Simplex Munditis

An interview with John Exter (June 1991)

This interview appeared in the June, 1991 Moneychanger. In recent days I have been thinking about it over and over, because it appears that after all these years, John Exter’s vision of the final debacle of fiat money is now unfolding. When we did this interview back in 1991, the monetary system, still in the throes of the S&L crisis, already was showing signs of unravelling, but it recovered for yet another and more expanded bubble in the US and the world. I have slightly edited this version to remove certain references which were then current but are now obscure. Its timelessness, however, endures.

I would only add that our present fiat monetary system always tends to excess. Because it has been granted a legal monopoly to create money out of thin air, subject as a system to a mere 1.16% reserve requirement. It is in the interest of the holders of this monopoly, and everyone who can wield its power through leverage, to use that leverage to the hilt. Absent government regulation or a collapse of confidence, it will always expand leverage and debt until it collapses.

Now we are ending a period of exuberant faith in this system. It is no surprise that faith, expressed as "globalism" and so-called "free markets," has been busily dismantling the institutional controls and regulations which were established in the wake of the last global collapse, the Great Depression. In a recent Esquire (10/98) CFR foreign policy expert Walter Russell Mead wrote, "The faster capitalism goes, the more dangerous it gets. For 25 years, the US has been using its international influence to make the global economic system more like the laissez-faire free market system of the Twenties, and now we’ve got what we want: a system that is free to grow rapidly. And—surprise, surprise—free to crash and burn."

The real tragedy in all this is not the blindness of the "experts" which led to removing regulation. Rather, it is their stubborn, wilful blindness to the true cause of the woe. It is not capitalism, or much less free markets, which have caused this catastrophe, but a governemnt sponsored system of fraudulen fiat money. It promises, and for a time delivers, prosperity, but the end is always a bitter impoverishment of nations. John Exter always forces us to return to this simple truth.

Simplex munditis—elegant simplicity—was the rule the Roman poet Horace laid down for the uttermost refinement of taste. Nor does aesthetics disagree with economics or other sciences, for science always prefers the simplest theory which explains and comprehends the greatest number of facts.

But our fickle human minds grow forgetful. Over the years simple, timeless truths lose the glitter of novelty or become so universally accepted that we forget how brilliantly they shone when new. Watts’ steam engine no longer interests us for its novelty, although in its day it revolutionised the western world. Although the microchip is changing our world today, after 20 years’ exposure it is a commonplace.

Today the monetary truths which Mr. John Exter has enunciated for 40 years—the gold standard, the danger of debt, a deflationary economic collapse—have become (in some small circles, at least) unchallenged axioms, but when he first began to explain them he was practically alone. Now that the evidences of a deflationary depression are undeniable, it is fitting and profitable to return to this hard money pioneer and re-examine our foundations.

John Exter is one of the world’s most knowledgeable individuals on international banking and the US Federal Reserve System. Over the years he has known the world’s most important central bankers on a first name basis. His experience has given him a unique foundation for understanding the monetary events of the past 80 years.

Born in 1910, Mr. Exter went to graduate school determined to discover what had caused the devastating Great Depression. After graduating from the College of Wooster (1928-1932) he went to the Fletcher School of Law and Diplomacy and, in 1939, to Harvard for graduate work in economics.

After a stint at MIT during World War II, Mr. Exter went to the Board of Governors of the Federal Reserve System as an economist. In 1948 he served first as adviser to the Secretary of Finance of the Philippines, and then to the Minister of Finance of Ceylon (now Sri Lanka) on the establishment of central banks. He became the first governor of the newly organised Central Bank of Ceylon in 1950.

In 1953 Mr. Exter was named division chief for the Middle East with the International Bank for Reconstruction and Development (World Bank). In 1954 the Federal Reserve Bank of New York appointed him vice president in charge of international banking and gold and silver operations.

Mr. Exter left the New York Fed in 1959 to join First National City Bank (then the world’s second largest bank, now called Citibank) as vice president. In 1960 he became senior vice president. As an international monetary adviser for the bank’s International Banking Group he had special responsibilities for relations with foreign central banks and governments. In 1972 he took early retirement to become a private consultant.

Mr. Exter is a member of the Council on Foreign Relations (CFR), the Committee for Monetary Research and Education, the Mont Pelerin Society, and other groups and boards too numerous to recount. He and his wife Marion have four children. He very kindly made time for this interview on June 14, 1991.

