Gerald (Jerry) Zezas

Home » Monetary Policy » The Gold Standard and the Dollar

The Gold Standard and the Dollar


With all the talk of Fiscal Cliffs, Debt Ceilings and the like, it seems as if everyone is an armchair economist, suggesting things like “If I have to balance my checkbook, the government should do the same”, or “The government just keeps printing money, it has no value anymore”, or some such or other complaint of the fact that we’re no longer on a “gold standard”, as if anyone really knows what that is.

Here are what I consider to be some of the fundamentals of our economy. Some will consider me insane to suggest the things I do, but these are so fundamental as to be overlooked by most. First, some background about money. To wit:
The value of money is an illusion. It is extrinsic in nature. It is valuable because we decide it is. The fact that we’ve decided that a small sheet of high cotton content paper varies in value based on the number that is printed on it is, on its face, ridiculous. That sheet of paper with a $100 in the corner has no more actual value than the one with the $1 in the same corner, yet we are willing to give 100 times more for the former than the latter. Well, you say, it’s not the face value, really. It’s the fact that it represents that much in gold. Keep reading…

The value of gold is an illusion. It, too, is extrinsic. It is a useless metal, (other than some limited use in electronics and dentistry, but there are many substitutes) and doesn’t have any major uses other than for the purpose of frivolous adornment. The fact that the price of gold has gone from around $300 per ounce to about $1600 per ounce in 12 years is not the result of a shortage of gold. It is not the result of some new technology for which gold is an essential element. It is not the fact that that metal has changed in chemical structure. It is because someone with a lot of financial clout decided that since the world was in such turmoil, he’d better obtain a horde of it as some presumed hedge against the coming world financial collapse, so he started buying it en mass. This led others, having seen his fear of the unknown, to commence doing the same, leading to a slow, methodical increase in its value, and we followed along. That’s it.

Now, I’m not suggesting that there is anything wrong with this. A common currency is essential to the workings of any society. In the days of the cave-man, various rocks were reportedly considered valuable, to the point they would be placed on the outside of the cave, to indicate the relative wealth of those residing within.

Now, as with any commodity, relative rarity is also a factor in its value. The easier it is to acquire, the less it is likely to be worth. So, by extension, once the market has more of that commodity than it can use, its value drops.
But our money is “backed” by gold, is it not? Well, actually, nope. As stated above, gold has increased in value by a factor of 5 or more in the last 12 years.* So if that bill in your wallet was worth $10 in 2002, then it would be worth $50 today, correct? If the gold is worth more, then the money it backs should be worth more, yes?

If you were to find out that Fort Knox had been robbed last week and that all the gold was gone, would you take all the money in your wallet and burn it? After all, its value has just been lost to thieves, right? It’s no longer worth anything, correct?

Well, of course you wouldn’t, because it would still be worth its face value to you, to the corner grocer, to the cable company, to Amazon and to everyone else you pay. The only way that this presumed value of the dollar can be its actual value is if we, society, determine the value of that bill. What is stored at Fort Knox or the Federal Reserve Bank in NYC really means nothing other than to give us a good feeling that our paper money actually represents something that weighs a lot. Hogwash. The dollar is worth a dollar because others will give us a dollar’s worth of goods and services for it.
Now the promised treatise on the economy.

Any government can print money. It’s what governments do. It’s what gives them the power to regulate commerce. The perpetual question is: how much is too much money?

That question rarely gets answered based on empirics. Instead, various pundits throw out a multitude of calculations based on the cost of bananas in Bogota and the price of a box of Creme-of-Wheat in Peoria.

The perpetual cynics of the world will always say that too much is being printed. Most of us think it wrong to be able to print money, irrespective of how much gold is “behind” it. (See above). It just seems too easy, so there must be something sneaky about it. Like unprotected sex, it’s assumed that sooner or later it will catch up to you and you’ll end up with some nasty disease.

The licentiousness of printing money ad infinitum is based on long-held beliefs that you can’t make something out of nothing. In truth, however, you can. You just have to be big and powerful and have a really expensive printer.
The United States is in a unique position globally. It is the financial powerhouse, whose currency is the standard of the world. US Treasury bonds are always in demand, as evidenced by the fact that the reduction by the S&P of our bond rating 2 years ago (as a result of the last time Congress resisted raising the debt ceiling) has had no effect on the rates our bonds pay-the world ignored the downgrade and kept buying.

So, how do we know when we have printed too many dollars? How do we know when their value is becoming diluted? You already know this one. It’s called inflation.

Inflation, as most with a 7th grade education can tell you, is when there are too many dollars chasing too few products. Like snowballs to an Eskimo and sand to an Afghani warlord, the more dollars I have, the less I value each of them. It follows that if the dollar becomes less valuable in the eyes of the merchant, (having nothing to do with any shiny metal), he will require more of them to buy the same thing. A box of cereal that cost $5.00 yesterday might cost $5.10 today, since today’s $5.10 is worth yesterday’s $5.00. The cost of the item has inflated.

But if you look at our inflation rate, it’s incredibly low. In January of 2013 we are below 2% annual inflation. That means that our currency is maintaining its value quite well throughout these 4-5 years of financial turmoil. It means that there are not too many dollars flooding the financial markets. It means that we can print more dollars, build more infrastructure, and spend on healthcare, military and the other things a powerhouse like the US requires. We can print money until the rate of inflation starts to rise, and then we can back down. The fact that inflation is low says that we have not printed enough money!

Now, your gut may tell you that this is somehow wrong. That just printing money can only lead to no good. But, try and remember the last time you relied on your gut and turned out right.

Gambling, relationships, drug addictions and bar-fights are usually the result of one following his gut. How many people win at the roulette wheel, what percentage of relationships turn into successful marriages, how many drug addicts became so intentionally and how’d that last bar-fight work out for ya?

Facts, not home-grown, grade-school economics are what drive financial markets. We need to ignore those who think that managing a $15 trillion GDP has any resemblance to balancing your personal checkbook.

*This does not begin to address the fact that gold doesn’t wear out, and more gets mined every year. This should indicate that the supply of gold increases every year, yet the price doesn’t drop, as it would with any other commodity. This should be another indicator of the manipulation of the value of gold, having no relevance to any market conditions.

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