SPEAKING FREELY Gold: A barbarous relic
By Nathan Lewis
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
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The dollar is now worth less than 1/800th of an ounce of gold - the most
significant financial development in the world today. Why is this more
important than crude oil over US$95, or copper over $3, or wheat over $7?
Because, unique among all the commodities and industrial products in the world,
gold is money.
What does this mean: "gold is money"? It means that gold has the primary
desired characteristic of money, which is stability of value. Thus, when the
"price of gold goes up", the value of gold doesn't change much. What you are
witnessing is the value of
currencies declining. The dollar, yes, but also the euro, yen and yuan. The
result of declining currency value is inflation.
You can think of gold as a currency, just like the euro or yen. The futures
market for gold reflects this fact: the forward price of gold reflects the
implied interest rate on gold loans, in the same manner as the forward price of
currencies reflects interest rate differentials. From this we note that the
implied interest rate on gold is the lowest, over the long term, of any
currency on earth. That's because gold is the highest-quality currency on
earth.
The United States' Founding Fathers understood this well. In the constitution
of 1789, they mandated that gold would serve as the basis of money in the
United States. The United States stuck to this principle for 182 years, until
1971. During those 182 years, the US never suffered permanent, large-scale
inflation. Immediately after decoupling the dollar from gold in 1971, inflation
ignited in the US and around the world. The dollar lost about 90% of its value
vs gold that decade, and prices adjusted accordingly. It took 20 years to
recover from the disaster.
The lesson was obvious: stick to gold. Alan Greenspan, the most successful
central banker since 1971, has been hinting rather heavily on the lecture
circuit that sticking to gold is exactly what he was trying to do during his
tenure.
The principle of a gold standard is elementary: gold is stable in value, so if
you peg your currency to gold, your currency will be stable in value.
Conceptually, there's nothing more to it than that. When the currency's value
is high, increase the base money supply. When the currency's value is low,
reduce the base money supply. The currency manager need not buy, sell or own
gold, although they can do so if they wish. The operating mechanism of a gold
standard is not buying or selling gold, but the adjustment of base money
supply. In this fashion, a proper gold standard is a "currency board linked to
gold".
Between 1823 and 1914, 91 years on the gold standard, the yield on the British
government's Consol bonds was never above 4.0%. These bonds were of infinite
maturity. This one statistic tells you all you need to know about monetary and
macroeconomic stability under the gold standard. If two currencies are pegged
to gold, then their exchange rates must also be stable. Despite all the
thousands of PhDs issued and papers written over the past decades, no
government or mainstream economist has ever been able to touch this track
record. They don't even try.
Floating currencies have been around for millennia. The attractions of currency
manipulation are so great that it seems there's always someone who wants to
give it another try. The philosopher Plato apparently helped the ruler of
Syracuse issue a floating fiat currency in the year 388 BC. The results of that
project, and all of the hundreds that followed over the centuries, were exactly
the same. They eventually failed, and the successful governments returned to
gold as the basis of their monetary affairs.
Soon, people will again understand the whys and hows of establishing and
operating a gold standard system. The governments that do so will find they
become more influential in the world, just as the United States did after 1789.
Perhaps the monetary leaders of the 21st century will be China, Malaysia,
Dubai, or Russia. Or perhaps the US will find a way to begin a new Golden Age
of its own.
The irrational fascination with government currency and interest rate
manipulation will wane. No longer will we consider today's chaotic floating
currencies, managed by secretive bureaucracies by way of an ever-changing array
of ad-hoc rationalizations and blame-dodging excuses, to be the pinnacle of
economic understanding. We will look back on today's fiat money system, and
finally see it for what it always was: a barbarous relic.
Nathan Lewis is the author of Gold: the Once and Future Money, published
by Agora Publishing and J Wiley. He is the principal of Kiku Capital
Management.
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
Pleas e click hereif you are interested in contributing.
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