The Gold Standard, Part 5

This entry is part 40 of 50 in the series 2011A

One of the main reasons gold standard advocates want us to return to gold as a backing for money is its stability.  Gold has always been a stable valuable metal, they say.  Some go so far as to claim that gold has always kept its same value over the ages.  For instance, some claim an ounce of gold bought a new suit of clothes in the days of the Roman Empire, in the 1920s and even today.

Overlooked by them is the variables in the cost of clothes.  As of this writing one can buy a high end suit for the price of an ounce of gold (around $1350) but a consumer can get a nice suit at the Men’s Warehouse for around $200 and less than that in some discount stores.  This means you can get seven suits today for what it cost a Roman to buy one.

On the other hand, a decent suit cost $30 or more in the 1920s, which was equal to one and a half ounces of gold, valued at $20.67 and ounce.1

So instead of gold maintaining the same purchasing power for a suit of clothes over the centuries, in relation to this one item, it lost 50% of its it’s value by 1920 but gained by almost 700% by 2011.

Just as gold varies in value compared to a man’s suit of clothes even so did we illustrate great fluctuations in relations to the other monetary mental – silver.

How about other items? Would the value of gold fluctuate over the decades and centuries compared with wheat, beef, land, diamonds, seasonings and other items?

Yes it would and in many cases the variation of value is quite profound.

But what if we don’t single out the value of one commodity in relation to gold but take an average as is done with the wholesale or consumer price index?

We have illustrated the fact that deflation of value can occur during a depression, but how about inflation?  Can this occur while relying on a gold standard?

It is common knowledge that pumping too much money into the financial system will cause inflation.  Has this happened in the past when large amounts of gold was added to the supply?

Adam Smith points out that the value of gold is not always stable using Spain as an example.

“Gold and silver, however, like every other commodity, vary in their value, are sometimes cheaper and sometimes dearer, sometimes of easier and sometimes of more difficult purchase. The quantity of labor which any particular quantity of them can purchase or command, or the quantity of other goods which it will exchange for, depends always upon the fertility or barrenness of the mines which happen to be known about the time when such exchanges are made. The discovery of the abundant mines of America reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had been before. As it cost less labor to bring those metals from the mine to the market, so when they were brought thither they could purchase or command less labor; and this revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account. But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity which is itself continually varying in its own value can never be an accurate measure of the value of other commodities.”2

Spain thought it had hit a huge bonanza when it began to rob the New World of its gold and silver. It plundered 1,230 tons of gold and 60,440 tons of silver from 1493 to 1690 but all that inflow of precious metal not only led to high inflation but to its undoing as a world power.3

A major problem was that their attention and labor was directed toward plundering as much gold and silver as possible instead of manufacturing at home.  Why produce anything when they could just buy it from other nations with all that gold and silver?

Consequently their true base of power and wealth – productive labor – declined and they fell off the stage as a world power.

The period of the California gold rush was another famous example.  Australia also had its own gold rush about the same time.  From 1851 to 1861 the world’s gold supply increased 161% accompanied by inflation of around 5% per year.4

In the gold rush communities inflation was much worse. It cost an ounce of gold (worth $1350 in today’s money) to just hire someone to wash and iron a dozen shirts.  Good food and supplies were also outrageously inflated.5

Not only did gold discoveries increase money supply and inflation but so did technological advances in mining and processing.  These caused an increase gold supply and inflation.  From 1897 to 1914 the U. S. gold supply increased 7.5% per year and prices rose about 50% during this period.

This led to a tremendous increase in our leveraged money supply.  “From June 1896 to June 1914, total bank deposits rose from $3.43 billion to $14.32 billion, or an increase of 317.5 percent or an annual rise of 17.6 percent…”6

Variations in gold supply has influenced its value since then but the next big change in the purchasing power of gold came not from supply but by presidential decree from FDR in 1934 that instantly changed the value of gold from $20.67 an ounce to $35.

