Dmitry Kalinichenko recently wrote a brilliant article entitled “Grandmaster Putin’s Golden Trap”. That article was originally written in Russian and later translated into English by Kristina Rus.
The translation is generally easy to read, but there are some portions of that English translation that may not have clearly expressed Mr. Kalinichenko’s original ideas.
The article began with,
“Very few people understand what [Russia’s President Vladimir] Putin is doing at the moment. And almost no one understands what he will do in the future. No matter how strange it may seem, but right now, Putin is selling Russian oil and gas only for physical gold.”
Surely, Russia is not selling its petroleum products only for physical gold. Surely, Russia is accepting other fiat currencies (such as euros, yuan and dollars) as “payment” for its crude oil. From his second line, Mr. Kalinichenko’s arguments seem false or even silly.
But Mr. Kalinichenko was speaking metaphorically.
“Putin . . . of course, still accepts US dollars as an intermediate means of payment. But he immediately exchanges all these dollars obtained from the sale of oil and gas for physical gold!
“To understand this, it is enough to look at the dynamics of growth of gold reserves of Russia and to compare this data with foreign exchange earnings of the Russian Funds coming from the sale of oil and gas over the same period.”
In other words, Mr. Kalinichenko claims that if you compare the amount of crude oil that Russia has sold for fiat dollars in the past several years to the amount of gold Russia has purchased, you’ll see that Russia has been buying almost exactly the same value in gold as it received in fiat dollars. Kalinichenko concludes that it is Putin’s policy to thereby “redeem” all of his fiat dollars for gold.
True, Russia has not been selling its crude oil directly for gold—but it has been selling its crude indirectly for gold with the dollar or other fiat currencies serving as only an intermediary.
To illustrate, let’s suppose I bought one million barrels of Russian crude oil and “paid” for them with fiat dollars. Russia would happily sell their crude for my fiat dollars. But Russia would not view my fiat dollars as the actual “payment” (that could be reliably “saved”) for Russia’s crude. Russia would not save my fiat dollars in their foreign reserves as a payment or world reserve currency. Instead, Russia would only view my fiat dollars (at best, a mere promise to pay) as an intermediate step between selling a real product like crude oil and acquiring a real “payment” like gold that can be safely “saved”.
Russia would only view physical gold as the actual and final “payment” for its physical crude oil.
Thus, just as Mr. Kalinichenko claimed, Russia is being paid for its crude oil with physical gold. Yes, fiat dollars are still used as an intermediary step in such transactions but, for Russia, the final payment is only gold.
• Russia’s view that paper or digital fiat dollars are nothing but an intermediate step on the way to acquiring a payment is neither radical nor new.
Article 1 Section 10 Clause 1 of the Constitution of the United States has declared, in part, since it was first ratified by the People in A.D. 1788 that,
“No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts.”
That clause of the Constitution remains has not been repealed or amended. Thus, within the States of the Union, you haven’t been able to legally pay your debts with anything other than physical gold or silver coin since A.D. 1788. For the past 226 years, it has been (and remains) unconstitutional to pay your debts with paper or digital fiat dollars within the States of the Union. Thus, just as President Putin correctly observes, it’s been true and constitutional for over two centuries that creditors and sellers aren’t paid until you receive physical gold or silver–at least within the States of the Union.
However, gold and silver coins are heavy, clunky, will eat holes in the pockets of your pants and ruin the line of your suit. Therefore, from early on in our nation’s history, people were allowed to carry paper dollars–which weren’t heavy, clunky, or destructive of pants pockets and suit lines–provided that those paper dollars could be redeemed gold and silver coin.
Because those paper dollars were redeemable in gold, they were said to be “good as gold”. Over time, the American people and even the people of the world came to believe that nonsense. But, being “redeemable” in gold necessarily means that paper dollars were an “intermediate” step in the process of being paid. “Payment” meant gold. Paper meant “intermediate step” in acquiring payment.
I.e., first, you take something you own and sell it to John Doe. Second, John Doe gives you, say, $1,000 in paper dollars. Third,you take your newfound $1,000 in redeemable paper dollars to a bank where, you redeem (trade) your paper dollars for $1,000 worth of gold. You were not truly “paid” when you accepted $1,000 in paper dollars. You were legally “paid” only when you received the physical gold.
Thus, from the very beginning of this country’s history, paper dollars have always been an “intermediate means” of acquiring a true payment–physical gold or silver. Thus, “grandmaster” Putin’s recognition of fiat dollars as only an intermediate means of acquiring an actual payment in gold is not particularly new or original.