Moneychanger: After your remarkable consistency over the years, it now seems your predictions are coming to pass. Before we concentrate on that, let’s talk a little bit about your background. I was intrigued to learn that you had gone to graduate school with Paul Samuelson, America’s most unrepentant Keynesian economist. 

Exter: [laughing] I’ll say I did, yes. I knew him at Harvard graduate school.

Moneychanger: You arrived at Harvard about the same time that Keynesianism got there?

Exter: Keynes published his famous book, The General Theory of Employment, Interest, and Money, in 1936. I went to Harvard graduate school in the fall of 1939, 3 years later. By that time the principal professors of economics at Harvard had just grabbed Keynesianism and run away with it. It was like a new religion.

The leading Keynesian at Harvard was Alvin Hansen. His sidekick was John Williams. Williams was much more circumspect, much more doubtful about Keynesianism. When I later became a vice president of the Federal Reserve Bank of New York in charge of foreign operations, Prof. John Williams’ office was next to mine. He wasn’t only a professor of economics at Harvard specialising in money and banking, but also a vice president of the Federal Reserve of New York for years and years. That may have been the reason I got the job: I got along much better with him than with Alvin Hansen.

I should not say that I rejected Keynesianism right away. I had it pumped into me in those early years and actually taught it in the entry level economics course at Harvard. As the years wore on I became more and more sceptical. In 1943 I went to the Radiation Laboratory at MIT and ultimately became the assistant to the director of the laboratory. I helped Paul Samuelson get a job there, and from time to time we had lunch together. On one occasion Paul leaned over to me and said, "John, are you or are you not a Keynesian?"

I answered, "Paul, I have my doubts—serious doubts." I was not yet ready to take him on.

Later I did take him on, after I became Senior VP of Citibank. We met from time to time through those years, attended the same conferences, and were always antagonists. I was always in the minority—there were very few people on my side. Most were Keynesians, or, later on, Friedmanites.

Moneychanger: At the bottom they don’t differ much from each other.

Exter: They differ some. Both believe in government intervention in the economy, although Friedman restricts his intervention to the Federal Reserve, which is the worst intervention of all. They fight, too, but not as strongly as I have fought both of them. I put it right out on the table. In 1962 I was in Boston to make a speech to the [corporate] Treasurers’ Club of Boston for Citibank. I had the morning free, so I thought I’d call on Paul Samuelson. He was right across the river at MIT.

We immediately got into a terrific argument about why the dollar was weak and why we were losing gold. I had worked 10 years with the Federal Reserve system by that time, so I said, It’s simple: the Fed is printing too many dollars and they flow out of the country into foreign central banks who demand gold.

When Samuelson denied all this I asked him, "Paul, what do you think is the reason the dollar is weak?" He replied that the increase in productivity in Europe and Japan was more rapid than in the US. Luckily Japan was in trouble at that time, so I said, "Why do you think Japan is worse off than we are?" I cannot remember his reply but I said, No, that’s not it. "Well, what do you think?" he shot back.

I said, Paul, I don’t think: I know. It’s because the Bank of Japan is running its printing presses even faster than the rest of the central banks around the world are running theirs, even our Fed’s. When he tried to argue against that I said, Paul, I know about this because the Bank of Japan has just been to Citibank for a loan. We sat around the table and talked about the reasons for it and required the Bank of Japan to tighten money. He was non-plussed. "Well, John," he said, "you could be right—but you’re lonely." [laughing]

As a matter of fact it was that very year, 1962, when I saw the same problem at the Federal Reserve. President Kennedy had pressured Federal Reserve Chairman William McChesney Martin to run the printing presses, to expand money, and Martin had given in. While I was VP of the Federal Reserve Bank of New York from 1954-1959, Martin was chairman of the Board, so I came to know him intimately. Later as a Citibanker in the ‘60s I called on him regularly in Washington.

I saw Martin knuckle under to Kennedy and begin to run the Fed printing presses. The Fed got locked into an expansionism it dared not stop and became a hopeless prisoner of its own expansionism. Reserve Bank credit was about F$25 billion in 1961. It is about F$290 billion today. [i.e., in 1991. A 1,160% increase. —Ed.]

I immediately began to buy gold, which was then F$35 an ounce. I understood that this monetary expansion would go on and on, so I have recommended gold ever since. In 1968 I went 100% position into gold. Americans were prohibited from holding gold, but we could hold rare coins. The Treasury had declared sovereigns to be rare [laughing] even though they weren’t really rare at all. I could buy sovereigns for F$9.00 each. [Today they’re about F$85 each. —Ed.] A sovereign is a little less than a quarter of an ounce, so I was buying gold at about F$36 an ounce. I was also buying gold mining shares for income.