Then when Nixon took us off the gold standard in 1971 it went from the decreed value of $35 to over $500 an ounce in 1980 and then down to $288 an ounce in 1998, then up to $1350 by 2011.7

Conclusion:  Truly it is established by history that, even though gold is one of the more stable commodities, it is susceptible to value fluxuations up and down just like everything else.  Gold and silver have been used for money, not because they are the ideal, but because they are the most practical of metals

Concerning gold, even the hero of the gold standard philosophy, Ludwig von Mises, said:

“But even if the 100 per cent reserve plan were to be adopted on the basis of the unadulterated gold standard, it would not entirely remove the drawbacks inherent in every kind of government interference with banking.”8

“The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd.”9

Friedrich Hayek, another gold standard hero stated:

“The gold standard, even if it were nominally adopted now (1992), would never work because people are not willing to play by the rules of the game.”10

If gold, the most practical of metals for money, is far from an ideal standard then are we doomed to be held hostage to a very fallible money system?  We  will consider this question and explore the alternatives.

Notes:

1. http://www.thepeoplehistory.com/20sclothes.html

2. Adam Smith; Wealth of Nations, Part 1

3. Lost Science of Money By Stephen Zarlenga; Page 102-3

4. A History of Money by Glyn Davies, 1994, Pages 481-482

5. California Gold Rush Cooking; Lisa Golden, 2001 Schroeder, page 18

6. The Case for Gold by Ron Paul and Lewis Lehrman, Pg 120

7. http://www.goldinmind.com/gold-basics/how-much-can-you-lose-by-investing-in-gold.html

8. Human Action; Fourth Revised Edition; Fox and Wilkes, 1996, , Ludwig von Mises, Page 440

9. Ibid, page 473

10. Interview with Thomas W. Hazlett from the July 1992 issue of Reason  http://reason.com/archives/1992/07/01/the-road-from-serfdom/print

 

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10 thoughts on “The Gold Standard, Part 5

  1. JJ
    Of course that is a part as well as fluctuations in the value of gold. All commodities and products flutuate in price. That is my point. I agreed with Mises who said: “But the very notions of stability and unchangeability of purchasing power are absurd.”

    Blayne
    I think you are taking it about out of context. Mises says in the same article:

    “that it limits the government’s power to resort to inflation. The gold standard makes the determination of money’s purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence.”

    Gold purchasing power has remained relatively stable over millennia, that doesn’t mean it is perfect and especially in times of economic crisis, sure it will will fluctuate but it stays relatively stable in relation to its availability and not in relation to current fiat currencies that fluctuate wildly in economic crisis. So I think it is a misnomer to say that Mises did not see it as stabilizing factor in sound currency.

    Mises is speaking in terms of money free of government intervention. He goes on to say:

    “The international gold standard works without any action on the part of governments. It is effective real cooperation of all members of the world-embracing market economy. There is no need for any government to interfere in order to make the gold standard work as an international standard.

    What governments call international monetary cooperation is concerted action for the sake of credit expansion.”

    JJ
    I’ve read a lot of views from writers siding with the Austrian school such as Mises, Hayak, Rothbard, Mark Sousen, Nathan Lewis, Thomas Woods Jr., and most everything Ron Paul has published and haven’t heard the gold standard discussed as meaning anything different than money being backed up by gold.

    Blayne
    Well I think in terms of a gold standard they are referring to linking the dollar to one standard weight of a commodity in this case gold, at least a government issued dollar, this is so there is one standard. However silver and other commodities in certain weights will equal that gold standard weight. So yes in a sense it could be termed a gold standard. Here is what Rothbard says

    “precious metals, gold and silver, have always been preferred to all other commodities as mediums of exchange where they have been available.

    Rothbard, Hayak and Ron Paul part ways here somewhat. Where they prefer competing currencies. However Ron Paul in the past has agreed with Rothbard and has proposed legislation along those lines however more recently has advocated competing currencies. Which I also agree with.

    JJ
    Agreed and I have never said anything contrary to this [fiat currency]. But in the past what was called the gold standard was often fractional banking where for every dollar of gold held by the banks $9 or more in fiat money was issued.

