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Gold and the Great Depression 

If you were to ask someone 100 years ago: What is money?

They would reply: Gold.

If you asked the same question 200 hundred years ago the reply would be: Gold.

And if you asked the same question 1,000 years ago, you would get the same answer: Gold.

But if you asked someone today, the question: What is money?  They would generally look perplexed. 

And the responses offered would vary widely.  One person would say: Dollars. Another would say: Euros.

Another would say: A promissory note.  And still another would say: Available credit or purchasing power.  Are these bad answers?  Are they wrong?  Let us explore.

We know that money is an essential part of human civilization.  It facilitates commerce between individuals and businesses, and trade between nations.  It advances markets beyond barter and serves as a means for the accumulation of capital.  William Stanley Jevons, in 1875, stated that money has four functions – it is a:

1. Medium of exchange

2. Common measure of value

3. Standard of value

4. Store of value

Today’s money falls short in its function as a store of value. 

If you consider just the dollar, it has lost 95-percent of its value in less than 100-years.  And many other currencies that were around 100-years ago, no longer exist.  In other words, they became worthless. 

But then the concept of money has been distorted over the last hundred years too.  Rather than cash in hand, it is now cash flow.  Rather than available savings, it is now available credit.  Rather than pay as you go, it is buy now pay later.  And rather than wealth accumulation, it is ability to service debt.  In effect, money has lost its integrity.  It is no longer true and honest.

Here is why…

Today’s money is not true and honest because it does not provide a firm baseline for measuring the price of goods and services. 

When a carpenter measures the length of a cabinet as being three feet, he is certain that the length measured as three feet will always be three feet.  To the contrary, when a shopkeeper prices a 24-ounce loaf of bread at $3.29, he is not certain that the value of one loaf of bread will always be equal to $3.29.  In fact, in 1971 he would have valued three 20-ounce loaves of bread equal to $0.89. 

Has the usefulness of a loaf of bread, on a per ounce basis, really changed 826 percent? 

Certainly not.  Rather, the baseline used to measure the value of a loaf of bread has changed.  It is true that prices of individual goods and services will fluctuate to account for natural changes in supply and demand, but when money is anchored to a stable baseline, overall prices will by and large be stable.

Money, as a store of wealth, is also a store of an individual’s time and industriousness.  When a person goes to work to earn money they are trading their time for that money.  Would not they rather use that time to be with their family or to engage in hobbies or recreation? 

Indeed yes.  But they have made the decision to earn money today, to provide greater security, and to possibly store up some of that time for use at a later date.  When money is not true and honest, when it loses value over time, it not only robs a person of their savings, it robs them of their time and, in effect, their life.  Also, because it is not true and honest, it spoils the notion of ‘an honest days work for an honest days pay.’

For money to be true and honest it must be a store of value.  In other words, it must retain its value over time.  It must not rely on governments to fix its price or to determine its circulating quantity.  It must not be borrowed into existence or created out of thin air.  And it must exact discipline from the public, from governments, and from bankers.

Governments generally abhor true and honest money because it demands true and honest limits to their size and power.  True and honest money does not allow for massive deficits or the long term accrual of debt.  Because government spending on lofty programs and wars is primarily financed through debt, true and honest money imposes strict limitations on government’s capacity to pursue such endeavors.  With true and honest money governments must be funded through tax revenues and trade tariffs; government overreach of these, to their disdain, are readily detected and rectified by the populace.

It was the desire to increase in size and control that led the U.S. Government, and all governments that followed, to deceive their citizens and terminate the use of true and honest money. 

The foundation was laid in the U.S. when the Federal Reserve Act was enacted by congress in 1913.  This created the central bank for the U.S. Government – the U.S. Federal Reserve.  And once the U.S. Federal Reserve was in place, the U.S. Government could fiddle with the supply of money to meet its ends.  But it wasn’t until nearly 60 years later that the final trace of true and honest money was ultimately eradicated.  A steady process of deception would have to first take first place to subdue the public’s understanding of money.

First, in 1933, at the height of the Great Depression, the U.S. Government, under the Gold Confiscation Act, confiscated gold money from its citizens and replaced it with paper Federal Reserve Notes.  It became illegal for individuals to own gold, except for small quantities that coin collectors and dental practitioners could hold.  This alone eliminated the public’s capacity to hold government inflation of the money supply in check; they could no longer redeem inflated paper money for gold.

Then following World War II the United States had the greatest market share of the world economy and world power.  And, because of this, they were able to establish the post war monetary system of the western world on their terms.  The Bretton Woods system of 1944, created a pseudo gold standard where the dollar was backed by gold, at $35 per ounce, and member countries pegged their currencies to the dollar.

Nonetheless, the United States progressively increased its money supply in the years following the Bretton Woods system.  And while member countries were allowed to redeem the dollars they acquired through trade for gold bullion by the United States, it was unwelcomed by the dominant world power.  Rather, the United States persuaded these member countries to inflate their money supplies to maintain their respectively pegged values.

By the late 1960’s, with the seeds of the Great Society and Vietnam War spending sown, expanding world money supplies bloomed wild price inflation.  And then France, to the aversion of the United States, no longer played their part in the charade; rather they began redeeming their dollar reserves for gold.  In 1971, President Richard M. Nixon had seen enough of his country’s gold disappear.  Seizing the unique and exceptional opportunity he had, Nixon defaulted on the Bretton Woods system, and stiffed the world unconditionally.  Dollars were no longer redeemable for gold; the world’s currencies became wholly the fiat – paper money – of governments.

Since then currencies have floated like anchorless buoys, rising and falling on a sea of surging currents.  And the imbalances that have resulted in international trade are astounding.

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