speculative tangents. These became known as "derivatives," since they did not possess shares but options based on futures.

What many investors did not seem to realize was that putting their money into mutuals or derivatives did not gain them any equity. Their entry into the financial world could not be used as collateral, was not insured, and was being placed in areas without their permission and beyond their knowledge. The SEC, for instance, insisted that stock purchasers acquire equity in their stocks, had to put a certain amount down, could use their stocks as collateral, could vote it, have access to annual meetings, and were insured. Despite a flood of warnings from hard money newsletters, the market continued to soar higher than ever before, longer than ever before. The newsletters began to lose subscribers because the wolf delayed his appearance and his existence was deemed improbable. Then he arrived in what Wall Street called "wolf packs:" speculators who attacked Asian currencies as "unsound." And the Great Global Credit Bubble began to leak and fall. Abstractions about a global economy began to splinter and a chilling reality appeared.

The Free Trade abstractions contained, of course, some persuasive economic reasoning, or they would not have grown so popular. Economic columnist Samuel Britian of the Financial Times of London said "more and more policy makers realized that it was quite absurd for each country's investment to be limited by its domestic savings. Resources would have been more efficiently used, and emerging countries would be able to develop faster, if nations with a net surplus of savings were able to lend them to countries with a net deficiency. It was on this basis that part of the 'Asian miracle' was financed." It also helped finance the remarkable growth spurt in the U.S. of the 1990s. Unfortunately, this second "spurt" consisted mainly of opening the U.S. market to the world while driving U.S. business out of the country. It should not have taken any special expertise to notice that this policy created a massive flood of foreign goods reflected in giant international trade deficits every year. Entire industries melted or moved abroad, taking jobs with them. That was reality and not an abstraction. Meanwhile, some of the foreign recipients of U.S. capital were in the control of fragile governments, even openly unfriendly governments like North Korea. To enable such a government to improve its nuclear capability, as President Clinton has done, seems little short of mindless.

It is important in this discussion to attempt to answer how we became so distant from the world of our predecessors, whose ambience was far from being as chaotic as the one we now inhabit. Fortunately the Time Machine enables us to stop and regard any previous period we choose, with all the deceptive wisdom of retroactive clarity. In 1931 a series of bank failures in Central Europe brought the economies of Germany and Austria down. Following these events and shaken by strikes and demonstrations, Great Britain devalued its currency and went off the gold standard. What this meant was succinctly described M. J. Bonn, a financial writer at the time:

"September 20, 1931, was the end of an age. It was the last day of the age of economic liberalism in which Great Britain had been the leader of the world. She had built a mighty empire in five continents by political domination and economic development. Now the whole edifice had crashed. The slogan 'safe as the Bank of England' no longer had any meaning. The Bank of England had gone into default. For the first time in history a great creditor country had devalued its currency and by so doing had inflicted heavy losses on all those who had trusted it."3

It must be remembered that the U.S. was then in a unique position, despite attacks on its gold stock in 1930, in the fall of 1931, in the first half of 1932 and early 1933. But 1931 ended with a gold drop of barely $174 million. After that, gold flowed into the country from Canada, Latin America and the Far East. The official gold reserve amounted to about $4 billion at the beginning of 1933, equal to about 50 percent of the Fed's liabilities, compared to about 70 percent in the 1920s. The dollar was therefore in a strong technical position, despite failures of small banks. As these failures spread, the Fed remained oddly immobile, and actually refused President Hoover's pleas to intervene. Then Roosevelt arrived, in March, 1933. He declared a "Bank Holiday" on March 6, 1933, which ended the panic. "On March 9, 1933, Congress enacted (at the President's request) the Emergency Banking Act of 1933, which gave him authority to prohibit the export, hoarding, melting, or earmarking of gold or silver coin or bullion or currency."4 (Emphasis added.)

A little less than a month later, the President issued Executive Order 6102 ordering all U.S. citizens to deliver their gold coin, bullion and certificates to the Federal Reserve, to be paid for by other forms of U.S. coin or currency. His next reach was to obtain authority to devalue the currency by not more than 50 percent. And after that, to outlaw all contracts written "in gold, or a particular kind of coin and currency of the United States."5 Citizens were told, of course, that failure to obey these various commands would result in severe penalties as well as confiscations of gold without redress.

