Gold is Stable Money

Excerpted from Gold, The Once and Future Money, pp. 13-17
© Nathan Lewis
Reproduced with permission

Because money is information, and the messages sent by the monetary economy dictate in hard, clear terms the actions of billions of people, naturally humans have taken great pains to develop means to keep this information as pure and uncorrupted as possible. If an engineer orders a mechanical shaft of "500 millimeters," and the shop produces one of 500 millimeters, but due to fluctuation in
the meaning of millimeter it is 10 percent shorter than the engineer desired, both the engineer and the machine shop have unable to cooperate productively. The information contained in the phrase "500 millimeters" has become corrupted, meaning different things at different times. The engineer may decide to machine the parts himself, the machinist to take up engineering. The circle of exchange is broken, and the productivity of both decline.

Throughout history, humans have sought the most stable money attainable, because stable money, or uncorrupted information, allows greater productivity and prosperity, while unstable money, or corrupted information, cripples productivity and prosperity. It is impossible to improve the system's productivity by corrupting the information that enables it to function. Such a corruption may result
in more production -- a greater volume of goods and services, a greater number of hours worked or employees hired, a blip in statisticians charts -- but much of the increased production will be wasted, or the greater effort will produce less results, and thus true productivity declines.

There have always been those who have sought to twist and manipulate the monetary system, because any change, though it hobbles the smooth operation of the overall extended order, provides a benefit for one group or another. War enriches weapons makers. Crime provides a livelihood for police officers, lawyers, and prison keepers, and disease is the bread and butter of doctors and undertakers, and there are those who can benefit from monetary instability and devaluation. Debtors benefit at the expense of creditors. Exporters benefit at the expense of importers. The unemployed benefit at the expense of the employed.

Historically, governments are the prime offenders, the institution with both the motive and the ability to carry out the deed, and many industrial or social groups are always ready to entice the government into manipulating the currency for their benefit. But governments rest on the approval of the entire citizenry, not just one part, and no government can act at the citizenry's expense indefinitely and remain in power. Democratic governments can be cleansed by the vote, and the members of less flexible political systems win eventually resort to assassination, civil war, emigration, military coup, or secession.

Today the forces for a sound currency are again ascendant. Governments and central bankers around the world today agree unanimously on the desirability of stable money, ever more so after some monetary disaster has reduced yet another economy to smoking ruins: Mexico in 1994, Thailand, Korea, Indonesia, and the Philippines in 1997, Russia and Brazil in 1998, Japan throughout the 1990s, Turkey in 2001, Argentina in 2002, Germany in the 1920s, Latin America in the 1980s, and virtually everyone in the 1970s, to name just a very few of the more well-known cases. The governments and citizens cry out together for good money, stable money, boring money, forever the same, supremely reliable, the bedrock upon which the extended order can flourish, not this stuff that wiggles and waggles unpredictably every second of every day, a never-ending chaos that saps the vitality of all countries' economies. On the political side there is near total unanimity. The problem, first, is that nobody apparently knows what exactly this stable money consists of. Second, nobody knows how to accomplish the task of creating and maintaining it.

But even the briefest study of history shows that today's condition of floating currencies is a very new phenomenon. It began August 15, 1971, the day Richard Nixon severed the dollar's link with gold and destroyed the world monetary system, which at the time went under the name of the Bretton Woods system. In the three centuries before 1971, the world for the most part had stable money. After 1971, or more properly after a series of steps in the late 1960s and the early 1970s, it did not. The capitalist economy since the Industrial Revolution, and a long time earlier as well, was based on stable money. The advocates of laissez-faire never ceased to support stable currencies. Their critics, the early socialists and communists, agreed with them on little other than the necessity of a sound unit of account. Floating currencies are not a phenomenon of the free market but the market's inevitable reaction to unceasing currency manipulations by world governments. Since the system today is the exception rather than the rule, it should be easy to find a solution to the monetary problems that plague humanity on a daily basis.

