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A Confiscatory Redenomination of Gold

[heading]A Confiscatory Redenomination of Gold[/heading]

The world has entered into a neo-soviet situation, where prices are fixed just as they were in the Soviet Union. The quicker you come to understand this, the quicker you’ll come to understanding why gold is where it is today.

If you want to better understand the evolution of the gold price in the 21st century, looking towards the Soviet example could help.

In the Soviet Union, the currency fixing got quite interesting with the introduction of the “third ruble”, which was introduced in 1924 as the “gold ruble.” Already by 1924, the Bolsheviks had revalued their currency three times, and they were far from done doing so.

After the II world War, the Soviet government implemented a “confiscatory redenomination of the currency” (decreed on December 14, 1947) so as to reduce the amount of money in circulation. As Wikipedia writes:

The main purpose of this change was to prevent peasants who had accumulated cash by selling food at wartime prices from using this to buy consumer goods as the postwar recovery took hold. Old rubles were revalued at one tenth of their face value. This mainly affected paper money in the hands of private individuals. Amounts of 3,000 rubes or less in individual bank accounts were not revalued, while salaries remained the same.


Then in 1960, a repeat of the 1947 reform – same terms and so on.  By this time, the Soviet ruble was made formally equal to .987412 grams of gold, but the exchange for gold was never available to the general public. The ruble maintained parity with the Pound sterling until the brekaup of the Soviet Union in 1991 when the ruble became the new currency of the Russian Federation.

Sam Dawson of The Nashua Telegraph wrote in 1960:


The Soviet Union is devaluing its ruble in terms of its theoretical gold content. This is bringing it close to what the rest of the world all along has thought it was worth – about one-fourth of what the Kremlin has  pretended it was worth.


Since the Soviet Union conducts most of its trade with non-Communist nations in the form of barter anyway, the change over to the new “heavy ruble” Jan 1 1961 will be largely one of bookkeeping without much apparent practical effect.


In international politics, the USSR is hoping to make the world think that its new ruble is stronger than the American dollar. Few businessmen – whether American or foreigners – will buy that propaganda.


They can’t take rubles out of the Soviet Union. They can’t convert them into gold – whether they be the present rubles or the new ones which strictly at home will be equal to 10 of the old rubles. Businessmen aren’t allowed to convert rubles freely into currency of their own lands.


Business transactions of the Soviet Union with the United States will still strictly be on a barter basis. Example: The USSR trades Cuba so much oil and machinery in exchange for so much sugar. And if the USSR grants ruble credits to nations in Africa and Asia they must use the rubles to buy Soviet machinery or technical aid.


In gold, the new Soviet move means simply that the heavy ruble is said to be worth some four times as much as the present one – that is .98 grams of gold for the new one against .22 grams of gold for the old. Only, just try to get the gold.


Stripped of the usual communist hocus-pocus, this is devaluation.  It is like the talk of the devaluation of the dollar which stirred Europe a few weeks back to pay premium prices for gold, now $35 an ounce. The US didn’t and no one seriously expects it to. If it ever should, it would be devaluing the dollar.


In the Soviet Union itself, the changeover simply means that a Russian can turn in 10 of his rubles and get a single new one. That’s roughly what France did when it wanted to lop some zeros off its paper francs.


Price fixing devastates, as the aforementioned case of devaluation in Russia post-World War II demonstrates. But, westerners today are getting their own taste of price fixing. Many individuals purchased precious metals at prices higher than the metals stand right now. Whereas gold peaked at $1920 heading into the Fall of 2011, today it sits with many analysts predicting further softness.

What this has done is cost many, many goldbugs lots of opportunity cost. Money that could have been put elsewhere to good uses was caught up in the financialization of the economy. At least it was physical. Timing is everything, and that time will still come. That’s why it is important for goldbugs to remember the upside.

You can still own gold. No matter what the Soviet said the price of gold was relative to the ruble, one thing remained certain: the people could not have the option of trading their rubles for gold. That’s why the ruble, domestically, was essentially a food stamp.  Now is an important time for US citizens to take advantage of precious metals before premiums begin to reflect the true price of precious metals and the US dollar is rendered a food stamp.

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