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Today’s history lesson: Eighty years ago…

Posted by Jeff (ILoveCapitalism) at 2:54 pm - June 22, 2013.
Filed under: Big Government Follies,Debt Crisis,Depression 2.0

Via The Circle Bastiat. Franklin D. Roosevelt, greedy to increase his power over Americans’ economic lives, confiscated their gold bullion & currency. People who wanted to keep their own money (because gold and gold-backed notes had circulated as U.S. money, until then) were labeled “slackers” and “hoarders”, then prosecuted:

New York Times, 6/12/1933, on gold 'hoarders'
You can see a clearer, larger image of the article here. Those who cooperated received, for the most part, only partial compensation (paper dollars which Roosevelt then devalued, the next year).

Such a confiscation would have been unthinkable to America’s Founders. They revolted against King George III for less. Are property confiscations part of America’s future under Obama? Time will tell.

After establishing the Constitution, the Founders fixed the U.S. dollar as being just under 1/20 oz. of gold, because paper-money experiments during the Revolutionary war had taught them that sound money was a crucial element of a sound, free and prosperous society. That 1/20 oz. value guided the American economy for roughly 140 years, through the greatest net economic expansion in human history.

Beginning with Roosevelt (who, again, confiscated the gold dollars, then devalued the paper ones from an official gold value of 1/20 oz. to around 1/35 oz.), the dollar’s value has dwindled, as the government taxes us all covertly by printing more and more money.

Americans regained the right to own gold bullion in 1974, but the dollar has remained mere paper. On average (or with some ups and downs), its value continues to dwindle. The dollar’s market value in gold was roughly 1/250 oz. when Bush 43 took office, 1/800 oz. when Obama took office, and is near 1/1300 oz. today.

I believe that further depreciation is to come.

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27 Comments

  1. 401k’s and savings accounts are the next gold.

    Hispanic Obama in Argentina, Black Obama in Zimbabwe, and European Obama in Cyprus have already shown us what’s coming next: wholesale confiscation of private property, accumulated wealth, and assets, all to purchase votes of the welfare-addicted 47% and with the full collusion of conservative-haters who hold the Tea Party in contempt.

    Comment by North Dallas Thirty — June 22, 2013 @ 3:06 pm - June 22, 2013

  2. A small quibble: …the dollar has remained mere paper. On average (or with some ups and downs), its value continues to dwindle. The dollar’s gold-exchange value was roughly 1/250 oz. when Bush 43 took office….

    I’m not convinced that this is a useful measure. When a metal is used to “back” a currency, that metal only has the value government says it has–vis., FDR’s inflating the value of the gold he stoleconfiscated from $20/oz to $35/oz right after he collected it.

    Currency has the value of what it buys, and that’s primarily determined in the market place–more or less freely and openly in a free market economy, less or more freely and not very openly in a black market economy. And the latter grows with the overt interference of government.

    Withal, the point is valid: the government is saying what is the value of our currency with its freely operating printing press. And more and more of our economy is moving underground.

    Eric Hines

    Comment by E Hines — June 22, 2013 @ 3:22 pm - June 22, 2013

  3. EH – Fair enough. For the record, I was talking about the market price :-) If gold trades at (say) $800/oz, then equivalently, a dollar’s gold-exchange value on the market is 1/800 oz. That’s what I meant. I’ve altered my text to state that.

    Before FDR, gold did trade “on the market” at $20.67/oz., in the sense that the Treasury was obligated to exchange (and did exchange) gold for dollars, at that price. But FDR suspended convertibility for everyone except foreign central banks (where $35/oz was the official price). Then Nixon suspended convertibility for everyone, including foreign central banks and so gave birth to the modern “fiat money” era.

    The U.S. officially values its gold reserves at $42.22/oz and has for decades now….which is ridiculous!

    If you want to talk about the degree to which the U.S. money supply is implicitly backed by U.S. gold reserves, that’s a very interesting discussion. First you have to pick which money supply you mean: M0, M1, TMS(Austrian School), M2, M3, etc.

    James Turk uses M3 and has a fun chart: http://www.goldmoney.com/gold-research/felix-moreno-de-la-cova/fear-index-may-2013-the-value-of-gold-as-money.html

    If you believe his chart, then as a historical average, the market will (slowly over time – perhaps very slowly) price gold in such a way that the M3 money supply will be about 3% “backed” by official U.S. gold reserves (at market price).