Government money manipulation and floating currencies have appeared since before the birth of Christ; and also since before the birth of Christ, the discontented citizenry has brought to the fore political leaders to return their country's currency to stability. Alexander of Macedonia unified the Mediterranean world under a hard silver coinage; 25 centuries later, he remains known as "the Great." Julius Caesar returned Rome's currency to a gold standard, and he remains an icon of Rome's greatness. Alexander Hamilton helped launch the United States with a gold dollar, and his face today graces the $10 bill. The person who hired him, George Washington, is on the $1 bill. Napoleon returned France's currency to a gold standard, and the French accepted him as their emperor. Lenin returned hyperinflationary Russia to the gold standard, and statues of him were erected throughout the land. Mao Tse-tung returned China to a gold standard, and the country rallied around him. The US. occupation government in Japan returned the hyperinflationary yen to the gold standard in 1949, and the Japanese allied themselves with the country that attacked them with nuclear weapons only three years earlier. Richard Nixon plunged the world into monetary chaos, and he remains the only U.S. president ever torn from office.

Ronald Reagan, the "Teflon president," whose popularity endured through crisis and scandal, came close to returning the dollar to the gold standard in the 1980s, but settled instead for an end to the devaluation policies that dominated the 1970s. Bill Clinton may have learned his lesson: An economic boom based on his administration's strong dollar policy -- abandoning a century-long tradition of cheap dollar Democrats -- put voters in a forgiving mood regarding his other dubious escapades. The voters know that it is by no means certain that future presidents will be so wise.

Chaotic currencies have been stabilized countless times. It has already happened three times in United States history alone -- or five, depending on how you count. The situation today is not unique in that sense, though the challenge facing governments, politicians, and the citizenry today is as great as it has ever been. Until 1971, in all of history the world had never faced a situation where the entire monetary system of the globe had been separated from its traditional metallic anchors. There had always been floating currencies, but never had all currencies floated simultaneously. More than ever, it will take a leader with deep understanding, vision, and backbone to guide a return to monetary stability. That leader would best be an American, since the US. dollar remains the world's leading currency, but might turn out to be European, Chinese, English, Japanese, Russian or Argentinean.

If so, after a number of years the world might drop the floating dollar and adopt the euro, renminbi, pound, yen, or yes, even the ruble. The first US. currency was confetti issued by a government that soon collapsed. For two centuries afterward, "not worth a Continental" was a casual term for worthlessness. It wasn't until the introduction of the gold-linked dollar that the U.S. currency grew to be accepted throughout the world. The British pound had been the world's premier currency for two centuries, but after Britain broke with gold in 1914 and again in 1931, the world abandoned the venerable pound and the dollar rose to world supremacy...

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Excerpted from Gold, The Once and Future Money, pp. 13-17
© Nathan Lewis

This, friends, is an excellent book.

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Intrisinc value

Can someone educate me as to the intrinsic value of gold? People accept paper dollars because value is arbitrarily assigned to them and there is a demand for them in exchange for other commodities. How is gold any different?

Is it merely the fact that it is rare and not easily replaced?

As in "why gold?" Why not a copper standard? or a nickel standard?

People say that the paper standard is easily manipulated, but gold can also be manipulated, hoarded or the market flooded, so what's the big difference?

the strangerr's picture


Mesogen, one answer lies in the second sentence you laid down. Un-backed (fiat) paper dollars are in fact assigned an arbitrary value. Gold and Silver values are set by the market. They can be manipulated, but not indefinitely and not without consequences.

But your main question is to the value of gold (or silver). Gold and silver do not need us, we need them. As metals they are valuable to us; Google ‘uses’ for either – the applications are staggering. Silver is probably not far behind petroleum in importance to modern society. Many tangible ‘things’ have severed as money, but thousands of years of economic exchange have chosen silver and gold.

Here is where a simple understanding gets lost over time. Paper money makes its repeated début as a receipt for something real; typically gold or silver. The backing is removed over time or the ‘receipts’ are simply over printed; fiat or effectively fiat.

Fast forward to now – the difference between gold and fiat money is akin the difference between holding something and keeping score on a note pad. No problem just using the score pad; until someone starts cheating.

It’s clear that if ‘extra’ entries are added to the Note Pad, inflation has occurred. Depending whose column the digits are added, inflation enters the system unevenly; insidiously. The Fed would have us believe that if we arbitrarily erase information from the Note Pad, deflation occurs. I disagree; I think the tracking system becomes fubar and seizes like an engine without oil; depression time.

If you want to stay in FRNs remember, they have lost over 96% of their value the last eighty plus years; this is a bankable trend. Besides, they can even be created without a printing press, countries like China have silos full of them, and they are stolen by the pallet.