    Blayne
    Perhaps not intentionally but it appeared to me like you refereed to fiat currency as just paper whether gold backed or not. One thing they all seem agree one is 100% reserve an any currency as anything less is fraud. Here is what Rothbard says on it:

    “This plan, essentially the one advocated by Congressman Ron Paul (R.-Texas), would return us speedily to something akin to the best monetary system in U.S. history, the system from the abolition of the Second Bank of the United States and the pet banks, to the advent of the Civil War. Inflation and business cycles would be greatly muted, if not eliminated altogether. Add the abolition of the Federal Deposit Insurance Corporation, the requirement of instant payment of demand liabilities on pain of insolvency, and the long overdue legalization of interstate branch banking, and we would have a system of free banking such as advocated by many writers and economists.

    We could, however, go even one step further. If we were interested in going on to 100 percent reserve banking, eliminating virtually all inflation and all bank contraction forevermore, we might require 100 percent banking as part of a general legal prohibition against fraud. The substantial 100 percent gold reserve tradition (held by writers and economists ranging from David Hume, Thomas Jefferson, and John Adams, and partly to Ludwig von Mises), considers the issuing of demand liabilities greater than reserves as equivalent to a warehouse issuing and speculating in warehouse receipts for nonexisting deposits. In short, a fraudulent violation of bailment.”

    He goes into further detail however this was back in the 80’s and this plan is untenable now. And perhaps this is why Ron Paul now advocates competing currencies, as back then he saw this as a transition measure and perhaps the opportunity to still fix things. Those opportunities are now gone.

  2. Quoting JJ:

    “As of this writing one can buy a high end suit for the price of an ounce of gold (around $1350) but a consumer can get a nice suit at the Men’s Warehouse for around $200 and less than that in some discount stores. This means you can get seven suits today for what it cost a Roman to buy one.”

    Men didn’t wear suits in Roman times. If your gold comparison has any validity you would have to compare an expensive Roman toga to perhaps a modern hand made Italian silk suit made by a highly skilled tailor. But even that is not entirely a valid comparison because the modern suit has the advantage of using cloth and thread made on modern machinery.

    Quoting again:

    “This means you can get seven suits today for what it cost a Roman to buy one.”

    The only thing that you have demonstrated here is that the Industrial Revolution has dramatically lowered the cost of clothing for your average person (only the wealthy could afford togas in ancient Rome just as only the wealthy can afford very expensive tailored suits today). This also resulted in a “Hygiene Revolution” in that the industrial production of relatively cheap clothing made it possible for average people to launder their clothing a lot more often than in Roman times.

    Finally, you wrote:

    “If gold, the most practical of metals for money, is far from an ideal standard then are we doomed to be held hostage to a very fallible money system?”

    I think that what we are being “held hostage” by is reality. As you have taught in other areas there is only relative perfection. So far I remain skeptical. Gold is not perfect measured against an unreal standard but it has some highly demonstratable virtues in the real, but imperfect world.

    lwk

    1. I assumed the guy I read who was talking about a “suit of clothes” in the Roman era was merely referring to their attire at the time and I continued with the same assumption. I probably should make a note in the final draft to clarify that a man’s clothing was different in that age.

      1. The point was not – hopefully – to be overly picky. It seemed to me that the only clothing from Roman times that could reasonably be compared to modern clothing (in terms of value measured in gold) woudl be the highest end, mostly hand made clothing. Otherwise you are comparing “apples to oranges” in that the relatively cheap clothing most of us wear, myself most certainly included, is a product of modern technology and in no way comparable (in terms of value in gold) to what the average guy wore in Roman times.

        lwk

        1. I agree with lwk here and he saved me the trouble of responding to this particular post. Also I don’ see how your example of the ability of an anouce of gold being able to buy more suites today then in the days of Rome makes the purchasing power of gold go down, it increases it. But as lwk mentions that is due to modern industrial techniques making it cheaper and more efficient to make clothes.