Since it happened so long ago, modern readers may not appreciate the magnitudes of these expansions of governmental power. No civilized government had ever seized all the real money of its citizens. Only the crude, ignorant, and primitive rulers of the Soviet Union6 had ever committed such a crime against the people. The New York Times said, "There is probably no instance in history of so bold an economic experiment [!]." Melchior Palyi, in his book The Twilight of Gold cited this on page 281 and added, "The similarity with deliberate coin clipping was striking." Nor was that all of the "economic experiment." For nine months, starting April 20, 1933, President Roosevelt allowed the dollar to float at various rates. That ended January 31, 1934, when Mr. Roosevelt, assisted by Secretary of the Treasury, Henry Morganthau, announced that the gold dollar in the government's sole possession, would now be worth $35 per troy ounce, instead of the historic $20.67. That marked the first time any government arbitrarily changed the price of gold, which had always been set by the marketplace. In effect, he devalued the paper dollar he had paid the citizens for their gold by 41 percent - or almost half. Overall he took all the real money in order to provide the needy with the crumbs from the savings of the rich and the middle class, leaving only paper money, which he almost immediately inflated, and which he obviously planned to continue to inflate whenever he chose, at anytime. Gold was the yardstick to which paper dollars were attached. When that connection ended, the value of gold became whatever the U.S. President said it was.

Nor was that all. Conversions of the paper dollars into gold were forbidden to U.S. citizens, but remained open to foreign nations. This was something entirely new. Never before had any nation created a domestic currency weaker than its international currency in peacetime. Other nations began to follow suit. In retrospect it seems that Britain's devaluation made America's seem less shocking - on the surface. But the British devaluation was unplanned, provoked by violent demonstration, and a collapse of nerve by the central bank. Roosevelt, says Melchior Palyi, "acted with the cynical deliberation of a charlatan."

Very few Americans seemed to realize the seriousness of what President Roosevelt launched. Remember, gold was the oldest real money in the world. Forty seven nations used gold as their currency in the late 1920s (not a hundred years ago) when the world was trying to restore the economic stability of the pre-World War I civilization. In the early '30s, when the western nations devalued their currencies (refused to pay more than a part of their debts), respective governments and central banks in effect declared themselves insolvent. This created a tidal wave of losses for people around the world. This is what Britain and the U.S. did, in an abandonment of honor. This alone may have been the largest loss our civilization ever suffered.

This is not simply because the 1930s crash was so calamitous, but because it led the world into an abandonment of gold as currency for the masses, leaving the world's gold supply largely in the hands of central bankers and politicians. The limits that gold imposed on the printing of paper currency was removed. That meant that every government could print money at will, leaving citizens no alternative except money that had been converted into worthless coupons.

Some find this difficult to grasp. Few Americans now recall when gold was money. They think that gold is quaint, or bizarre. They agree with the Frenchman who called gold "a barbaric metal." But the Oppenheimers, who recently made massive purchases of South African gold, do not agree.7 But what do they think the dollar is, when its international value is a little less than what a nickel was when we had gold? How much lower can it fall? The Wall Street Journal, that sectarian center of paper stocks, bonds, mortgages etc., lists gold as a commodity. The fashionable abstraction is that there isn't enough gold in the world to support a global economy. Well, gold was plentiful enough for the twenties, and has been steadily produced ever since. Meanwhile, the abstracts against gold seem still imposing, but the now blazing bonfire of the paper currencies are bringing a renewed reality to the "global economy" opened up by President Roosevelt and other crypto-Socialists.

What we are watching, on an unprecedented scale, is the painful collapse of governments ignorant of history, repeating everywhere in the world outside Switzerland the error of John Law in France and Peron in Argentina, of the Germans in the early twenties and Hitler in World War II (when in the end his money was printed on only one side) and by Brazil on and off almost all the time.