When Nixon closed the gold window on August 15, 1971 I was 60 years old. Normal retirement age was 65, but on my own initiative I could retire at 60. I realised at once that I should not spend another four years in the bank, so I become a private consultant in domestic and international money (which I still am). Since 1968 I had been recommending a 100% gold position. That has proven absolutely fabulous advice for those few who took it.

Moneychanger: In 1984 I compared 1964 and 1984 prices in terms of paper, silver, and gold. In terms of gold the 1984 prices were 20 to 30% of what they had been in 1964. In relative purchasing power, gold has been a consistent winner over that time, in spite of the frustrating ‘80s.

Keynesians have mostly favoured a one-world currency—one fiat currency to circulate around the world.

Exter: Keynes to my memory never wrote about that, but the idea has always been widespread. Long after Fed Chairman William McChesney Martin retired, I heard him at a meeting advocate a one-world currency, so this has been in men’s minds for many, many years. They’re trying now to establish a single currency in Europe. I don’t mind that so much, if Europe wants it, but this present world-wide fiat paper money—what I call "IOU nothing" money—is going to break down. We’re headed for the worst economic catastrophe in all of history. Obviously the best one- world money would be gold, the good old gold standard, but that is a pipe dream now.

Moneychanger: You make a point that is extremely important historically: since 8/15/1971 the entire world has been on an unbacked paper money system. That has never before happened in history.

Exter: Yes, I say that over and over again. That’s why we are heading into such a catastrophe: the whole world has gone off gold. Without central banks, such a catastrophe could not be possible. Single paper currencies without gold backing have collapsed, going way back to John Law in France, our own continental dollar, and the French Revolutionary assignat, all in the 18th century. In this century I myself remember three different German marks: the mark until after WWI, the Reichsmark until after WWII, and since then the deutsche Mark. Two German currencies have just become worthless in my lifetime.

Moneychanger: The unbacked paper money system has proven itself so successful in its repeated national collapses that governments and central bankers want to try it on an international basis. That doesn’t make a bit of sense.

Exter: It’s impossible.

Moneychanger: You recognised very early that one major problem with Keynesianism was its reliance on debt.

Exter: That’s what my upside-down debt pyramid is all about. The debt burden at some point becomes unsustainable because too many debtors borrow short term and lend long term, or, worse yet, borrow short term and put the money into bricks and mortar. [Exactly the crisis that erupted in Asia in 1997 —Ed.]

Moneychanger: Exactly. Because most people thinking about inflation back in the ‘70s were looking at the models of John Law or Revolutionary France or even Germany after WWI, they saw our inflation ending in a hyperinflation. You have steadily insisted that our inflation would end in a deflation and a debt collapse.

Exter: Yes, that’s very important. I’m sure the collapse that I’m talking about will start in the dollar. (My debt pyramids are always in single currencies: there’s a dollar debt pyramid, a deutsche Mark debt pyramid, a Yen pyramid, and so on.)

This will be a deflationary collapse rather than an inflationary blow-off because creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid—junk bonds, failing banks, SandLs and insurance companies, Donald Trump, and Campeau. [Trump has survived until now, 1998, but Long Term Capital Management and other ailing hedge funds fit the same bill. —Ed.] Creditors will try to get out of those weak debtors and go down the debt pyramid, to the very bottom: currency (dollar bills), even though they pay no interest. Next above currency are Treasury bills, issued by the government and backed by the Federal Reserve, which supports the market through its open market operations. They are by far the largest component of Reserve Bank credit, so are really as safe as currency notes, plus they pay interest. Still, you can’t buy anything with Treasury bills; you have to liquidate the bills to get money of some sort to buy something.

The higher debtors sit in the pyramid, the less liquid they are. At the top are all the least liquid debtors that I’ve already mentioned. This explains why we are headed for deflation. Creditors will move out of debtors high in the debt pyramid as many of those debtors fail through defaults and bankruptcies. That is very deflationary.

Did you know the public has already begun to go for currency? In 1989 currency in circulation increased F$11 billion; in 1990, F$27 billion. We have already had a major run down the debt pyramid into currency in circulation. Creditors have also run into Treasury bills. That is why Treasury bill rates have fallen faster and further than commercial paper rates.