    Given the current quantity of M3 and of official U.S. gold reserves, then, gold’s “fair” value (value by the historical average) is probably around $1500/oz. Which means that gold could be a little undervalued right now (cough).

    Comment by ILoveCapitalism — June 22, 2013 @ 3:37 pm - June 22, 2013

  4. I knew what you meant–it’s why I was quibbling. [g]

    But at your exchange rate of 1/800oz of gold for a dollar, the dollar has that value only in terms of gold–I cannot usefully exchange that gold for, say, food. One of the interesting aspects of currency is that given a [dollar], a bag of wheat, and an hour’s labor, the wheat and labor may both be priced in dollars, but that doesn’t mean I can, of necessity, exchange a dollar’s value of wheat for a dollar’s value of labor directly–how much wheat I’d have to hand over would depend a lot on the laborer’s need for wheat. Which is why we don’t do barter very much anymore.

    And it’s why the various Mx definitions of the money supply don’t agree very well with each other, even when they’re defined in terms of each other.

    3% backing by gold: not that far off from the current fractional reserve requirement: 10% on transaction deposits and 0% on time deposits. These two types of deposits, in their aggregate, comprise a significant fraction of the M1 version of the money supply.

    Eric Hines

    Comment by E Hines — June 22, 2013 @ 4:30 pm - June 22, 2013

  5. [...] at Gay Patriot has up a really interesting blog post on “Today’s history lesson: Eighty years [...]

    Pingback by Ghoulish Libs Pass Out Pro-Abortion Candy at Netroots Conference and Weekend Links! — June 22, 2013 @ 5:09 pm - June 22, 2013

  6. Let me try to read your comments more carefully.

    FDR’s inflating the value of the gold he stoleconfiscated from $20/oz to $35/oz

    I think we have a difference of perspective. I don’t see it as FDR suddenly making gold more valuable, like “Hey everybody! Gold is now worth more!” (although yes, he did make gold suddenly worth more of fixed, dollar-denominated financial assets, such as debts).

    Rather, I see it as FDR suddenly making the dollar less valuable, like “Hey everybody! A dollar isn’t 1/20 oz. of gold anymore, it’s 1/35 oz.” Which perspective is right? I would argue that mine is ;-) The dollar remained implicitly *a certain amount gold* (even if only foreign central banks still had convertibility)…but now less.

    That devaluation of the dollar arrested the Great Depression’s deflation in dollar-denominated prices… and not the deflation in gold-denominated prices (dollar prices / 35 to see the underlying amount of gold).

    Currency has the value of what it buys, and that’s primarily determined in the market place

    Agreed. Always true. The prices-in-gold of things can go up or down, just as the prices-in-fiat-currency can.

    I cannot usefully exchange [an amount of] gold for, say, food.

    Not entirely so. First of all, wait for the next crash. (half-joke) Second, in pre-FDR days when the dollar was either gold or convertible into gold on demand, by definition you exchanged gold every time you spent (or accepted) a dollar. Third, you can usefully exchange gold for food or oil in many developing countries today; the linked Felix Moreno article mentions a few.

    Overall, my perspective is that gold is real money, or at least objective money. It has remained what the world’s central banks and BIS use to make the most real and important payments to each other; they rarely move gold, but when they do, something real has just happened. Gold is also starting to be used again in at least a little of international trade. The fiat currencies rise or (more often) fall in value against many goods – the most useful of which as a traditional yardstick for value in general, is gold.

    It’s true that governments have arranged it so that nearly all of us use their fiat currencies, and not gold. But gold is still at the root of the international monetary system, and the most marketable good. Being the most marketable good (or equivalently, the good with the slowest-declining marginal utility; its total utility is not great, and yet you’d always like to own more of it) makes it the thing that people choose for money when not constrained by government, and the thing that countries move among themselves to reflect real shifts in financial power.

    Comment by ILoveCapitalism — June 22, 2013 @ 7:38 pm - June 22, 2013

  7. Fox News Special – African American Conservative on Sean Hannity:

    http://commoncts.blogspot.com/2013/06/video-fox-news-special-african-american.html

    Comment by Steve — June 22, 2013 @ 8:23 pm - June 22, 2013

  8. I think we have a difference of perspective.

    In one way, yes. But my point wasn’t to claim that gold per se had gone up in value but merely to illustrate that gold, like fiat currency, has the (nominal) value that government says it has. On a practical level today, and even yesterday when we had gold (and silver) certificates, what we moved in payment was the currency and not the bits of gold or silver. Even with gold-back currency, gold coins went out of favor with the advent of a standardized piece of decorated paper that announced itself as having the same $20 value as a gold double eagle.