We are told, meanwhile, that our government has not been steadily inflating - a lie so outrageous it is astonishing that anyone can utter it - and that we have been experiencing a boom. Well, the Street traders have been living high, but when CEO's of relatively small firms now command salaries in the millions per year, that sounds to us as if dollars are not what they were. When the eerie crowd that heads Time Warner shuffles tens of millions among one another, it seems strange that blue-collar incomes are falling. Some boom. When The New York Times, long the cheerleader of the "exuberance" Greenspan deplored, now tells us (October 16, 1998) that "the expansion of the 1990s is the weakest since World War II," we wonder where their reporters (Clintonites one and all) have been. Do they ever leave the Four Seasons?

The results of the "weakest boom," the suddenly serious Times tells us, "is painfully obvious in many households. While wealthier families enjoyed big gains, particularly from the booming stock market, many households find that their incomes, adjusted for inflation, are no higher today than they were in 1989. . . . Americans for the most part have been running in place for 25 years. And as economies around the world weaken, Americans are unlikely to gain ground soon. . . .

"By one estimate, 5 percent of all the nation's households have filed for bankruptcy protection the last five years. While the job market is strong .. . if the economy goes into a downturn, is it safer to have the government running up debt, or the citizenry? After all the government can print money or borrow to meet its obligations, while the citizenry is not nearly so flexible. If layoffs or shrinking stock portfolios or falling home prices were to leave consumers without the means to pay their loans, the defaults and bankruptcies could weigh at least as heavily on the economy as the shock from a collapsing hedge fund . . . .

"After adjustment for inflation, [we thought inflation had been solved!] the 1997 median family income, $37,005, is roughly where it was in 1989 - and only $1,260 above 1973's income of $35,745. Many households in the 1960s added more to their incomes in a single year than their counterparts today have added in 25 years. And they did it with one wage earner, not two or three, working fewer hours than the average jobholder does today."

Not a word about the closed factories, or the huge sums lavished on other nations. Not a word about the Global Economy, or the nations who regard our subsidies, our unsecured "loans," our donations of commodities ranging from food and medicines to military supplies, weapons as well as soldiers, sailors, marines, planes and pilots.

In view of the fact that 35 percent of all 18 to 24-year-olds are taking college courses, it may not be sensible to accept Dr. Sternberg's analysis that we are educating too many students who are bright but uncreative. It does not seem to us that any nation's population is loaded with 35 percent elite. It seems to us more likely that we are orienting rather than educating our students to be politically supersensitive more than to think - and who too often dominate the best jobs in our government, media, colleges, and professions. We have been ruled, for far too long, by persons who have lost their way, and have led us far astray. If they cannot extricate us, then we believe we should change our electoral system and release ourselves from the trap of only two national political parties - one completely corrupt and the other completely intimidated - and create new parties who know the difference between the lure of the abstract and reality.

NOTES

1. "High IQ Is Not Enough" by Richard Donkin, a columnist in the Financial Times of London, 25 Sept. 1998.

2. Except for Bill Gates, now being enviously pursued by our great Justice Department for creating more millionaires in his company than any other person in all business history, and who dropped out of college to began his inventing in a garage.

3. The Twilight of Gold: 1914-1936, Myths and Realities by Melchior Palyi,Regnery, 1972, p. 278.

4. Ibid.

5. The Hard Money Investor, edited by Hal Bryan, P.O. Box 11, Enumclaw, WA 98022, March 1966.

6. Whom Mr. Roosevelt admired, and ordered their diplomatic recognition at the peak of Stalin's purges.

7. And have moved their holdings from the South African to the London Stock Exchange.

by Otto Scott
November 9, 1998

Copyright © 1998 by Otto Scott's Compass. All Rights Reserved.
Reprinted by USAGOLD with permission. No further reproduction without permission.

For a complete list of available works by Mr. Scott, including his monthly journal (Otto Scott's Compass), books, and audio tapes (Points of the Compass), please visit The Compass at www.the-compass.com.

Return to the The Gilded Opinion Index Page

Centennial Precious Metals Gold coins & bullion since 1973 P.O. Box 460009 Denver, Colorado 80246-0009

We invite you to contact us for quotes and purchase information. 1-800-869-5115 00-800-8720-8720 6 am to 5 pm Mountain Time Monday-Friday admin@usagold.com