"You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold." -George Bernard Shaw
"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." -Fredrich August von Hayek
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” – Ernest Hemingway
As we continue to deal with the fallout from the Great Recession (and with the help of primary campaign of Ron Paul), more and more people are rightfully questioning the status quo and asking themselves important questions. "What is money and how does our monetary system work?" "What is fractional reserve lending?" "What does the Federal Reserve do?" "Should money be made available in unlimited quantities by the Fed, and who most benefits from its policies (hint: not you)?" "Do deficits matter?"
More and more talk lately has been centered on the idea of a return to the gold standard, which many believe is clearly laid out in the Constitution. Yes, the Founding Fathers knew the dangers of "fiat" -- money that has no intrinsic value but only has value via government regulation or law. What we view as money is so because the government will accept only it for payment of debts.
All those and more are great questions, and Skipgold plans to address many of them in future posts. But for now, we will stick with something a little simpler. Mainly, why has gold been used as "money" so much in human history? What makes gold so special compared to all the other elements on earth?
First, check out this great, short video that for some God-forsaken reason was not embeddable (at least not with my feeble computer skills). Go ahead. Click on that hyperlink. I'll wait.
Okay, hopefully you found that interesting. But even before the invention of the internet, many centuries ago Aristotle observed the basics of what good money should be. Money should be:
- Durable: Money must stand the test of time and the elements. It must not fade, corrode, or change through time;
- Portable: Good money needs to hold a high amount of 'worth' relative to its weight and size;
- Divisible: Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be "fungible", defined as "being freely exchangeable or replaceable, in whole or in part, for another of like nature or kind."
- Intrinsically Valuable: This value of money should be independent of any other object and contained in the money itself, starting with rarity.
There are so few materials that employ all those characteristics. Agriculture products, diamonds, oil, artwork, etc. all come up short in one or more categories. Unbacked paper money comes nowhere close to qualifying. Gold does and that is why whenever it has been available it has become money. In the same way steel, concrete and wood have been used for construction and oil has been used for energy, gold is most perfectly suited as money. Get in a time machine with a pocket full of gold coins, and regardless of time or place in history you end up, you would be able to survive and transact. A pocket full of Benjamin's would yield you some nice fire tinder or emergency toilet paper, and little else.
Skipgold has written much on gold since the start of the blog in 2005. I suspect there will be much more written on this topic in the months and years ahead. Since the fundamental problem of our economy is far too many debts and liabilities compared to the income that has to pay that back, I believe our monetary system will have to be remade at some point in our lifetimes.
QE or Not QE. Is That the Question?
Scene: Princeton University economics class taught by Ben Bernanke. After a late night of studying, a student falls asleep in class. This sent Bernanke into a tizzy and he came over and pounded on the desk, demanding an answer to a question he had just posed. The student, shaken but now awake says "I'm sorry Professor, I missed the question -- but the answer is increase the money supply..."
Despite all the models, the white papers, the academic credentials, and the sophisticated talk, all the Federal Reserve really does is print money. That is the sum total of "quantitative easing", or QE. Lots of people think that alone can create economic wealth, but I think that defies logic and common sense. Didn't the Soviet Union prove that economic top-down control by a handful of elites doesn't work? We do like our illusions.
As economic figures recently have been coming in generally weaker than expected, the calls from Wall Street for more manna from heaven have been heating up. But does money printing work? Can it be our economic salvation? John Hussman writes one of the most worthwhile reads in his weekly missive, and a couple weeks ago he had this to say about QE:
That same speculation that has been driving the financial markets higher is also influencing the commodities market, including driving oil prices higher. But don't expect any Presidential news conferences decrying stock speculators.
April 23, 2012 in Current News Commentary, Economy, Personal Finance & Investments | Permalink | Comments (0) | TrackBack (0)