    …in pre-FDR days when the dollar was either gold or convertible into gold on demand, by definition you exchanged gold every time you spent (or accepted) a dollar….

    Yes and no. I exchanged a scrap of paper that claimed I was exchanging gold. Lots of panics, though, like the one in 1907 that took an Evil Banker to bail us out of, occurred because not only could we not get our paper dollars back out of the bank, but we couldn’t get the gold represented by those dollars, either. That’s a function of fractional reserve banking in large part, to be sure, but the bottom line was that all those scraps of paper that represented gold, whether dollar bills or bank statements, were worthless in terms of gold because we couldn’t get our gold. When we exchanged the dollar bills in our pocket–those of us who had some in the Panic(s)–we exchanged a scrap of paper for a good or service.

    In the end, those scraps are only promises, not actual metal. Or fiat value.

    …the thing [gold] that countries move among themselves to reflect real shifts in financial power….

    Not entirely. Very little actual gold moves in international commerce, including when loans get made, paid, or called. Most of what happens is a bunch of electrons bounce, and the gold they are claimed to represent get moved from this account to that account. All the US Federal debt instruments that the PRC thinks it holds are just a bucket of electrons carrying a promise whose entire value depends on reputation.

    Eric Hines

    Comment by E Hines — June 22, 2013 @ 8:46 pm - June 22, 2013

  9. gold, like fiat currency, has the (nominal) value that government says it has

    I’m still not sure I see (or agree with) the point.

    - On one level, yes of course. When you say “nominal value”, you mean value *in fiat currency*. So your statement becomes “gold, like fiat currency, has the (fiat currency) value that government says it has.” The statement is true by definition. The market may decide that one ounce of gold will buy you a fine suit. The government may push (through convertibility, money supply management, etc.) one of those good’s price to $900. Assuming the market preserves the real-value relationship of the two goods, the other will also then price at $900 – with government having “said” the respective nominal prices (or equivalently, value of fiat money) through its money supply management.

    - And on another level, no. The U.S. Government today says that gold has a nominal (fiat currency) value of $42.22/oz. And that’s obviously false, outside of certain government-specific contexts like export controls.

    what we moved in payment was the currency and not the bits of gold or silver…
    In the end, those scraps are only promises…

    Agree, but… With convertibility (which now we don’t have, or not at $42.22 anyway), the currency is morally equivalent to the physical thing. Meaningful convertibility makes the representation meaningful.

    By the way, the Evil Banker who saved the day in 1907 is supposed to have said “Gold is money. Everything else is credit.”

    I agree that fractional reserve banking is itself the cause of the runs/panics that plague us. Deposit banking ought to be legally on a bailment model, not a loan model.

    By the way, it’s amazing how many people don’t understand FRB and that our deposit system is on a loan model. (Don’t understand that, in making a deposit, you actually lend your money to the bank for its use.)

    Very little actual gold moves in international commerce

    That’s not what I hear about the hundreds of tons of physical gold imported monthly into China and India.

    To be precise: You’re right that there is only a little gold settlement in international trade, today. (Iran, Turkey, maybe China or India are however trying to expand it, e.g., bring back gold settlement in the oil trade.) So the physical gold that’s been flowing East is because Eastern entities have made a choice, that it’s simply what they want to buy.

    But wait a tick. Why would they? And more important, with what money? Answer: The Western money that they, their countries and companies have earned in trade surpluses. (China, for sure. India may still be running trade deficits, in which case they’ll soon find that they can’t afford to import gold, as their currency sinks.)

    So, we have this fantastically layered, indirect, international trade and financial system built to OBSCURE real economic movements: in this case, that physical gold is still the ultimate money and has been flowing East, effectively to pay for Western trade deficits. That’s not at all evident, in the system as designed. You’re not supposed to notice. But it’s the underlying truth.

    Comment by ILoveCapitalism — June 22, 2013 @ 9:30 pm - June 22, 2013

  10. The important thing is, we have a president who is so ignorant of economics he thinks a Fiat Currency is an Italian car.

