All great civilizations have conducted trade with silver and gold (until the societies declined). A distinguished professor at the University of California at Berkeley re-discovered why gold has always played a central monetary role, and why the rare metal has never been a ‘consumption good.’
After years of ground-breaking research, the late Professor Roy Jastram uncovered the unique monetary value of gold. In his book, The Golden Constant, the business professor charted the relationships between gold and numerous commodities over the centuries.* Starting from the year 1560, the data reveal the nearly constant purchasing power of gold.
PHENOMENON OF THE GOLDEN CONSTANT
Various factors can cause commodity prices to get out of line with gold. At times, supplies of products are scarce; at other times, some commodities are extremely abundant.** Weather, wars, catastrophes, and government interference affect market pricing. But prices for the commodities re-adjust quickly, and fall back into line with their constant relationships to gold.
Professor Jastram proved 1 oz of gold buys the same amount of a particular commodity today as it did at almost any time in the past.
Gold is a measuring rod. The purchasing power of gold remains nearly a mathematical constant during periods of inflation or deflation. According to archæology and Professor Jastram’s recent historical records, the ‘golden measuring rod’ maintains relationships with individual commodities that are constant over time.***
This rare coin was found buried near the wall of an ancient storage room for grain. Gold is timeless money; its value is accepted everywhere and in every era. If gold in any form were buried at the bottom of the sea, anyone could dig it up thousands of years later and easily trade the treasure.
The acceptance of the intrinsic monetary value of gold and silver is universal. But today, people everywhere receive coins made of copper, nickel, and tin in their change. There is an ancient monetary law now associated with Copernicus and a British financier named Sir Thomas Gresham that reveals why this is so. “Gresham’s Law” explains why silver and gold coins have disappeared from circulation around the world.
THE ANCIENT LAW OF MONEY:
Bad money drives out good money.
Before 1965, countless numbers of U.S. 90% silver coins circulated across the United States; and silver coins in other nations circulated freely. But when coins made only of base metals were introduced, people quit spending their silver coins, and started saving them. “Bad money” rapidly drove “good money” out of circulation.
It seems we all can discern base metals from precious metals. Today, no one would consider spending an old 90% silver dollar [$1] or a $20 Gold Piece at the monetary “face value” of the coins. People always retain good money and spend bad money. According to the U.S. Constitution, paper currency that is not backed by gold or silver falls into the category of bad money: “No State shall… make any thing but gold and silver coin a tender in payment of debts….” [U.S. Constitution, Article I, Section 10].
Gold and silver are “monetary metals.” In 1792, the U.S. Congress under President George Washington specifically fixed the dollar to gold and silver: $1 equaled 1/20th oz of gold for almost 150 years. During this golden age, the United States and Great Britain shared a true gold standard: Paper dollars, paper pounds, and gold coins were interchangeable currencies for everyone. The dollar and the British pound had a standard exchange relationship: £1 equaled $4.86 [gold coins below]:
The $50 bill [above] was equivalent to 2.4185 Troy oz of gold:
“Fifty dollars in gold coin payable to the bearer on demand.”
Until 1933, everyone could exchange paper dollars for gold dollars at the monetary “face value” of the coins. The face value of the U.S. coins below is $35: $5 [Indian] + $20 [St. Gaudens] + $10 [Indian] = $35. Today, the gold coins would cost $2,408, instead of $35. Put another way: It now takes 68 times as many dollars to buy the same amount of gold!
On March 6, 1933, the President closed all U.S. banks and devalued the dollar by 69%. On Aug. 15, 1971, the dollar’s tie to gold was completely severed. After 179 years of good money [gold-backed dollars] in the United States, America’s dollar became “fiat” money [currency backed by nothing]. Since 1933, the dollar has fallen more than 6,000% against gold. Over time, the price of gold rises compared to the diminishing value of the dollar.
TRADING BAD MONEY FOR GOOD
PHYSICAL gold is good money because of its scarcity (it cannot be printed). When neither dollars nor pounds were tied to the discipline of gold, savvy investors began purchasing gold coins to protect their savings from currency debasement. At the end of 1973, my mother paid $10.55 for British gold pounds and gave £1 to me [Sovereign below; Victoria was crowned in 1838]:
BRITISH GOLD POUND [£1 “Sovereign”]
1817-1933: Gold £1 = $ 4.86
1973: Gold £1 = $ 10.55
Nov. 1, 2015: Gold £1 = $284.75
Feb. 6, 2017: Gold £1 = $364.90
Over time, bad money loses value and good money preserves wealth. Today, one would need 364 dollars to buy the gold pound my mother bought in 1973 for 10½ dollars.
It now takes 34 times as many dollars to buy the same amount of gold. In 43 years, the value of the dollar has fallen more than 3,000% against gold. (That means the dollar has lost more than 3,000% of the purchasing power it had back in 1973 for food, housing, and healthcare.) On the other hand, the purchasing power of the the ¼ oz gold coin is as strong in 2017 as it was the year British Sovereigns were first minted in 1817.
Then and now, an exchange of bad money [PAPER DOLLARS]
for good money [GOLD and SILVER] is a prudent investment.
By Denise Rhyne
The Dollar Will Lose Value Over Time – Guaranteed:
* Prof. Roy W. Jastram, The Golden Constant: The English and American Experience 1560-1976, John Wiley & Sons, Inc. for the American Finance Assn., “A Ronald Press publication,” 1977, (Carmel Valley, CA, June, 1977).
** Until 2015, crude oil prices demonstrated the phenomenon of the golden constant. In 1873, 1 oz of gold could buy 15 or 16 barrels of oil. In 1973, 1 oz of gold could buy 15 barrels of oil. In Nov. 2014, 1 oz of gold could buy 16 barrels of oil. Due to an oil supply ‘glut,’ 1 oz of gold can now buy 24 barrels of oil (April 2017). The gold-backed dollar had a stable relationship with oil: From 1873 to 1973, the price for one barrel of crude oil moved within a $2 range. After WWII until 1973, crude oil moved between $2.47 and $3.57 per barrel. For twenty-five years, the dollar-to-oil ratio remained within a $1 range. [Dow Jones & Company, B P Statistical Review, U.K.]
*** Archaeologists have uncovered records from antiquity which point to the constant relationship between gold and wheat. Clay tablets unearthed in Babylon suggest the price of wheat has changed little in terms of gold. It seems King Nebuchadnezzar could buy about the same quantity of wheat as can be purchased today for the same gold weight. [Creating Economic Order–Record-keeping, Standardization, & Development of Accounting in Ancient Near East, Inst. for the Study of Long-term Economic Trends, Intl. Scholars Conference Ancient Near Eastern Economies, British Museum, Nov. 2000, Volume IV, A. Mederos, C. C. Lamberg-Karlovsky.]