Moneychanger: As manifested by 2-1/2 times as much cash being put into circulation without any particular effect on prices. [Compare the Fed’s announcement that it would put an extra F$150 billion in circulation to ease Y2K-induced cash hoarding. This extra cash demand adds more deflationary pressure. —Ed.]

Exter: That’s a very important point. This increase in currency in circulation has gone under the mattress. It was not needed to make purchases. You don’t buy many things with cash other than groceries and gasoline. Instead we use credit cards or write checks. So this currency was not demanded for commerce but for safety.

That’s a tremendous increase—you can follow these figures in Barron’s and the Wall St. Journal. A month or so ago currency year on year was up F$29 billion. Since the highest previous increase in the history of the Federal Reserve system was about F$13 billion, this is far more total currency in circulation than ever before. Much of it has certainly been bought to be put under the mattress.

Moneychanger: It hasn’t shown up in prices or in bank deposits.

Exter: We got along with an increase of only F$11 billion in 1989. That’s all we needed then to buy goods and services, so the bigger increases since then must certainly have been stashed away.

The final step down is out of the debt pyramid altogether into gold. Do you know that at F$360 an ounce, it would only take about F$18 billion to buy up a whole year’s worth of newly-mined gold? This increase in currency in circulation would have done that with F$9 or 10 billion to spare. Of course, if the public had bought gold instead of currency, the price of gold would be several hundred dollars higher than F$360 an ounce.

Moneychanger: Just as your debt pyramid sits on a tiny golden point that supports a huge superstructure, that door of escape called the gold market is very narrow. There is not much room for many people to squeeze through that door.

Exter: Right. People do not realise how scarce gold is. There just isn’t that much gold around! Nobody knows exactly how much, but there’s only something over 100,000 tonnes, maybe as much as 110,000 or even 120,000. Annual production has been around 1,500 tonnes for many years. Right now it’s a little more, 1,600 or 1,700, but that’s a very small increase in the total gold stock, 1.7% or so. [A metric ton of gold is 1,000 kilograms or 32,150 troy ounces. 1997 gold mine productiion was 2,464 tonnes, but central bank lending, forward sales, option hedging, and implied disinvestment added another 773 tonnes to supply. This "phantom supply" could not be foreseen in 1991. —Ed.]

Moneychanger: Not enough to affect the price significantly. You say that this increase in currency in circulation is a sign that creditors are moving down the debt pyramid. Another giant sign is the insolvency of the SandLs—

Exter: That’s what they’re getting out of, weak SandLs, weak banks, weak insurance companies. They’re getting out of all those illiquid debtors at the top of the debt pyramid and going down to currency at the bottom.

Moneychanger: You understood years ago that the problem was the expansion of this debt pyramid. We’re left wondering just how long it can keep on building. There are two limiting factors. The first is psychological: how far human will confidence stretch without breaking? The second is an accounting problem: how much debt burden can the economy stand before the interest bite chokes off all economic activity?

Exter: That’s right. I thought of this upside down debt pyramid when I was at Citibank in the early ‘60s. I first gave talks on it inside the bank, trying to influence the bank because I saw too much borrowing short term and lending long term. It was just awful! I kept on warning the bank, but was just brushed aside. When Nixon closed the gold window I said, "This is my chance to get out," so I took it. [laughing] It was a great move on my part because I could buy gold and gold mining shares when gold was F$50 an ounce or less. Now Citibank is on the problem list because it has so many bad assets.

Moneychanger: What particular signs currently make you think we’re getting close to the collapse of the debt pyramid?

Exter: The most important one is this flight to currency. It is bigger than anything I expected right now. We are still having troubles with banks, thrifts, insurance companies, and others, which will cause more people to move down to Treasury bills and currency. At some point they will go to gold. We’re at the threshold of that point. When they go to gold instead of currency or Treasury bills, the price of gold will take off. It will be a bandwagon everyone will want to get on. Then even those who have bought currency will see how foolish they were and that gold is far better to hold than currency, that it is the best store of value money man has ever found. It’s stupid for people to hold currency. The Fed can simply print all they want at very low cost. Paper money is as abundant as leaves on trees.

Moneychanger: When that happens, however, it won’t be simply a larger number of people investing in gold: overnight it will become a buying panic. All that backs those Federal Reserve notes is confidence. When that breaks, there’s no safety net at all. The financial system will just fall 50 stories and hit the pavement.