    Comment by V the K — June 22, 2013 @ 10:58 pm - June 22, 2013

  11. Several trust-officers that I spoken-to in the last year or so have stated that their greatest long-term fear for the private Family Offices they manage is rampant inflation—purposely, needlessly and callously-created by TPTB to pay-off the US Debt and the massive governmental pension-liabilities looming. One expected at-least a 50% deflation in the US Dollar within 10-years. Several others expected more on the order of between Nixon’s floating-the-Dollar and today—about 67% to 75%-nominal deflation in real value.

    A US Quarter when I was graduated HS in the 1977 was worth about one-Dollar today in real buying power. And my brother had a auto-loan from the bank that was a bargain at 22%-annum….and a good mortgage was 16-18%, if you could get one.

    Comment by Ted B. (Charging Rhino) — June 22, 2013 @ 11:03 pm - June 22, 2013

  12. the Evil Banker who saved the day in 1907 is supposed to have said “Gold is money. Everything else is credit.”

    Well, nobody’s perfect. [g] What he didn’t understand–the mindset of the times, not his ignorance–is that gold is credit, too–because it has the value government says it has. Or the value the market says it has. Hence today’s disconnect between the government’s proclaimed value of $42-ish/oz vs the market’s value of $1290-ish/oz–down from a nearby high over $1600/oz, and those days’ perceived need to…revalue…gold/silver on occasion from the market/government disconnect on both the value of the metal and of the currency, as well as from profligate spending.

    It’s a tautology that gold’s value in dollars varies just as much as a dollar’s value in gold varies. But that’s because each’s value is defined in terms of the other. Neither has any intrinsic value, no more than beads, or wheat, or oyster shells.

    [I]t’s amazing how many people don’t understand FRB and that our deposit system is on a loan model. (Don’t understand that, in making a deposit, you actually lend your money to the bank for its use.)

    Yeah, it’s been a peeve of mine for some time that economics isn’t a fourth R in our educational system: budgeting beginning in K-garten, finance beginning around 5th or 6th grade, and economics in late junior high, or thereabouts.

    (Along with a civics/government/US History continuum of some sort, in the same age/grade range, as a 5th R, but that’s for another thread.)

    On the matter of FRB, though, that has as much power in backing a currency as has any metal–and is more useful in one respect. Increasing the amount of money in circulation is how an economy grows and how everyone becomes able to raise their individual standard of living in absolute terms if not relatively. FRB allows that increase without printing bills, and the value is reasonably well preserved without a need to find and mine more metal; the fraction just needs to be enforced rather than adjusted up or down at government convenience–sort of like not debasing the metal-backed currency.

    You’re not supposed to notice. But it’s the underlying truth.

    I’m not sure I care. If gold has a “mandated” value, whether by government or the market, what happens if, say, the market declined to buy gold any more? Recall the Hunt brothers literally cornering the market for silver. That got unlocked only because government made them unload (in their case contractual commitments to take delivery, rather than the actual silver). The reverse works, too. If the market declines to buy, government can preserve the value–market or official–only by requiring the purchase of gold through some sort of Obamacare for Gold facility. Certainly this is an unlikely scenario, but my point is that with goods (gold) moving in one direction, money is moving in the opposite direction, as you noted. But with the two valued in terms of each other, what’s really moving is a hard good (wheat, maybe) or a service (a management facility for the gold) and a highly portable store of value representing a momentarily agreed value equal to the good/service value. No net value is moving in either direction.

    Metal-backed or fiat, the value of money is just a promise, and so is the value of the backing metal; the validity of the values depends solely on perception and reputation.

    Eric Hines

    Comment by E Hines — June 22, 2013 @ 11:22 pm - June 22, 2013

  13. The important thing is, we have a president who is so ignorant of economics he thinks a Fiat Currency is an Italian car.

    Or a Chrysler….

    Eric Hines

    Comment by E Hines — June 22, 2013 @ 11:23 pm - June 22, 2013

  14. You guys are having an interesting, and deep discussion of gold, the dollar, and their relationship. I would like to bring a couple of links into the discussion. ILC, if you look at the second paragraph of this first link, I think you will see that it supports your opinion:

    http://pricedingold.com/sp-500/

    This second link is a chart of the S&P 500 priced in grams of gold. You can clearly see the FDR bump, and the Nixon bump and what their actions did in pricing the S&P 500. The third peak is wrapped around the dot-com bubble, and the ensuing decade which witnessed a dramatic increase in the price of gold, yet, with little to no inflation. The bulk of that rise in the price of gold was during the Bernanke regime, and more specifically from 2009 and peaking in 2011 – one can draw their own conclusion as to what caused that dramatic rise in price during the Obama/Bernanke period. I certainly know what caused the rise.

    http://au.businessinsider.com/sp-500-priced-in-gold-2013-3

    In my little world of the stock market, and the dominance of the S&P 500, how it is priced in gold is very important. It tends to predict direction.

