Golden Thoughts

2008-2-23 05:33:00

Susan wrote:

"Blayne was not saying that the price of gold doesn't fluctuate. In fact he said the opposite. He said the amount of Federal Reserve Notes (paper money) to buy a gold coin changes, but that the value of the gold does not."

JJ:

Yes, I know that is what he is saying and there was no misunderstanding.

What I am saying is that the value of gold does fluctuate and change in value. Gold lost over half of its purchasing power within a two year time period in the eighties and then other times took a big jump. For instance it went from a low of 44.30 an ounce in 1972 to a high of $126.30 in 1973. The purchasing power of gold more than doubled within one year. This is a statement of historical fact.

Susan:

"For instance in the 1870's it took 1 gold coin (worth $20 at the time) to buy a man's good suit. If you were to take that same good coin (worth about $900 today) you could buy a man a good suit. You can still buy the same goods with the same coin therefore the value of the gold has not changed."

JJ:

I don't think this makes your case for $900 is a pretty pricey suit. It is difficult to compare products of the far past with today because mass production has made everything cheaper for us to buy including clothing. A lot of people in the 1870's had only one or two changes of clothes. Many had only one. Because an hour's wage buys more today we have more. Overall an ounce of gold buys more today than it did 100 years ago, but so does an hour's labor.

Larry:

"Yes, and deficit spending is in large part made possible by a fiat currency system. Again, simple history. Other than to finance major wars, when has the United States had the largest deficits? When it was on the gold standard, or after? If you know anything of history the answer is obvious."

JJ:

Because of the rigidity required of a strict gold standard no country is ever able to stay on it for an extended period of time. Whenever there is a crisis, especially where national survival is at stake, the orthodox gold standard will be abandoned.

Let's look at the three great crisis in our history where our survival was at stake. The first is the Revolutionary War. The Founders realized the war could not be won if we adhered to a strict gold standard so they issued fiat money called Continentals. This is one of the things we did that helped us sustain and win the war. The Continental worked great except for one problem. The British printed up all kinds of counterfeit money and infused as much as they could into the money supply causing inflation. But even with this regular sabotage the fiat money still saved the day.

The second great crisis was the Civil War. Both sides were smart enough to realize that if they strictly adhered to money backed by gold that they would lose and both issued fiat money. One of the reasons the North won is the Greenbacks were more standardized and reliable, and without them Lincoln would have probably lost the war.

The third great crisis was the Great Depression followed by World War II.

Because people were hoarding gold which limited the amount of money in circulation, FDR effectively took us off the gold standard and made the ownership of gold bullion illegal. We thus switched to a fiat system of creating money which was greatly increased during World War II. If we would have went back on a gold standard during the war we would have lost it to Hitler who was also on a fiat system that was alarmingly successful.

Three times our national survival was at stake and three times we were saved, not by gold, but by fiat money.

A gold standard can work and control inflation in times of stability and modest growth, but we never have stability for long periods of time and in times of crisis the powers that be will go off the gold standard. Then there is the natural tendency of government to overspend and this will create problems no matter what type of money system we are in. Even on a gold standard politicians and bankers will circulate illegal money or commit fraud.

The main problem with gold as a standard for paper money was pointed out in the parable. That is it takes a tremendous amount of labor to mine and store it in vaults. This is labor that does nothing to improve the quality of life of citizens. If that labor can be used to create goods and services that people want to use or purchase then much greater growth and production can be accomplished.

That said, I am not saying our current money is managed well for it is not. A new system needs to be created that will stabilize the money supply. Unlimited deficits create major problems in any money system. Fortunately, this mismanagement will shortly change. As we move into the Aquarian Age and people become more mentally polarized they will rebel and not allow their finances to be destroyed because of the stupidity of their leaders. People will take more control of their own destiny.