Exter: That’s right, but most people unfortunately will not recognise this until they see the price of gold shooting up. Gold has been in the doldrums for a full decade, and many people have concluded it’s a bad investment. Those who bought currency instead of gold just did not understand what they were doing. They knew they wanted to get out of deposits because they were afraid of the banks and SandLs. The only sure refuge they knew was currency. It may be the "coin of the realm," but it’s still only paper IOU-nothings.

Moneychanger: The instinct is correct, but the means is wrong. The government and the Fed have intentionally kept Americans ignorant of the advantages of gold. After 40 years of planned ignorance it’s no wonder so few understand gold’s value. In effect they are running to gold, but it’s paper "gold". It’s the same intent and motive.

Exter: They don’t realise that gold is money, the best store of value money that man has ever found over thousands of years. Also, gold is money world-wide; dollars are money only in the United States. So it is not Americans only who have been stupid: it is people the world over.

Moneychanger: When a number do realise it, we’ll have the problem of very many people trying to press through a very small door all at once. That can only happen if gold’s price rises very, very rapidly.
You’re looking for a world-wide depression. That would clear out the debt bubble that’s built up over the years and liquidate the bad debt. How long will that last?

Exter: The rest of my life and longer. It’ll be decades. This will be an economic catastrophe on a scale never before seen in history. We can see it coming now. Even in the published figures, deposits are shrinking. Bank and thrift balance sheets are shrinking by much more than the figures published by the Federal Reserve, because many assets have not yet been written down and they are getting worse and worse by the day. We have had more than three decades of heady expansion. We have now entered a merciless contraction from which gold is by far the best escape.

I’ve been a banker. Obviously a bank is most reluctant to write down bad assets. It hurts the balance sheet too much. The authorities have forced banks and thrifts to write the bad assets down, but they have a long way to go. The figures that you read today are too high—they’re really lower, but no one knows how much lower. It is hard to sell bad assets. This has been Seidman’s problem in the Resolution Trust Corporation and the FDIC. He takes over weak banks and thrifts, and then it takes him so long to liquidate. Whether it’s commercial real estate or residential, it’s very difficult in this kind of market to liquidate those assets.

Moneychanger: Certainly not for anything like full value.

Exter: And it’s not going to get better.

Moneychanger: Anyone buying those assets would be out of his mind to pay more than 30-50% of their loan value.

Exter: That’s right, and taxpayers absorb the losses.

Moneychanger: One question really puzzles me. In past conversations you have described yourself as a "product of the establishment." Your résumé certainly shows your experience in the financial establishment. You have been one of the people who actually run the financial machinery of this country. Why can’t the others see what you have seen?

Exter: Oh, boy, that is a good question.

Moneychanger: Destroying the currency contradicts their own interests. Whether you look at the Federal Reserve system as a monopoly or cartel, or as a government agency, still their interests should be the same: stability and enhancing the value of their paper currency, not destroying it. Why can’t they see that? It’s a mystery to me.

Exter: It’s a mystery to me—maybe less of a mystery because I’ve been a loner for so many years. That’s why I told you the Paul Samuelson story: "Well, John, you could be right, but you’re lonely!" That story reveals a lot. Incidentally, Paul was quoted in the Wall St. Journal as saying that he never thought he would live to see runs on banks again. So there is a only a small group that understands. You are in that group, but you’re a loner, too.

I’ve battled Friedman more than Samuelson, mainly because Samuelson has been a professor all his life. Friedman left the University of Chicago and went out to the Hoover Institute at Stanford. We’re both members of the Mont Pelerin Society; he is a past president and one of the founders. Many in the Mont Pelerin Society are on my side, but a majority of the members are monetarists, i.e., Friedmanites. Friedmanism dominates Mont Pelerin Society meetings. There are no Keynesians of whom I am aware.

In a book published in the late 1950s Friedman laid out his view. The key was that the Treasury should sell off all its gold in the marketplace over a period of 5 years, go to floating exchange rates, and have the Fed increase the money supply at a fixed rate every year—he didn’t give the rate. [laughing]

When I read that years ago it shook me to the core—he went further than Keynes had gone. Keynes had said, "The gold standard is a barbarous relic. It makes no sense to dig gold out of the ground in South Africa and put it back into the ground at Fort Knox." Everybody had heard that, but Friedman went two steps further than Keynes, so in many respects he’s been worse all these years, even though he professes to be a free marketeer. 
These two schools of economic thought, Keynesianism and Friedmanism, have been taught in colleges and universities for decades now. Paul Samuelson’s textbook . . .

Moneychanger: I used that textbook in school, and it’s terrible.

