Throughout history, gold has been the primary basis of money (credit) in international trade. In recent years, China and Russia have been aggressively adding gold to their foreign exchange reserves. A 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.”
THE PHENOMENON OF THE GOLDEN CONSTANT
In his book, The Golden Constant, Professor Roy Jastram charted the relationships between gold and numerous commodities over the centuries.* Starting from the year 1560, the data reveal that gold maintains relationships with individual commodities over time. After years of ground-breaking research, the Berkeley business professor uncovered the unique monetary value of gold:
Gold is a measuring rod. An ounce of gold buys the same amount of a particular commodity today as it did at almost any time in the past.
Various factors can cause commodity prices to get out of line with gold. Supplies of products are sometimes scarce. At other times, supplies are abundant.** Weather, wars, catastrophes, and government interference affect market pricing. However, prices for the commodities re-adjust quickly, and fall back into line with their constant relationships with gold.
According to Jastram’s recent historical records, the purchasing-power of gold remains nearly a mathematical constant during periods of inflation or deflation. Archæologists have unearthed clay tablets in Babylon*** which point to the constant relationship between gold and wheat. For the same gold weight, Nebuchadnezzar could buy about the same quantity of wheat as can be purchased today.
Archæology confirms the timeless nature of gold money. The rare coin on the left was found buried near the wall of an ancient storage room for grain. If gold in any form were buried at the bottom of the sea, one could dig it up 1,000s of years later and easily trade the treasure.
GOLD & SILVER COINS DISAPPEARED.
In every era, and in every nation, people have recognized the intrinsic monetary value of gold and silver. Yet today, only coins made of base metals (copper, nickel, tin) circulate throughout the world. An ancient Monetary Law now associated with Polish scientist, Nicolaus Copernicus, and a British financier named Sir Thomas Gresham reveals why this is so. “Gresham’s Law” explains why gold and silver coins have disappeared from circulation.
THE ANCIENT LAW OF MONEY:
Bad money drives out good money.
From antiquity, gold and silver have performed the function of money among commercial societies. Before 1965, countless numbers of silver coins circulated freely around the globe and across the United States. But when coins made of base metals were introduced, people everywhere quit spending their silver coins, and started saving them. “Bad money” rapidly drove out “good money.”
It seems we all can discern between base metals and precious metals. Today, almost no one would consider spending 90% silver dimes, quarters, halves, or dollars (below) at the monetary “face value” of the old silver coins. People always retain the “good money” and spend the “bad money.”
GOOD MONEY is good because of its scarcity.
Silver and gold are MONETARY METALS. According to the Constitution, 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, 1789].
In 1792, the U.S. Congress under President George Washington fixed the dollar to gold at $20 to 1 oz. For the next 142 years, anyone could go to a bank and convert one paper dollar into 1/20th of one Troy ounce of gold.
PAPER CURRENCY WAS “AS GOOD AS GOLD.”
This $50 bill reads: “Fifty dollars in gold coin payable to the bearer on demand.” (The paper bill was redeemable in 2.4185 Troy oz of pure gold.)
From 1792 until 1933, the U.S. and Great Britain shared a true gold standard: Coins of gold and silver (U.S. & British), paper dollars, and paper pounds were interchangeable currencies. The pound and the dollar had a standard exchange relationship: $4.86 equaled £1 (each ¼ oz gold coin right was one British pound).
DEBASING THE DOLLAR
In 1933, President Roosevelt declared a “national emergency” (March 6); nationalized gold (March 9); and devalued the dollar by 69% (Jan. 30, 1934). On August 15, 1971, President Nixon completely severed the dollar’s tie to gold.
Before Nixon’s momentous monetary decision, the dollar was 100% convertible to gold in foreign exchange (“as good as gold” from 1792 to 1971). Overnight, the dollar was backed by nothing. The world’s “reserve currency” had become bad money. Why? There are no limits to currency that is backed by nothing.
TRADING BAD MONEY FOR GOOD
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 one “Sovereign” to me (£1 Sovereign below):
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
As the value of the dollar diminishes, the gold price rises.
Today, one would need 364 dollars to buy the gold pound my mother bought in 1973 for 10½ dollars. It now takes 30+ times as many dollars to buy the same amount of gold. The dollar has lost more than 3,000% of the purchasing-power it had back in 1973. On the other hand, gold ‘keeps up’ with the rising costs for food, housing, healthcare (over time). The purchasing-power of my ¼ oz gold coin is as strong in 2017 as it was in 1817 (the year Sovereigns were first minted).
Before the dollar was debauched, one could exchange paper dollars for gold dollars at the monetary “face value” of the coins. The face value of the coins below is $35: $5 (Indian) + $20 (St. Gaudens) + $10 (Indian) = $35. Today, the gold coins cost $2,408 (instead of $35). Since the first devaluation of the dollar, the dollar has fallen 6,000+% against gold. Put another way: It now takes more than 60 times as many dollars to buy the same amount of gold!
In your lifetime, the dollar has lost tremendous value. Preserve your wealth by converting paper currency into PHYSICAL gold and silver coins. If your savings are tied up in bonds, the interest you are earning does not compensate for the eroding purchasing-power of the dollar. An exchange of bad money for good money is a prudent investment.
* Professor 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).
** Crude oil prices demonstrate 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’ (since 2015), 1 oz of gold could buy 24 barrels of oil in April 2017.
The gold-backed dollar had a stable relationship with oil. From 1873 to 1973, the price of one barrel of crude oil moved within only a $2-range. For twenty-five years, the dollar-to-oil ratio remained within only a $1-range (crude oil moved between $2.47 and $3.57 per barrel after World War II until 1973). [Dow Jones & Company, B P Statistical Review, U.K.]
*** A. Mederos and C. C. Lamberg-Karlovsky, “Creating Economic Order: Record-keeping, Standardization and the Development of Accounting in the Ancient Near East,” Institute for the Study of Long-term Economic Trends, Intl. Scholars Conference on Ancient Near Eastern Economies, Vol. IV, British Museum, Nov. 2000.
Submitted by Denise Rhyne.
WEIGHTS, MEASURES & BALANCING SCALES:
CONTENTS: Ancient Monetary System Weights: TALENT, MANEH, SHEKEL, GERAH, BEKAH; TROY Weights; METRIC Weights; CARAT Weights; KARAT Purity; MILLESIMAL Fineness; FAR EAST Weights; British POUND (Pennyweight, Pound Sterling, Sovereign); DOLLAR (Old U.S. Gold Coins); Historical GOLD-to-SILVER RATIOS (U.S. 90% Silver Coins, American Gold & Silver Eagles); BIBLE Weights (Conversion TABLE); WORLD COINS (Gold Contents).
THE FUNDAMENTAL TRANSFORMATION OF THE UNITED STATES: http://www.washingtongoldexchange.com/2018/fundamental-transformation-of-the-united-states-12719/
WHAT ARE CAPITAL CONTROLS? http://www.youshouldbuygold.com/what-are-capital-controls/