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Dear Daily Crux reader, Most Americans have no idea how this country lost its way from the small-government, sound-money principles of our founding fathers to the disastrous and corrupt money system we have today. This week, we have the second part of our interview with Porter Stansberry on America's immoral paper-money system. (To read the first part of this interview, click here.) This week, Porter explains why the world gave up the gold standard, how the Federal Reserve came to control the U.S. money supply, and how to protect yourself from what he sees as the unavoidable collapse of this terrible system. Good investing, Brian Hunt Editor in Chief, The Daily Crux www.thedailycrux.com ------------------------------------------ The Daily Crux Sunday Interview Porter Stansberry:  Why the U.S. is on the road to financial disaster, Part II The Daily Crux: Can you tell people what changed in 1914? What was happening during that period? Stansberry: One of the things that most people ask is, "Sure, Britain had a gold standard, but then why was there a gold standard globally? Why was Britain able to enforce that around the world?" And the answer is something economists call Grecian's Law, which says that people obviously have a preference for sound money. Given the choice between holding banana republic paper and holding a sterling-backed pound note, people will choose to hold the pound note. And so that had the effect of forcing out all the bad money. ---------- Advertisement ---------- The dirty money-making secret of America's most "obnoxious" millionaire This guy will probably piss you off, and will DEFINITELY offend you... but he could also help you make a heck of a lot of money over the next year. Click here for more information. ------------------------------------- Because there was a global standard backed by precious metals, people preferred it. Any time people wanted to make a contract or do an international business deal, they always demanded to be paid in sterling. That had the effect of making a global demand for British currency or for currency that was backed in what's called specie – meaning gold or silver. Because there was a global money backed by specie, every other money had to match that quality or it would essentially be discarded. And that went on until 1914, when the British government got involved in World War I. The costs of World War I were simply astronomical... The global economy had never seen so many resources spent on a war before. If you look at the number of troops, for example, between the last big war that Britain was involved in – which was the Napoleon conflict in Europe in the early 1800s – and then 100 years later in World War I, the numbers are not even an order of magnitude in similarity. World War I was a massive, horrible catastrophe, and no way was there enough specie to pay for it. So to finance it, England went off of the gold standard. That is, they began to print essentially IOUs, and they did so until they bankrupted their nation fighting this war. And that was the end. They made attempts to return to a specie standard in the 1920s, but at a much lower value than they had had before, and they were never able to finance it. They were just never able to return to that standard. They lacked the political will, they lacked the trade balances, everything else that you need to make that happen. After World War II, the Bretton Woods Agreements took place, and the United States made a promise that the U.S. dollar would be specie-backed. All the other currencies could all have dollar reserves instead of gold, because the dollar would be just as good as gold. And of course, this is the false promise of every paper money. That it'll be just as good as gold. And most people know that Nixon totally betrayed our partners and abrogated that agreement in 1971, simply saying, "We're no longer going to trade dollars for gold. Period." So the U.S. is still the world's largest holder of gold, but we don't have nearly enough gold to back all of our dollars. And depending upon how you measure it, and depending upon what the actual monetary base is at any given time, gold would have to be valued at roughly $6,000 an ounce in order for the U.S. government to back all of the dollars with gold. Crux: How did the value of the dollar hold up after Bretton Woods through 1971? Did the U.S. maintain a relatively sound value of the dollar in those 25 years or so? Stansberry: No, they didn't. To maintain a sound value of the dollar based on a gold standard, you would have to have a balanced federal budget and you'd have to have a balance of trade or a current account balance. The U.S. never really achieved that. You might find a year or two in the '50s where there was a balanced federal budget, but I doubt it. I think we always ran deficits. And of course the deficits exploded in size in the 1960s when we tried to implement President Johnson's Great Society programs at the same time we were expanding our commitment to the Vietnam War. And it's interesting to me that you have sort of the same scenario happening today... You have a very liberal president that's fighting a very expensive global war in a country without a real government. Basically, we're involved in a civil war in Afghanistan. And that's exactly what was going on in Vietnam. There was a civil war there, too. So we have an open-ended commitment to one side of a civil war in a foreign land. And at the same time, we're promising absolutely enormous increases to domestic government spending in welfare programs, the cap and trade program, and the new health care program. So you have all the elements in place for a huge runaway inflation, including a very compliant Federal Reserve, which has already doubled the monetary base in the last year and has continued to buy the lowest-quality mortgages from all of its connected banks. Crux: In the last couple of weeks or so, we've seen people waking up to the dollar declining in value. Gold has hit $1,200 an ounce. Copper has hit $3.25 