Thursday, May 31, 2012

The Gold Standard - a mechanism for stability

I written about the cost of gas and why I feel it costs less today then it did in back in the 50s and 60s.  I will attempt to give a reason why the gold standard was good for the country, but am not saying that it would be easy to revert back.  In fact, I say that going back to a gold standard would be disastrous for many reasons.
You can't print this
Rather than dwell on disaster, I want to focus why I liked the gold standard.

People work for money typically.  The barter system is still in use today, but typically people work for money (dollars).  These dollars are a form of purchasing power that can be used at a later date.  People use dollars in exchange for goods and services.  What are these dollars?  Dollars are debt.  All dollars in existence have been borrowed by someone.  The dollars you hold in your wallet or purse...someone else is paying interest on those dollars.  This is why every dollars says Federal Reserve Note.  A note is a form of debt.

I realize that our currency value is not in the price of the metals.  However, the price of metals are tangible.  The coins quarters from 1932-64 that are composed of silver have been able to retain purchasing power.  The currency we have today has not been able to do the same.

I heard a story that 50 years ago, you could buy a fine Italian suit for 1 ounce of gold.  Today, you can buy a fine Italian suit for 1 ounce of gold.  I remember that I could buy a gallon of gas for a dollar back in the 90s.  Then in 2002 it cost me $1.50.  Now it is over $3.50 even $4.00 per gallon of gas.

You all have heard that as soon as you drive your new car off the lot that instantly you lose $3000 or something to that effect.  Why is that?  Was it depreciation of the vehicle?  I do not think so...because had that car sat in the parking lot one extra day, it would have not lost $3000.  So what happened?

The object that you purchased with your money wasn't ever worth the amount that you paid for.  In fact, I would suggest that the different might be the dealership's profit.

Getting back to currency we have today.  Our dollars are made out of paper and no real difference exists between a $1 or $100 with the exception of an idea that one is worth more than the other.  We as a country have accepted this. What happens if a country decides to create lots more money?  Well, you could have hyperinflation like Zimbabwe.  Another example of throwing money at a problem.  You could become a billionaire pretty easy in Zimbabwe. 

This sort of thing would not happen under a gold standard.  Under the gold standard, paper notes are convertible into pre-set, fixed quantities of gold.  If you saw lots of currency being easily available, then people would start exchanging currency for gold.  It wasn't perfect, but at least you knew that you would lose purchasing power if you kept your dollars under your mattress.

I can here people thinking...why would you want to do this?  Well, if you don't trust banks, where else would you put it?  Perhaps a tin can and bury the can in your backyard.  Create a treasury map to find your gold.  Hey...it worked for pirates.  Because for you to actually believe you can get something for nothing...well let me tell you that you've been lied to all these years.

I'm certain people have been told that you can put money in the bank or CD, and you'll make money.  Well, this isn't the case.  After all...what did you do to earn this money?  Should you really deserve additional purchasing power by giving your money to the bank?  Does this make any sense?

If you do a job for someone.  Let's say you work on a farm.  All you do is collect eggs and feed chickens.  In return you get a place to sleep and 3 meals a day.  The farmer doesn't care how long it takes...the pay is the same.  You are only working 20 hours per week for this job. You do this for a year.  The next year rolls around.  The farmer asks if you could milk the cows as well.  The farmer said he will pay you $100 per month to milk the cows.  You tell the farmer that you will not milk the cows, and expect a $50 raise to collect eggs and feed chickens.  This year it only takes you 15 hours per week to do the job.

Is it fair?

My answer is no.  It wouldn't be fair to the farmer.  You are doing the same job.  You receive the same pay.  Since you are not being paid in dollars...inflation is not a factor for you.  However, you actually increased your productivity, and could look for another job if you wanted to enhance your situation.

Since the gold standard doesn't exist anymore, it is one of the reasons why the rich get richer, and the poor get poorer.  For every dollar created, reduces your purchasing power.  Thus requires you to work more to maintain the same standard of living.

This is one of my problem with the current system.  Feel free to criticize.

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