    Hope you all enjoyed the links.

    Comment by mixitup — June 22, 2013 @ 11:39 pm - June 22, 2013

  15. This would make you proud of being s self hating gay republican

    The Supreme Court has yet to announce its decision on the two gay marriage cases. However, that has not stopped conservatives from pledging to defy marriage equality, if the high court makes a pro-LGBT decision.

    In a letter released Thursday, more than 200 conservative activists — ranging from the Catholic League’s Bill Donohue to Oklahoma State Rep. Sally Kern (R) — vowed to ignore any ruling in favor of same-sex couples. The group of endorsers, signing under the moniker of Freedom Federation, is composed of anti-LGBT Christian conservatives, many of whom have fallen from prominence in recent years.

    “We stand together as Christians in defense of marriage and the family and society founded upon them,” the letter reads.

    Liberty Counsel head Mat Staver and Deacon Keith Fournier, the editor-in-chief of Catholic Online, drafted the “Marriage Solidarity Statement” that attacks marriage equality by invoking “Natural Moral Law” and questioning the authority of the Supreme Court.

    “This Natural Moral Law gives us the norms we need to build truly human and humane societies and govern ourselves. It should also inform our positive law or we will become lawless and devolve into anarchy,” the statement warns. “Redefining the very institution of marriage is improper and outside the authority of the State. The Supreme Court has no authority to redefine marriage.”

    While the letter ends with a vague threat that the signers must draw a line on the definition of marriage and will not cross it, the statement does not specify what the Freedom Federation intends to do if the Supreme Court rules in favor of marriage equality.

    Raw Story makes a good point, writing: “What, exactly, they intend to do is unclear, since their churches presumably do not perform same sex unions, and because they themselves do not work in the wedding business or grant marriage licenses.”

    Comment by George — June 23, 2013 @ 9:34 am - June 23, 2013

  16. gold is credit, too–because it has the value government says it has. Or the value the market says it has.

    Yeah, see, you can’t make up your mind! ;-)

    The market – which is people, us – assigns relative values, i.e., how much of one real thing is worth another real thing. The issuer of fiat currency – which is government – decides, by money supply behavior, how much their fiat currency is worth in relation to real things in general.

    That’s in the long run. In the short run, government has some power to force relative values to change. For example, as it prints more money and sends it to the financial markets first, government can create bubbles in financial asset prices, making the relative real value of the financial assets higher than the market would have done on its own…temporarily.

    Neither has any intrinsic value, no more than beads, or wheat, or oyster shells.

    That depends on your definition of “intrinsic value”. Under my definition, real things always have at least a little – including gold, beads, wheat and oyster shells. But a dollar literally isn’t worth the paper it’s printed on – because the paper has been used (you can hardly re-use except for maybe wall decoration or to start a fire).

    I am probably talking about utility here, including goods’ marginal utilities. Gold is the most marketable good, in the sense that, although its total utility may not be as high as (say) food, it finds the slowest-declining marginal utility of any good in the marketplace. It’s true that you can’t literally eat your gold – but equally, gold doesn’t rot (or make you sick) if you have too much of it; in fact, it’s pretty damn hard to have too much of it. If there is any food to be had in desperate conditions, you can still almost always trade your gold for it.

    Increasing the amount of money in circulation is how an economy grows and how everyone becomes able to raise their individual standard of living

    I don’t agree with that at all. If it were true, Zimbabwe should be a rich country right now.

    Money is just a vehicle for real trade (to solve the problems of barter), and banking of any kind is just a vehicle for real savings and loans. What grows an economy is: real savings and real investments. Not their quantity per se, but the real planning and real actions of real people, that they embody. Because Velocity is capable of adapting to any quantity of money/credit in the long run, increasing the quantity of money/credit does nothing to boost economic activity or living standards – in the long run.

