“It takes a special kind of stupid” attributed to Roseanne Barr in the 1980s
Though I much prefer it when it was made into a meme with the picture of the actor Sam Elliot.
It’s not so popular anymore but there was a time when, to describe excessive wealth, people would say someone was as rich as Croesus. Around 550 BC King Croesus of Lydia, now part of Turkey, is thought to have originated the use of gold as money.
For most of the nearly 2,600 years since then, gold has been money. Its great virtue is that there is a relatively small supply of gold in the world. Let’s look at that.
The main complaint about paper money, specifically the US Dollar, by gold enthusiasts, is the slow erosion of purchasing power, otherwise known as inflation.
If prices are generally rising for goods and services, that means the value of a dollar is falling. This is not a good thing unless you own a lot of the kind of things that are going up in price. But for almost everyone, inflation is not a good thing.
So the natural conclusion is that if inflation is not a good thing, then its opposite, the appreciation of money, must be a good thing. Sorry, no. It’s actually worse. A lot worse. Because if the value of money is rising, if it’s buying more goods and services, that means that prices are generally falling. That’s called deflation and deflation is far worse than inflation.
The reason is that if the price of what you want to buy is lower today than it was yesterday, and if there’s good reason to believe that it’ll be lower tomorrow than it is today, then everyone will wait until tomorrow and only buy today what absolutely can’t wait. Economic activity shrinks and as that happens, people lose their jobs, have less money to spend, and prices fall further. The last of many deflationary spirals was the Great Depression.
And that’s just the bad times. In good times you have another problem. In good times an economy is expanding. What happens when an economy is expanding and the supply of money is limited? Economic growth hits the hard wall of not enough money. Money is what lubricates an economy. Without it, the engine grinds to a halt.
Gold enthusiasts long for a return to the gold standard. What was the world like for the centuries that we had the gold standard? I find one story from that era fascinating.
In the 1600’s the British Crown was fighting one of their many wars with France. To fight a war you need money to buy weapons, food for the troops, transportation, uniforms and on and on. Britain was so short of money they could not afford to buy buttons for their soldiers’ uniforms.
To solve this money shortage, the government hired Sir Isaac Newton to head the British Mint. The reason for hiring Newton was that on the side he was an alchemist. Someone that believed that it might become possible to turn iron into gold. No one, not even Newton, has ever succeeded in doing this.
Eventually governments simply started to suspend the gold standard during times of war. This became possible with paper that was backed by gold. Of course, with a war going on and its attendant increase in government spending, along with the lack of gold backing, inflation, sometimes quite high inflation, resulted. So as soon as the war was over, governments reinstituted the gold standard which not only brought an end to inflation but resulted in a deflationary depression. The last of these was the Great Depression of the 1930’s.
Before the Great Depression the previous depression in the 1870’s was called the Great Depression. We now refer to the 14 years of that depression as the Long Depression.
With the Long Depression coming after the Civil War and the Great Depression coming after WW1, and centuries of previous similar periods, it was widely expected that there would be another terrible depression following WWII. But that didn’t happen.
Following WWII governments around the world began to experiment with permanently leaving the gold standard. Eventually all, or almost all governments in the world adopted a new monetary system where the paper money they issue is only backed by the full faith and credit of that nation.
This system has worked extremely well. To be clear, it is flawed, and hard money advocates are quick to point out those flaws. They are not wrong. Since the end of WWII two nations have experienced complete currency collapse. Zimbabwe and Argentina.
The US Dollar’s purchasing power has consistently eroded with two difficult inflationary periods.
But the one reason we left the gold standard, to avoid a post war depression, has worked. And I would hold that the price paid, in terms of inflation, is very worth avoiding a catastrophic depression.
Fed Chairman Powell has said that crypto is the new gold, and I agree. Its main virtue is that there is a limited supply. In almost every regard the market for crypto behaves like the gold market. So, everything I have written here applies equally to crypto.
Changing the world’s financial system from one based on gold backed money to one based on fiat currency took decades to accomplish. It was not taken lightly. The final act was when the Nixon administration removed gold backing from the US dollar in 1971. This was 98 years after John Austin Stevens wrote in the NY Times, that “gold is a relic of barbarism to be tabooed by all civilized nations”. In 1894 William T Goss, a merchant in testimony before Congress said, “Gold is a relic of barbarism and should be discarded by all civilized nations as a medium of exchange.”
Hard money advocates would have us go backwards to a lesser developed system which was abandoned after repeated depressions for multiple centuries. And they would have us do that because it would make their money go up in value, which is the exact thing that happens in a depression.
A little humor on the subject from the greatest investor of all time, Warren Buffet, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated.
Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.