          I would add that over all in your gold standard series that in my view you have not accurately represented the so called “Gold standard” but have chosen a very narrow view held by few if any of gold standard advocates. First of all “gold standard” is a figure of speech for gold and silver and other precious metals from copper to platinum etc.. It has never meant money is gold only, or gold backed currency only. Second a scenario where the government issues all the paper money and holds all the gold supposedly backing the paper is not what most who advocate for sound currency would advocate. Also issuing receipts for gold or other commodities as paper money is not fiat money. Fiat money is money from nothing or backed by nothing. Those are just a few things I wanted to mention.

          1. Blayne:
            I agree with lwk here and he saved me the trouble of responding to this particular post. Also I don’t see how your example of the ability of an ounce of gold being able to buy more suites today then in the days of Rome makes the purchasing power of gold go down, it increases it.

            JJ
            Actually the example of the value of a suit of clothes in relation to gold was used by gold standard advocates that I have read. Their claim is that an ounce of gold has maintained the same value through the ages and bought a suit of clothes in ancient Rome, in the 1920’s and today. My point was that the value fluctuates and buys different amounts of product at different times and that this is not a good example of the consistent value of gold.

            Blayne
            But as lwk mentions that is due to modern industrial techniques making it cheaper and more efficient to make clothes.

            JJ
            Of course that is a part as well as fluctuations in the value of gold. All commodities and products flutuate in price. That is my point. I agreed with Mises who said: “But the very notions of stability and unchangeability of purchasing power are absurd.”

            Blayne;
            I would add that over all in your gold standard series that in my view you have not accurately represented the so called “Gold standard” but have chosen a very narrow view held by few if any of gold standard advocates. First of all “gold standard” is a figure of speech for gold and silver and other precious metals from copper to platinum etc.. It has never meant money is gold only, or gold backed currency only.

            JJ
            I’ve read a lot of views from writers siding with the Austrian school such as Mises, Hayak, Rothbard, Mark Skousen, Nathan Lewis, Thomas Woods Jr., and most everything Ron Paul has published and haven’t heard the gold standard discussed as meaning anything different than money being backed up by gold. Now some have views of money being backed up by other commodities or metals but I haven’t seen this being called a gold standard, but I haven’t read everything. A lot of people have different ideas ad definition of terms. One group is pushing something called a “Global Reference Currency” where money would be tied to a group of commodities.

            Blayne
            Second a scenario where the government issues all the paper money and holds all the gold supposedly backing the paper is not what most who advocate for sound currency would advocate.

            JJ
            Some I have read advocate this and others want to use receipts from private warehouses. There is definitely not uniformity of thought among the gold standard advocates I have come across.

            Blayne:
            Also issuing receipts for gold or other commodities as paper money is not fiat money. Fiat money is money from nothing or backed by nothing. Those are just a few things I wanted to mention.

            JJ
            Agreed and I have never said anything contrary to this. But in the past what was called the gold standard was often fractional banking where for every dollar of gold held by the banks $9 or more in fiat money was issued.

  3. I signed into wordpress so I hope this uses my avatar pic which I posted there. Also for typos, I noticed somewhere in there you used “and” where it should have been “an”.

    Larry Woods says,

    Outstanding. I was happy to see this important post just a short while before I drive off to Nashville for five days. I believe you adequately put to bed the waning gold standard dream for those realistic enough to admit truth. I hate to see the gold standard dream go because I too shared that dream for many years. As I said before, I wait on pins and needles to see your solution for a stable monetary system.

    I see both Mises and Hayek despair of ever creating a stable system. Hayek says people “…not willing to play by the rules…” will always plague any monetary system. A large part of the genius of the Constitution was the system of “checks and balances” which set jealousy of power to naturally offset concentration of power by dividing that power. But the power mongers have found a way around nearly every check and balance now. Your solution must contain a means to create checks and balances using natural power nodes with the money supply.