    Increasing the quantity of money/credit may boost economic activity in the short run, but only in the short run. First, only because of Money Illusion (or short-term stickiness in Velocity) – which wears off over time. And second, because the cost of increasing the quantity of money/credit more than gradually (or, the real event taking place when you do it) is the over-stimulation of real consumption, and equivalently, the undermining of real capital formation. And that actually lowers living standards, over time. So any short-term benefit of an accelerating money supply is counter-acted by the longer-term harms that come from it. Again, see Zimbabwe.

    I’m not sure I care.

    You’ll care in the future, when it’s a different world where the U.S. somehow seems to be in second place in the world economy and pecking order, because China and maybe Russia have picked up most of the West’s former gold.

    what happens if, say, the market declined to buy gold any more?

    But it won’t… at least not until the market finds a commodity which makes a better real money than gold. I won’t go into why gold replaced silver after silver replaced cattle and cow shells, etc. But, as Mises’ regression theorem indicates, *some* intrinsically valuable physical commodity (again, I regard them all as intrinsically valuable to some degree based on utility) must lie at the root of the monetary system, and always does. Gold is still the most practical, though conceivably gold could be replaced by a better physical commodity, if we find one someday.

    Comment by ILoveCapitalism — June 23, 2013 @ 1:21 pm - June 23, 2013

  17. mixitup – I think you agree that recently, stocks have taken a big jump up – priced in gold. What does that portend?

    I think that stocks (priced in gold) will ultimately bottom at the 1980 trough – and that it’s only a few years away now, maybe by 2017 – but the road to get there can still be a winding one.

    Comment by ILoveCapitalism — June 23, 2013 @ 2:11 pm - June 23, 2013

  18. Increasing the amount of money in circulation is how an economy grows and how everyone becomes able to raise their individual standard of living

    I don’t agree with that at all. If it were true, Zimbabwe should be a rich country right now.

    When the money is gold, an economy has trouble expanding because there’s only a finite number of ounces of it in circulation–and the only way to get more is to find it and mine it. But when large finds are found, the government must carefully control the mine’s output so as to control the value of the gold in terms of the things it buys.

    When government needs more things than it can buy with its limited supply of gold, it faces a choice: dilute the gold with other metals, shave the gold…coins…or borrow (there are likely other options, but these illustrate). The first two immediately on discovery gravely damage the value of the government’s word, especially concerning the value of the gold it has in circulation, the latter does the same damage when the government fails to repay.

    When the gold, instead, is used to back a dollar, the same thing obtains, only now with the added ability to print dollars commensurate with the gold supply. But, again, when the government needs to buy more than it has dollars for the purchases, it faces the same choices. Now, though, the debasement comes in the form of revaluing the dollar in terms of its gold backing (which is to say, revaluing the gold in terms of the dollars it backs (enough of this horse)). And borrowing. With the same negative effects.

    Now take away the gold backing, and switch to fiat dollars. Nothing material has changed; it’s just become easier to debase the dollar.

    But in all three cases, it takes an increase in money to grow the economy–borrowing is one way to achieve that increase, ideally with repayment coming from the growth; FRB is another; so is printing/releasing more gold into the economy.

    In all three cases, if the growth of the money supply goes too fast, inflation can get out of hand–which is why a Zimbabwe analogy breaks down–or if the borrowing goes to long or too often unrepaid, again the inflation gets out of hand, or if the printing goes too fast.

    There’s another common thread here: gold, gold-backed dollars, or fiat dollars, their value depends entirely on the reputation of the issuer and value of the issuer’s promises.

    Currency is a whole lot better than barter in terms of efficiency and lower costs of exchanges, but currency runs a higher risk, too: when I exchange an hour of labor for a bag of wheat, and then go trade that wheat for some cotton, every participant knows exactly what he’s getting in the exchange. As soon as currency is used as the intermediary for the exchange, all anyone is getting is a promise. In the vast majority of cases they’re valid promises. But the existence of runaway inflation–even of merely excessive inflation–is a demonstration that the promise has broken down or is starting to break down.

    As for the reasons gold replaced silver, beads, oyster shells, etc as the preferred medium for currency or for backing a currency, they all center on controlling inflation.

    Eric Hines

    Comment by E Hines — June 23, 2013 @ 4:07 pm - June 23, 2013

  19. When the money is gold, an economy has trouble expanding because there’s only a finite number of ounces of it in circulation

    No. As you’ve already mentioned yourself, people can trade with it fractionally via paper, credit cards or electronic debits, etc. And, as I have mentioned, as long as meaningful convertibility is around in some form, the representation will be meaningful. And velocity is capable of adapting, over time, to any quantity of money.