a pound. It looks like the "inflation versus deflation" argument is pretty much over. Would you agree with that? Stansberry: I would agree with you that the debate between inflation and deflation is over. But I would have said that debate ended last fall, when the Federal Reserve chose inflation over deflation. The Federal Reserve could have maintained a much firmer standard of money, but there was never even a moment's hesitation to go the way of inflation. They decided immediately to break all of the covenants of their charter – which I knew they would – and to buy assets directly from investment banks. And then they began to monetize enormous amounts of government debt as well. What most people don't realize is that your money isn't held with the Federal Reserve. The banks hold their reserves there. And the Federal Reserve could take those reserves and buy things that are of firm value. For example, triple-A-rated government debt. They should only buy things to the extent that they have reserves, and they should only buy things that are truly sound. They violated both of those sacred promises. They bought assets that are not sound, assets that instead have huge default rates. And more importantly, they bought things at a far greater extent than they have reserves. So they're creating money out of thin air, and they're buying low-quality assets. That is exactly how you destroy the value of the currency. Crux: So what is your outlook for the next couple of years? Are we getting closer to our current system being completely discredited? Stansberry: I began writing in the 2006-2007 timeframe that I thought we were in the first stages of a currency crisis. The first stage is when people begin to realize that the money isn't sound and they start to buy things that are. So you saw people fleeing into real estate. You saw people fleeing into gold. Even before the banking system collapsed, you saw real estate prices going up at an unsustainable pace, and you saw the price of gold go from $260 an ounce all the way to $700 or $800 an ounce. This was before the banking crisis. That to me is a sign of people deciding to hold their savings in something other than the dollar. Now you didn't see the central banks all over the world deplete the dollar. You just saw people in the United States, which is the first stage. The second stage of every currency crisis is when your foreign creditors begin to abandon your currency and when the domestic authorities begin to regulate the exchange of the currency. And so you have the first step of the second tier of the crisis, which is our foreign creditors begin to abandon the dollar and the only way to get out of the dollar if you're a foreign central bank is to buy gold and silver. You can make a case for copper. But copper is typically the money of the poor and the banks are going to buy mostly gold. They might buy a little silver if there isn't enough gold available. And believe it or not, there won't be enough gold available very shortly. So we're now at the very beginning of the second phase of the crisis, and the next thing I expect to see is the government of the United States will lay down what are called exchange controls. They will make it illegal for you to take your money out of the country, put your money into foreign currency, or both. Most people think that could never happen in America, but it happens all around the world all the time. In fact, it has happened in America before, and it will absolutely happen again. There is going to be a global run on the dollar, and it likely has already begun. Crux: Where do you see gold and silver? I think people are especially interested in what silver could do because it could return to the 16:1 ratio. Could you comment on that? Stansberry: Right now, silver has about a 50:1 or 60:1 ratio with gold. It takes 50 or 60 ounces of silver to equal one ounce of gold. So if you wanted to own gold right now, you could buy a gold coin... or you could buy 50 or 60 ounces of silver. When there is a global demand for silver as a currency or for a monetary base – in other words, when banks want to own silver, not just industrial companies and coin collectors – the historic ratio between silver and gold has been 15:1 or 16:1. This fluctuates slightly based on silver production, demand for gold, etc. But if you look back at the classic gold standard between 1720 and 1914, the ratio between silver and gold is about 15:1. So in theory, by buying silver today, you can actually buy a lot more gold than if you directly buy gold. The 60 ounces of silver that you buy today will get you one ounce of gold right now. But down the line, you're only going to have to pay 15 ounces of silver for an ounce of gold. So in three or four or five years, when there is robust global demand for silver as a currency, those 60 ounces of silver you buy today will get you three or four ounces of gold. Now a lot of people can't get their heads around that, and that's fine. You don't have to buy silver to profit from the collapse of the U.S. dollar standard. The easiest way is simply to buy gold. And your target for gold is that eventually the U.S. and the world will settle on a new gold standard. What will the value of the dollar be in that new standard? Well, if they did it today, if they said, "Starting today all foreign trade has to be settled in gold, not in dollars... If you want to buy oil from Saudi Arabia, you have to pay in gold. If you want to buy trinkets from China, you have to pay in gold..." If that happened overnight, the value of the dollar would fall to about $6,000 per ounce of gold. Overnight. Now, I don't think that's going to happen. I think the decline of the dollar is going to be very bumpy. Obviously, there's been a big move higher in gold recently, and we're going to give some of that back undoubtedly. It's also very difficult to bet against the United States government because they hold all the cards. If they want to force interest rates up a lot higher, they could wipe out all the people who are speculating in gold, no problem. But I don't think they could afford to do that, so I don't think they will. But you can't know for sure.  