But Putin’s recognition of paper dollars as intermediate mean to acquire payment seems new and brilliant because, after generations of being told that paper US dollars were “good as gold,” Americans and even the peoples of the world were conditioned to equate paper dollars with gold. Believing paper dollars to be equal to gold, and preferring the convenience of paper dollars, we stopped redeeming our paper dollars for gold and accepted the “intermediate” paper dollars as if they were an actual, final “payment”.
Worse, we not only stopped redeeming our intermediate paper currency for gold payments, we forgot the fundamental differences between paper currency (a mere promise to pay) and an actual payment–gold.
Result? The average American will gape at you at if you’re speaking in tongues if you try to explain that a $100 paper dollar is not an actual “payment”.
Result? Relying on the public’s ignorance, the federal government and/or Federal Reserve have been empowered by law to print paper dollars (“legal tender”) as if they were actual payments rather than mere promises to pay. That’s the financial equivalent of passing a law that allows me to write all the NSF checks I want on my empty checking account, and preventing those who receive my checks from ever submitting them to my bank for a “payment”. So long as others accepted my checks (mere promises to pay) as if they were actual payments, and so long as I have a supply of paper checks, I could buy anything I wanted from cars, to mansions, to continents.
Those of you who sold your cars, mansions or continents to me for mere scraps of paper would be fools destined to be quickly separated from your money (true, physical wealth). The same description applies to those of us who currently accept paper or digital “dollars” as actual payments for our work, our labor, our lives and our property: We be fools.
• The paper dollar’s usefulness as an “intermediary means” of acquiring a payment (gold or silver) was accepted because the paper dollar were “good as gold”–they could be redeemed for physical gold without any problem. At least, they could be redeemed for physical gold until A.D. 1933, when President Franklin Roosevelt removed gold coins from domestic circulation.
But domestic paper dollars could still be redeemed for physical silver, so who cared?
However, come A.D. 1968, the domestic paper dollar could no longer be redeemed with even silver coin. But very few noticed or understood that since A.D. 1968, our domestic paper dollars could not be redeemed in gold or silver and were no longer constitutional money within the States of the Union. We’d become “conditioned” to accept the paper dollars (mere “promises to pay) as an actual “payment” rather than as only an intermediate means to a payment (gold or silver coin). We’ad forgotten that a constitutional “payment” could only be gold or silver coin. Much to our detriment, we’d lost our ability to discern between a “promise to pay” (paper dollars) and an actual “payment” (gold and silver coin). We’d been dumbed down (or been conditioned) to accept a paper promises to pay (fiat dollars) as if they were actual payments (gold and silver coin).
President Putin’s new monetary strategy may sound radical, but all he’s done is to take a page out of American history (Article 1.10.1 of the Constitution) and applied it in his strategy of selling Russian crude oil for the “intermediate” paper, fiat dollars–and then trading those fiat dollars for physical gold in order to actually be “paid” for Russia’s crude oil.
Nevertheless, Putin’s new strategy is radical–but not because he’s figured out a way to be paid in gold. His strategy is shifting public perception of the fiat dollar’s utility from that of a “payment” to that of a mere “intermediary”. The significance of that shift in perception can’t be exaggerated. Led in part by Putin’s example, Americans and people of the world are beginning to see the fiat dollar as, at best an intermediate step–but not a payment.
• In A.D. 1971, President Nixon closed the “gold window” and stopped redeeming foreign-held paper dollars with gold. At that point, the paper dollar became a pure fiat currency that was not redeemable in gold or silver from the government or banks.
If you received fiat dollars for your work, products or investments, they were still a “promise [of sorts] to pay” in terms of “something” physical. But that promise would not be kept by the banks or government that issued that paper dollar. Legally, no one on earth could redeem the paper “promises to pay” from the government or banks with anything tangible other than more paper, fiat dollars.
If you wanted to be “paid” for your work or investments by the federal government or Federal Reserve, you’d only receive new paper dollars. The “promise to pay” was no longer supported by the people who issued the fiat dollars. Instead, the “promise to pay” had been changed into a promise that “somebody” would pay. That is, once you accepted a fiat dollar in return for your work, the Federal Reserve and/or government implicitly “promised” that you could find some other greater fool (me, perhaps?) would give you something tangible (like a car, house or gold) for your fiat dollars. Thus, the people (gov-co) who issued the fiat dollar did not have to also back up the implicit promise to pay. You would be “paid” for your fiat dollar only when you spent it with some other private party. If you were fool enough to accept some paper promise to pay from the gov-co, it would then be your responsibility to find some greater fool who’d give you something physical for the government’s “promises to pay” that you keep in your wallet.
Written by: ALFRED ADASK – continue at ADASK’S LAW