    Those three factors together mean that the quantity of any kind of money is irrelevant in the long run. We could reduce the quantity of U.S. dollars to a single one – a single dollar, that we all just trade very very tiny fractions of – and (after we’ve accomplished the debt repudiation that that would entail, from then on) the economy would work fine. Same if there was only one ounce of gold.

    I’d agree if you said something just slightly different, “When the money is gold, an economy has trouble *inflating*” its price/credit levels. But I’d call that a feature, not a bug.

    when large finds are found, the government must carefully control the mine’s output

    Why? Why not just have one finite round of inflation? You’re talking about a rare occurrence that adds only a limited amount to the money supply… as opposed to the process of endless money & credit expansion (inflating or debasing the currency) that we have under fiat currencies.

    Continuous inflation is what really messes up the economy’s capital structure, hampering the economy’s real growth. And that’s what we have: even by government CPI statistics (which understate CP inflation), the dollar has lost 99% of its value in the last 80-100 years.

    When government needs more things than it can buy with its limited supply of gold, it faces a choice: dilute the gold with other metals, shave the gold…coins…or borrow (there are likely other options, but these illustrate).

    How interesting, that you have a parenthetical ‘likely other options’ in place of the really good choice, the best choice, the choice which sound money is meant precisely to bring about: That government cut spending – scaling back its ambitions and living within its means.

    in all three cases, it takes an increase in money to grow the economy

    I’ve stated why I think that is quite incorrect.

    if the growth of the money supply goes too fast, inflation can get out of hand–which is why a Zimbabwe analogy breaks down

    ??? Growing the money supply too fast, and having inflation get out of hand, is exactly what they did in Zimbabwe.

    As for the reasons gold replaced silver, beads, oyster shells, etc as the preferred medium for currency or for backing a currency, they all center on controlling inflation.

    No, they center on the superior marketability (including the superior durability, divisibility, desirability or subjective utility to the greatest number of people, portability, etc.) of the replacement commodity.

    Comment by ILoveCapitalism — June 23, 2013 @ 4:28 pm - June 23, 2013

  20. Why? Why not just have one finite round of inflation?

    It’ll never be just one round. Population growth and technological improvements will see to that. Along with wars.

    Continuous inflation is what really messes up the economy’s capital structure, hampering the economy’s real growth. And that’s what we have: even by government CPI statistics (which understate CP inflation), the dollar has lost 99% of its value in the last 80-100 years.

    No. Too fast inflation does that. Inflation per se isn’t inherently bad or good, it just is. Your analogy is something of a non sequitur: on this, Keynes was right, in the long run we’re all dead. It doesn’t matter that our dollar today buys 1/100th of what it could have 90 years ago; we weren’t living then. It doesn’t matter, either, that our grandfather’s dollar could buy then 100 times more than it could today–he doesn’t live today. And all of that elides what was available to buy then and now. Our grandfathers couldn’t, to look at something of an extreme, put down all the money in China for a ride into space–that’s available today (or soon) for just a couple hundred large. Nor could our grandfathers then walk around with a cigarette pack-sized box in his pocket that ran a bunch of apps (what’s an app?), some of which run a radio, some of which run a TV, some of which do computing (what’s that!?), and one of the lesser of which makes and receives telephone calls. What matters is the value of a dollar and how that value changes in either man’s life.

    How interesting, that you have a parenthetical ‘likely other options’ in place of the really good choice, the best choice, the choice which sound money is meant precisely to bring about: That government cut spending….

    Not so much. Spending was subsumed into my government needs more than it can buy. Whether this or that spending is actually necessary is a political decision, and I was trying to strip political dynamics out of an essentially economic discussion. And there will be times when government needs to spend more than it has money to buy.

    ??? Growing the money supply too fast, and having inflation get out of hand, is exactly what they did in Zimbabwe.

    Which was one of my lesser points, a point with which you disagree (and on which we’ll likely never agree): too much inflation is bad, inflation itself is no big deal. It’s an equilibrium state, if at a rate rather than a hard, unchanging value, to which our economy has adapted, to which a free market easily adapts, and given adequate controls of it, has very little importance. You just want to control it at zero; I hold that it’s sufficient to control it at some low level. What matters most is its predictability.