Exter: Yes, it is awful. Samuelson doesn’t regard gold as money at all, doesn’t even see it as the best store of value. Why am I such a loner? Because these two schools of thought swept the world—not just this country, but the whole world—and I had to be very independent-minded to resist.

Moneychanger: Even today, when the bankruptcy of both Friedmanism and Keynesianism is undeniable, they still cling to it. Both have obviously worked against the best interests of the government, the Federal Reserve, and the nation, if you understand those interests to be financial stability.

Exter: Absolutely. Take a man like Walter Wriston, former head of Citibank. He was enamoured of Friedman—often had him speak to the officers. I had to sit helplessly and listen.

Moneychanger: Turning my question upside down, does the government or the banking system have an interest that is served by this debt expansion?

Exter: Yes. Citibank grew. From maybe a F$15 billion bank when I joined it in 1959 to a F$230 billion bank recently [A 1,533% increase. —Ed.]. Growth was especially rapid in the big oil boom. Citibank led the way in so-called "re-cycling": accepting short term petro-dollar deposits from the oil producers, especially those in the Middle East, and making what have turned out to be long term loans, especially in South America. I thought it was bad banking, but by then I was a helpless retiree.

Moneychanger: So they do have an interest.

Exter: Ohhh, a tremendous interest. Citibank at one time became the world’s biggest bank. Now the 10 biggest are in Japan; the whole banking system just turned around. It was a catastrophe, an absolute catastrophe, but there was nothing I could do to prevent it. Immediately after Nixon closed the gold window I made talks inside and outside Citibank, explaining that this meant we had gone to floating exchange rates: no more stable exchange rates, no more fixed exchange rates.

You may remember the Smithsonian Conference at Christmastime, 1971, when the world’s monetary authorities tried to perpetuate fixed exchange rates. Who was there? Arthur Burns, chairman of the Federal Reserve Board; Paul Volcker, Under-secretary of the Treasury; John Connally, Secretary of the Treasury. These and others of similar stature from countries all over the world met at Smithsonian thinking that they could re-establish fixed exchange rates without going back to the gold standard. It was preposterous. I called this a giant exercise in futility. They did fix rates, but they only lasted a little over a year.

In January, 1973 I happened to be in Zurich and called on the president of the Swiss central bank, Fritz Leutwiler. He said, John, I’m going to have to get out—I’m going to stop buying dollars to hold the rate. He did it in late January ‘73. There were people like him who understood the stupidity of it all, but not in the United States.

Moneychanger: That’s so strange. In spite of our monetary sins in America, there has also been a strong contrary tradition of monetary probity. That the people who run the financial system and the banks would just go crazy is hard to believe.

Exter: I have witnessed it. There were a few people very strongly on my side, like the Governor of the National Bank of Belgium, Maurice Frere, a great man. He was president of the Bank for International Settlements at the same time, so I knew him intimately. After we had both retired, he and I would go to IMF meetings and bemoan what was going on. He was much older than I, but more than anyone he helped me strengthen my own convictions. He understood what was happening, and was dead against it, just as I was. Another one was Karl Blessing, president of the German Bundesbank. Both were giants in the community of central bankers.

Moneychanger: What do we do from here? Keep on buying gold?

Exter: Yes. I still recommend being 100% in gold, or almost so.

Moneychanger: You would stay in gold and gold-mining stocks?

Exter: I’m for 100% in gold and gold-mining stocks to this day. When the gold price does start to take off, it will reach a point where it will simply jump. In 1982 gold jumped F$40 in one day. I expect to see bigger jumps.

Moneychanger: Was that the Mexican crisis?

Exter: Absolutely right.

Moneychanger: So there’s not really much point in talking about an upside price target for gold, is there?

Exter: No. There’s no target. The price will go through the roof and I don’t know what government reactions to that will be.

Moneychanger: Thank you again for your time and your courtesy.

My conversations with Mr. Exter have given me a new perspective on the banking problem. Even though central banking and fractional reserve banking form a terrible system, as long as there were men with character, that system could be made to work. Those men understood that there were monetary laws as fixed as the law of gravity, and respected them. It was a bad system, but by substituting character for gold, it could be made to work—for a while. But those sober, reflective people in banking have disappeared, replaced by time and the grandstanding speculators an inflation always spawns. Fractionalized banking is the child (or is it the mother?) of politics, and sooner or later politics will demand its due. Frail human character, in the face of politics, is no substitute for gold.

Originally published June 1991