Copper is money too; people forget that. That is why most were tricked by copper’s bull run the last few years. Copper was being stockpiled as a stealth dollar dumping play, before the real drive comes in gold and silver. That comes later; maybe tomorrow.

One last thought, gold is the best money to move value through space. Silver is the best money to move value through time. I hope this is helpful.

Money is debt!

It doesn't have to be gold. Any commodity would do the trick. The main point is that money should represent the ownership of some (physical) commodity. Your paper money notes and the number on your electronic bank account should be a storage receipts. They should mean that some bank stores some (physical) commodity which you are entitled to go and check out whenever you want.

This way, it is impossible to create money, unless one creates that (physical) commodity, which can only be made at market prices. Hence inflation is virtually eliminated. And to borrow money, one has to compensate the one lending it by offering a competitive interest rate. Hence a market interest rate would come into existence again. Borrowing would be demand for money, lending would be the supply of money and the interest rate would be the price of money which creates market where that demand and supply meet. The boom-bust-cycle we suffer from today, is caused by the "credit expansion" of the banking system. Whenever money is borrowed, banks create new money. There is no need to convince anone to lend his existing money. Thus the interest rate does not increase in reaction to increased borrowing. The interest rate we have today does not reflect an equilibrium between borrowing and lending, it is just a figure made up by banking beaurocrats. Any valuation, investment calculation or consumtion plan based on the so called interest rate of today, are simple flawed! It is the destruction of the market interest rate which causes the boom-bust-cycle.

Today when someone borrows money, they are not lend by anyone, but they are created out of thin air, which causes inflation and so results in taking value from everyone holding the currency without their consent. In a way, money today doesn't represent ownership, but au contraire, HOLDING MONEY TODAY IS LIKE BEING INDEBT: money is created as debts by the banks, and holding money means loosing value to inflation, just as if one pays interest rate on a debt!!!

Historically gold has had advantages in being easy to divide, easy to recognize, easy to lock up or hide, easy to transport, being chemically indestructable and so on. Today, those advantages might be of lesser importance because of the technical developments, but it remains a formabdle "brand" in the minds of people and hence a natural standard. I'd say that we should let people in the marketplace decide what they want to use as money.

intrisinic value

The gold has value because people want it - even now, without gold being money. Because money is general medium of exchange, gold (and silver) are suitable for this task, because:
- lots of people want to own it
- it is scarce enough to be valued by people high enough

Why not copper or nickel? Practical reasons, people value copper much less, you would have to take with you very heavy wallet. But for small values I think copper used to be used.

Paper standard can be easily manipulated, because you can print money so easily. If everybody was allowed to print money, paper money woudln't be "worth a colonial" within a day. You cannot print gold. You can only mine it and that is very expensive. If everbody was allowed to mint coins (provided he is not cheating on the quality of the coin)...well, no problem there :)

Now if there was a cheap way of creating gold (transmutation etc.), gold would cease to be a good candidate for money. This might happen in the future, but the free market will hopefuly find some good substitute.

Standard of Value

Our Constitution prohibits fiat currency ("Bills of Credit") and specifically cites gold and silver as being the only legitimate tender in the united States. We needn't get over-exercised about the fluctuating relationship between prescious metals, nor should we presume to peg the value of silver in terms of gold or vice versa, but we can DEFiNE the rehabilitated dollar in terms of gold, silver, or some combination of both. I lean toward a new bimetallism, with the dollar tethered between metals rather than resting on one or the other. Until such time as the Feds return to obeying their oaths of office, we can short cut them by regularly offering gold and silver specie in commerce. It's no less convenient than offering a credit card that you're not sure a vendor will take. Just offer, and be prepared to fall back to Federal Reserve Account Units of Debt. And smile, and assure the cashier that she knows best. It won't happen until we do it.
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Re-think this "just offer" idea a bit

Having worked many years in retail store management, I can tell you that this "just offer" approach is a good way to make people hate these alternate exchanges if you don't first make it really clear that they can't just put it in the bank deposit with the FRNotes.

I've heard people brag about this approach and I'm certain they are leaving a trail of unhappy, disappointed, annoyed and disgusted people behind them who, in some cases, probably toss the coins in the matter how delighted they were when you handed it to them.

You have to be sure they know what they are getting. Some people will prefer (gasp) FRNotes. Foolish, I know.

What would be fun and educational is to go back the next day and see if you can get them to trade them back again.


What do you think?