    Eric Hines

    Comment by E Hines — June 23, 2013 @ 5:22 pm - June 23, 2013

  21. It’ll never be just one round.

    I’ve read that the world gold supply increases by about 1 to 1.5% per year, including the contributions of “Population growth and technological improvements” to mine discoveries. That’s pretty reasonable. No need for governments to control it.

    Keynes was right, in the long run we’re all dead.

    Today *is* the long run of Keynes. We’ve reached it. And we are paying the price.

    What matters is the value of a dollar and how that value changes in either man’s life.

    A man’s life is roughly an 80-year period, in which the dollar has lost 99% of its value.

    I was trying to strip political dynamics out of an essentially economic discussion.

    That’s not possible; I mean, not if the economic discussion is to be valid. There is a reason it used to be called ‘political economy.’ Today’s pseudo-scientific economics went off the rails, when it started pretending to be scientific and apolitical; it has become, in essence, a junk science which has given us the deep holes that we now live in.

    Comment by ILoveCapitalism — June 23, 2013 @ 5:35 pm - June 23, 2013

  22. My grandfather did not obey the law. He kept his gold coins. The kicker is that he had a mistress and when he died in 1977, his mistress got the gold coins. As an investor, I find it odd that anyone would want to invest in gold. The value of gold depends on the market as do stocks, but unlike stocks in good companies, it never pays a dividend. I also find it odd that we work hard to mine and process gold ore into pure gold, then just make gold bars out of it and then put back in the underground vaults with armed guards guarding it.

    Comment by SC.Swampfox — June 23, 2013 @ 7:46 pm - June 23, 2013

  23. As an investor, I find it odd that anyone would want to invest in gold…it never pays a dividend.

    As an investor, I feel the same way.

    It’s not an investment. It’s an alternative to the U.S. dollar (cash), as a long-term store of value.

    Gold has ups and downs against the dollar – or, to be more precise, **the dollar** has its ups and downs against gold – but in the last 80 years, gold hasn’t lost 99% of its purchasing power. And the dollar has.

    The dollar (cash) also doesn’t pay a dividend. Especially nowadays.

    Comment by ILoveCapitalism — June 23, 2013 @ 8:37 pm - June 23, 2013

  24. It’s not an investment. It’s an alternative to the U.S. dollar (cash), as a long-term store of value.

    Gold has ups and downs against the dollar – or, to be more precise, **the dollar** has its ups and downs against gold – but in the last 80 years, gold hasn’t lost 99% of its purchasing power. And the dollar has.

    The dollar (cash) also doesn’t pay a dividend. Especially nowadays. – Comment by ILoveCapitalism — June 23, 2013 @ 8:37 pm – June 23, 2013

    Interest rates are at an all time low. The only thing to invest in today is dividend paying stocks or growth stocks, if you can find any growth stocks in these times when making a profit is frowned upon by progressives. Gold may have retained 99% of its value, but in the interim has not paid one cent in a dividend.

    Comment by SC.Swampfox — June 23, 2013 @ 9:12 pm - June 23, 2013

  25. Perhaps it didn’t sink in, where I said “It’s not an investment.”

    Investments pay dividends (or ought to), yes. And cash doesn’t. (Pure cash never does; and nowadays, savings accounts, CDs, money markets, etc. also don’t – or do just barely.)

    Cash, or money, is supposed to function as a store of value (in addition to medium of exchange, and unit of account). Which store of value has lost 99% of its value in the last 80 years? Hint: the dollar.

    Comment by ILoveCapitalism — June 23, 2013 @ 9:18 pm - June 23, 2013

  26. ILC, I don’t even see gold as proper storage of one’s wealth. It is a commodity whose price fluctuates and currently, in my opinion, is way over bought. Currency should be a storage of value when the interest that you can earn on it excedes the rate of inflation. But, currently holding cash may necessary, but it sucks ………… Especially, for retirees who need interest income on which to live.

    Comment by SC.Swampfox — June 23, 2013 @ 11:01 pm - June 23, 2013

  27. Currency should be a storage of value when the interest that you can earn on it excedes the rate of inflation

    Yeah. That’s the trick!

    sucks ………… Especially, for retirees who need interest income on which to live.

    Yeah. The Bernank has not been kind to them.

    Comment by ILoveCapitalism — June 23, 2013 @ 11:26 pm - June 23, 2013

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