    Right now, unfortunately, any balance of power hopelessly languishes because our Congress placed a private bank in charge of our money system – the proverbial fox-guarding-the-henhouse. There is no balance nor even semblance nor claim of balance. It’s just a one-way street. So your solution must meet two primary challenges: first it must adequately balance and stabilize the money system, but second it must have, inherent within itself, the amazing ability to supplant the Federal Reserve System which, at this point in time, destabilizes and wholly unbalances our current money system. Those guys will not give up their constant flow of billions lightly. You can expect a fight like we have never seen before. Perhaps it will take a complete societal melt down like that described in Revelations chapter 18, which I think describes the coming fall of our world monetary system, to make way for the new. To me, Revelation 18 paints a perfect picture of a system gone mad with disrespect and predation. I believe Revelation 18 paints the picture of a society that transferred all state powers into mandatory contracts called licenses so that natural rights are not longer honored in any official capacity and of a society that gave over control of their money system to a corrupt and totally selfish few and that gave over every other aspect of respectful government into the hands of disrespectful power mongers. And they managed to turn all these purposes of the Constitution upside down while giving lip service to that great document. As John says, “…for by thy sorceries were all nations deceived.” And I must admit the prospect that those predators get their comeuppins delights. Or maybe you managed to come up with a far more modest and less disruptive plan. I stand eager to hear where you think this will go and what your model of a balanced, stable, and respectful monetary system looks like.

    DK speaks of a resurrected man living in Europe and directly influencing world finances. He says this guy works with world banking institutions. I often think of this guy. For example, what did he think of introducing the Euro? And what plans does he concoct? Does he plan to wreck world money so it can get replaced by more respectful systems? Will his ultimate plan look anything like your coming plan for a stable money system? What if you could touch base with this guy and coordinate your efforts? If we ever got a heads up from this guy, every one of us here would happily exert our tiny pieces of power to help his plans. Probably students of Alice Bailey worldwide would gladly assist. Although many of them are so enamored with simplistic socialist solutions that they would disagree with anything requiring respect from the state. That is a huge problem and we must do a better job educating.

    How is it that so many Alice Bailey students locked onto socialism as an idea political solution? They fall victim to some very elementary deceptions like the old saying: if you are not a socialist by the time you are 20, then you haven’t got a heart; but if you are not a conservative by the time you are 30, then you haven’t got a brain. You would think that students of the ancient wisdom would clearly see that the doctrines of Christ require respect all the way through the system of the state and in every aspect and detail of it just as it requires absolute respect in our personal and business relationships. Christ is all about respect, never coercion. Isn’t that obvious? Yet I argue with many who should know better and who consider themselves careful students of DK. Sometimes I despair when I see so many DK students tripping over such low level deceptions. If they cannot even figure out that much, then how will they receive your book? I hear Solomon pleading, “With all thy getting, get wisdom.”

    I notice that your teaching of thinking for yourself and of tuning into soul contact always results in very logical and step by step conclusions. I notice that you apply the very systems of discernment and study and questioning that you teach us. For example, you recent comments on Braco exemplify this. I’m seeing a pattern here. Piece by piece logic double checked and guided by the soul and by the basic principles of harmlessness and the many other BOL principles. Next time you put out a challenge to resolve a conundrum, I will attempt to answer as you would answer.

    I dearly loved your description of soul contact. You asked the question about Braco but your soul stood aloof. So you gathered more info but info was short because Braco does not teach any doctrine. But your soul stood aloof. Finally you pinned your soul to the ground and demanded an answer. This reminded me so much of Hercules pinning the Doe’s foot to the ground with his arrow. This also reminded me of one of the early Mormon Apostles who would sometimes kneel in prayer looking for an answer and would then refuse to get back up until he got an answer. I love the idea that by an act of will we can sometimes force the issue with our souls. In fact, probably for us beginners, that will be how we mostly operate, pinning it down with struggle and arrows.

    Your brother,
    Larry Woods

    1. Great post Larry. Thanks.
      I’m not sure why your avatar didn’t show up if you signed in. I’ll see if I can figure out what’s going on.

  4. [quote]Variations in gold supply has influenced its value since then but the next big change in the power of purchasing power of gold came not from supply but by presidential decree from FDR in 1934 that instantly changed the value of gold from $20.67 and ounce to $35.[endquote]

    It looks like there are two typos in this sentence: “the power of purchasing power of gold” should be “the purchasing power of gold”, and “$20.67 and ounce” should be $20.67 an ounce”.

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