Buying gold and silver is always a speculation, and so it unfortunately always holds some risk. The thing that gives me comfort is I know there's no way out of this crisis except for gold to go much higher. There is no way the federal government can afford to reduce the amount of money supply. There is no way the Federal Reserve can afford to stop buying government debt or to stop buying bad mortgages. If we went to a sound money system tomorrow, the entire banking system would collapse. Unemployment in this country would go to 20%, 30%, 40% very, very quickly. We know that's politically unacceptable. So, the only way to continue to finance this current system is by printing a lot of money. Crux: So it's a one-way bet... Stansberry: It is a one-way bet. I can't tell you when, where, or how gold gets from where it is today to $6,000, $8,000, $10,000. Frankly, I've never cared. I've been saying the same thing for five years. I'll continue to say it. All you have to do is hold your savings in gold. If you put 10% or 20% of the money you make every year in gold, you're not going to have any problems. Crux: People love to argue about Barack Obama versus George Bush... or they like to vilify Goldman Sachs and Dick Fuld. But in the big picture, these things are very small pieces of the puzzle. The big problem is paper money. Why do you think people won't bring that up in polite conversation? Or even report on it in the news? This is the big root of our problems, but everybody likes to argue over the little, less significant stuff. Stansberry: Did you know there's a huge Federal Reserve bank headquartered in downtown Baltimore. Have you ever noticed it? Crux: No, I haven't. Stansberry: And you won't notice it. You'll drive by it every time, and you'll never notice it. It's behind a big brick wall. There are no signs on it. The point I'm making is that most government installations have big fanfare. They want everyone to know the government is there. You know where the federal courthouse is if you have one in your hometown. You definitely know where the local armory is. Crux: You know when the FBI kicks in your door... Stansberry: Right. Most agencies of the government like to make a big fanfare. They want you to know they're there. But they don't want anyone to know where the Federal Reserve is, and they don't want anyone to know how it works. They don't want anyone to know there's a difference between paper money and real money. And the reason is it's the most powerful tool the federal government has – by far. The Federal Reserve literally determines who gets credit. In a world of paper money, the people who get credit end up owning everything. They rely on public ignorance to remain in control of the system. And that's exactly why you see no discussion of it in the media. In the first place, most journalists don't understand it, and anyone who does and actually tries to write a lot about it ends up being marginalized. Either he's called a quack... or it's more direct. As you know, the government's been suing me for seven years now and they would love for me to stop publishing. The government doesn't want anybody to know how paper money works. They don't want anyone to think deeply about questions like, "Why would I want to hold this paper when it loses value every year and when I don't even have the slightest idea what's really going on behind the scenes at the Fed?" The paper money system we have is absolutely not a classic American system in any way, shape, or form. The U.S. Constitution says specifically the Congress shall have the right to mint coins. It doesn't say anything about paper money, and the Federal Reserve isn't mentioned anywhere. Instead, it's an aberration of modern progressive "political theory" – the Fed is actually modeled directly after the German central bank, which literally collapsed in the 1920s amid spectacular inflation. That's the truth... You can't make this stuff up. When they were setting up the Federal Reserve in the early 1900s, the bankers from the U.S. went to Germany – who at the time was thought to have the best federal government in the world – and learned how to do government banking. Of course, the central bank in Germany is what financed World War I and what led to the destruction of the deutschmark. If people actually looked at the history of how we got to where we are today, they'd be a lot more concerned, because our system is designed to be manipulated, and it is guaranteed to fail. Crux: So what is your reply to what we often hear from politicians? They would say your views on the Constitution, your idea that the government should have limits on printing paper, and your argument that we should adhere to a gold standard are antiquated – that they don't work in our modern, digital economy. Stansberry: My favorite comment that I get from mainstream politicians I speak to – unfortunately regularly – is that I should "grow up." Somehow they think insisting the founders of the United States of America were childish and immature is the correct view. To me, it's just hubris. The people who are in power today have no idea what the proper role of government is in society, and they believe anyone who thinks the government is doing a bad job is a kook or is sophomoric in some way. Crux: Or even treasonous... Stansberry: Of course, it's because they're in power and we're not, and they don't want to lose power. If they had to pay for everything in real money, the United States government would be broke probably 50 times over. So they don't want to lose the power to print more money, and I guarantee you they will not willingly give up that power. There will not be reform that fixes this problem. This problem will only be fixed by an enormous catastrophe. Crux: Well said. Thanks so much. Stansberry: Thank you. My pleasure. Editor's note: To stay up to date on Porter's monthly commentary and investment recommendations, consider subscribing to Porter Stansberry's Investment Advisory.