Overconfidence in Paper Currencies

Why Gold is Still the Best Measure of Price Stability


Bill Bonner
Reckoning today from Paris, France...

Yesterday, the Dow shot up more than 200 points, for no apparent reason. Gold backed down below $1,600 for a very obvious reason.

Nothing goes up in a straight line, not even gold. After such stunning gains over the last few weeks, the stuff that Ben Bernanke does not regard as money, gold, needed a rest.

But if gold isn’t real money, what is?

Pieces of paper that a private bank and the US Treasury say is real money?

“This,” they insist, “is a dollar. You shall use it as money.”

“Why?”

“Because we say so.”

“Because we say so” is good enough for most people most of the time. But there are times when it’s not. Such as when the financial authorities are up to no good. Then, smart people turn back to gold.

There’s no magic to money. It works as a medium of exchange and a store of value when, and only when, its quantity is strictly controlled. That’s what’s nice about gold. Its quantity is controlled by nature herself. People have been trying to get around it for centuries. Alchemists labored long and hard to turn base metal into gold. None succeeded.

The only way you can increase the supply of gold is by mining it...which is expensive and time consuming. Of course, technology helps. But technology tends to advance with the economy itself. So when the economy is growing at 1% a year...the quantity of gold tends to increase at about a 1% rate too.

What a miracle! Prices remain stable because the quantity of gold increases at almost the exact rate necessary. This is why you can reach about as far back in history as you want, you’ll find that gold was just about as valuable a thousand years ago as it is now.

In the 19th century, paper money was backed by gold. People had learned their lessons in the panics and bubbles of the 18th century. They didn’t trust pure paper currencies. Lincoln fiddled the dollar during the War Between the States...inflating the currency to pay for his killing campaigns – but it was put right soon after. Apart from that, for the whole period...from the beginning of the 19th century to the creation of the Federal Reserve in 1913...the dollar was stable and reliable; people trusted it because there was real money – gold – standing behind it.

But now, the chief of America’s central bank says that gold is not money; the dollar is supposed to be money now. And now, the feds don’t worry too much about how many dollars they issue. Their primary goal is no longer preserving the purchasing power of the buck – it’s lost 95% of its value since the Fed was set up. Now, they’re more concerned with the stock market, with the housing market, with consumer spending, and with the next election.

So, what do you think, dear reader? Can you have confidence in these men? Do they know what they are doing? Did they see the crisis coming? Did they understand what was happening? Have their efforts to fix it been successful so far? Is protecting the value of your money – and the financial health of the nation – their number one goal?

Five years from now, which do you think will be worth more? The dollar without gold behind it? Or gold, without the dollar?

The dollar, you say?

Well, good luck to you!