10 September 2008

Simplex Munditiis

Mr. John Exter

This interview appeared in the June, 1991 Moneychanger, and I reprinted it again in October 1998. I’ve posted it permanently on my website, too. When I reprinted this in the midst of the 1998 LTCM crisis, it appeared that after all these years, John Exter’s vision of the final debacle of fiat money is now unfolding. When we first did this interview 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 bigger bubble in the US and the world. Today that bubble has burst but not yet deflated I have slightly edited this version to remove certain references current then but obscure now. Its timelessness, however, endures.

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 0.85% 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 & regulations established in the wake of the last global collapse, the Great Depression. In a 10/1998 Esquire article 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-fair 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 & burn.” In February, 2002, those words bite even more sharply

The real tragedy is not the “experts’” blindness 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 government imposed system of fraudulent fiat money. It promises, and for a time delivers, prosperity, but in the end always impoverishes those who trust it. John Exter forces us to return to this simple truth. – FS.

Simplex munditiis -- 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 the greatest number of facts.

Alas, 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 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 & profitable to return to this hard money pioneer & re-examine our foundations.

John Exter is one of the world’s most knowledgeable individuals on international banking & 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 & Diplomacy &, 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, & 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 & Development (World Bank). In 1954 the Federal Reserve Bank of New York appointed him vice president in charge of international banking & gold & 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 & 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 & Education, the Mont Pelerin Society, & other groups & boards too numerous to recount. He & 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, & 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 & 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 & banking, but also a vice president of the Federal Reserve of New York for years & 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 & actually taught it in the entry level economics course at Harvard. As the years wore on I became more & more sceptical. In 1943 I went to the Radiation Laboratory at MIT & ultimately became the assistant to the director of the laboratory. I helped Paul Samuelson get a job there, & from time to time we had lunch together. On one occasion Paul leaned over to me & 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, & 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 & 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 & 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 & 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 & talked about the reasons for it & required the Bank of Japan to tighten money. He was nonplussed. “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, & 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 & begin to run the Fed printing presses. The Fed got locked into an expansionism it dared not stop & 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 & 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 & 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 & 1984 prices in terms of paper, silver, & 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 & 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, & the French Revolutionary assignat, all in the 18th century. In this century I myself remember three different German marks: the mark until after WW I, the Reichsmark until after WW II, & 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 & 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 & lend long term, or, worse yet, borrow short term & put the money into bricks & 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 WW I, they saw our inflation ending in a hyperinflation. You have steadily insisted that our inflation would end in a deflation & 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, & 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 [See pyramid chart -- Ed.] out of the most illiquid debtors at the top of the pyramid -- junk bonds, failing banks, S&Ls & insurance companies, Donald Trump, & Campeau. [Trump has survived until now, 1998, but Long Term Capital Management & other ailing hedge funds fit the same bill. – Ed.] Creditors will try to get out of those weak debtors & 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 & 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 very flight to quality that we are seeing in 1998. – Ed.]

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 & 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 & 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 & 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 & 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 & 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 production 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 S&Ls --

EXTER That’s what they’re getting out of, weak S&Ls, weak banks, weak insurance companies. They’re getting out of all those illiquid debtors at the top of the debt pyramid & 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 & 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 & 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, & others, which will cause more people to move down to Treasury bills & 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 & 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 & 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, & 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 & S&Ls. 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 & 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 & 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 & liquidate the bad debt. How long will that last?

EXTER The rest of my life & 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 & 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 & they are getting worse & 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 & 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 & the FDIC. He takes over weak banks & thrifts, & 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, & 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 destroys 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 & 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 & went out to the Hoover Institute at Stanford. We’re both members of the Mont Pelerin Society; he is a past president & 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, & 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 & 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 & Friedmanism, have been taught in colleges & universities for decades now. Paul Samuelson’s textbook . . .

MONEYCHANGER I used that textbook in school, & 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 -- & I had to be very independent-minded to resist.

MONEYCHANGER Even today, when the bankruptcy of both Friedmanism & Keynesianism is undeniable, they still cling to it. Both have obviously worked against the best interests of the government, the Federal Reserve, & 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 & 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, & 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 & 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 & 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 & 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 & 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 & I would go to IMF meetings & 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, & 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 & gold-mining stocks?

EXTER I’m for 100% in gold & 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 & I don’t know what government reactions to that will be.

MONEYCHANGER Thank you again for your time & your courtesy.

My conversations with Mr. Exter have given me a new perspective on the banking problem. Even though central banking & 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, & 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 & the grandstanding speculators an inflation always spawns. Fractionalised banking is the child (or is it the mother?) of politics, & sooner or later politics will demand its due. Frail human character, in the face of politics, is no substitute for gold.

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