Our purpose, here, is to demonstrate that gold is & long has been, the best & truest measure of monetary value; of the functional adequacy of any currency. But first, an introduction.
Recent upheavals in commodity markets have stimulated confusion as to value, money and near to medium term economic prospects, both here & elsewhere. For clarity, we must define an essential term, inflation, as we will use it. While popular usage of the term has gradually devolved from reference to a rising supply of money--often with focus on a relationship to the things that money can buy--simply to reference to rising prices; here, when we discuss inflation, the reference is always to the supply of the circulating medium of exchange (i.e., the money or currency of a domain under discussion--ordinarily the United States of America). Any other usage would only confuse the intended analysis.
Determination of the price of any item, material or labor, present or future, always involves a vast array of factors--some objective, some subjective. While inflation of a currency has a tendency to lift all prices (the costs in terms of that currency of all items); that tendency is only that, a tendency. It may not be sufficient to stop the fall--even a sharp fall of some items--where a decline in demand is sufficient to override any lifting effect.
An obvious example, would be the failure of the Federal Reserve to arrest a fall in housing prices in dollar terms, in today's America. Before 2007, housing prices were artificially ballooned by a combination of monetary (dollar) inflation, an urban legend that housing values only tended to rise, loose lending practices that accelerated the effect of that dollar inflation & political programs to deliberately enable people to buy more expensive housing than they could realistically expect to pay for, as well as a Capital Gains Tax policy that treated home ownership more favorably than other assets. After such puffery of values, it was only natural that full price "deflation" in housing would take a while. Yet, even with a mountain of resulting foreclosures overhanging the housing market, it should not be imagined that the Fed's compulsion driven monetary policy has had no effect on housing prices.
Flooding the world with fiat money tends to lift all prices; yet not necessarily enough with respect to any particular item, as with the still deflating balloon in housing, to prevent continued fall in the dollar price of such item, even in the face of the large supply of new dollars, in any particular period. Understanding the potential variability in the market prices of all items--dependent as each must be upon an immense array of both objective & subjective factors, effecting both supply & demand--is essential to understanding pricing & the relevance or lack of relevance of indices of current prices to true monetary value, at a given moment in time.
Fluctuation in the comparative value of any two items, being exchanged, over the short or long run, will not indicate equal volatility; will not, without further comparison to other items in commerce, reveal which of the two items is the less stable, which the more volatile. Nor, frankly, will a comparative study of other items, showing a greater volatility of one at a given moment, necessarily establish a permanent characteristic. Again, a vast potential array of subjective, as well as objective factors, will always be present. Can we, then, realistically assess the relative merits of competing monetary systems; to comparatively rank alternative media of exchange? Certainly!
Since the circulating currency (the operative medium of exchange in a market) provides a measure of value for all economic transactions, the monetary purpose can only be well served by a stable currency; one that enables participants to make rational decisions, based upon predictable parameters. The relative stability of gold against the fiat dollar is obvious; the supply of the one, limited by nature; the other, only by the moral scruples of those in power. Yet some have tried, perversely, to manufacture doubt as to gold's utility from the very fluctuations of the fiat dollar against gold, after Nixon ended the last element of gold convertibility in 1971.
By 1980, a panic flight from the dollar into gold drove the price of gold up to $800 an ounce, until the Federal Reserve embraced double digit interest rates--finally topping out at 21% (!)--to arrest the panic. What followed? As the relative supply of fiat money contracted, the dollar rallied & gold prices moderated. Gold then moved more or less sideways, finally hitting a post panic low of $252.80 in July, 1999. From there, the rise has been substantial but orderly. Yet, even in going through a complete panic cycle, from a panic out of fiat money to its comparative recovery, the dollar at its recovery best had retained less than 1/7 (13.84%) of its value when still partially linked to gold in early 1971! Is there really debate over which currency offers stability?
Gresham's Law holds that bad money always drives good into hiding. The Roosevelt Administration endeavored to thwart the principle by effectively confiscating the people's gold in 1934, before it could go into hiding to preserve the achieved wealth of provident American citizens & their families. What is the critical issue?
Money is not only an immediate vehicle--medium of exchange--to convert present labor into the goods & services one requires. In considering future uses: Family reserves, personal savings, insurance or any multi-generational pursuit, the ability to store achieved value takes on even greater significance. While fluctuations between competing currencies, or any currency against gold, may reflect a myriad of subjective as well as objective valuations, a long term comparison of trends in relative valuations should demonstrate which currency has and--where possible to extrapolate--will best perform the monetary function, including--as it always must--the ability to store value for future use.
The Founding Fathers established a gold standard, while allowing silver as a working alternative. They specifically forbad the States (Constitution, Article I, Sec. 10) from making anything but gold or silver an acceptable medium for the discharge of debt. Comparing the present fiat "dollar's" performance against gold, then, is both fair & particularly American.
In a separate Addendum ("Capital Gains Tax") to our February, 2009 Feature on "The Function of Money", we calculated that at an $860 an ounce price, the fiat dollar had depreciated at a compound rate of 4.18% per year against gold over the then 75 years since Roosevelt had confiscated America's private gold reserves. That $860 dollar figure was near the bottom of the early 2009 trading range. Now, 28 months later, the depreciation is yet more dramatic:
With a recent low around $1475 (the acceleration against the dollar, reflecting spiraling Federal deficits, already monetized by contemporary Keynesians), the annualized compound depreciation since the 1934 confiscation of American reserves, is now 4.76%, the current fiat dollar worth less than 1/42 (2.4%) of even the Roosevelt dollar, which had remained convertible for foreign nations. [Compared to a 1929 dollar, the annualized compound rate of decline is over 5.07%; the dollar worth less than 1/71 (1.4%) of what it was.]
Those Founding Fathers, who had prohibited States from making anything but gold or silver a medium for the discharge of debt (Constitution, Article I, Sec. 10), prohibited taxation of individual resources on any basis but per capita in Article I, Sec. 9. Note the effect from taxing Americans for imaginary "capital gains," ones that only reflect a depreciating dollar through the decades, on family reserves (wealth achieved by the hard work & ingenuity of America's productive families). Consider how truly an anti-capitalist misuse of the ability to print money, combined with a punitive & unintended tax system--Government by the intellectually & morally inadequate--has betrayed an original intent to encourage provident & responsible individual initiative.
We dealt at length in an earlier (December, 2009) Feature on "Gold & Money In America,", with common misconceptions as to the utility of a monetary gold standard & specifically with the frivolous argument that gold backed money has less utility as a vehicle for investment than fiat money. We will not repeat the more detailed response. Suffice it to say, that a currency, fully redeemable in gold, has every utility of any other currency with the crucial additional attribute of being far better able to protect the multi-generational capital accumulations of a people--reserves achieved through the years, intended for a provident future;--a future that far wiser men, who created the America now being debased, had sought to make possible.
Those who deny the utility of a gold standard, simply do not understand the monetary function. It is no more necessary to carry around large amounts of gold to make large transactions, than to carry large wads of any other currency. One simply writes a check, issues a bond or note, or transfers shares of stock. The fact that dollars represented by that check, bond or note, are fully convertible into a certain quantity of gold, simply provides greater stability, an assurance that two or three generations hence, the new holder of the sum originally expended, will not be stuck with only 1 or 2% of what was bargained for, should that sum be held in reserve, rather than for immediate use. The only down-side in the process is for demagogues & political mountebanks, who seek to appear public benefactors by dissipating the real wealth of a people; currying favor among those they can corrupt by playing on an all too common ignorance of the monetary function.
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