The Value of Money

My cousin’s husband has been buying gold. A lot of it. And he has been doing it for quite a while.

He is not the only one. Gold prices have gone through the roof ever since the economic crisis hit America.

Why gold?

Because in times of trouble, people hoard gold. They lose trust in paper currency, especially currency that is not backed in gold.

Ron Paul based much of his campaign on a return to the gold standard. He was dismissed as a crank by much of the media. But some people did their own version of the Paul plank. They bought gold.

The gold standard necessarily limits the amount of currency in circulation, because gold is a precious metal that is fairly hard to find. That is why we have a gold standard, and not a sand standard.

William Jennings Bryan ran for president as a populist against the gold standard. His famous “Cross of Gold” speech at the 1896 Democratic convention still reverberates through the ages:

“Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”

He wanted a bi-metal currency system that included both gold and silver. That would have loosened up the money supply and helped farmers and small businessmen, but made big New York bankers very nervous.

The gold standard’s greatest virtue was price stability. Inflation simply doesn’t happen when the currency is pegged to gold (unless, of course, you have a great influx of new gold — e.g., the California gold rush). Its great vice, however, is lower economic growth. Unemployment tends to be higher in periods where we adhere to the gold standard.

When Richard Nixon closed the gold window in 1971, he took us off the gold standard. It wasn’t an easy transition. Inflation skyrocketed, and he even tried to impose wage and price controls in order to bring it under control. His successor, Gerald Ford, lost when his campaign to Whip Inflation Now failed, and the struggling economy ultimately doomed Jimmy Carter’s presidency.

It was not until Ronald Reagan and Paul Volker together wrestled down inflation (with a cold-blooded strategy of high interest rates) that we were able to break out of the malaise.

Now we are entering another period of great economic transition. The Fed seems content to keep money cheap, and the Congress has followed suit by borrowing trillions to spend on a stimulus that may only stimulate more debt.

The question this begs is simple yet scary: What is the value of money? If not pegged to gold, what is its intrinsic value as long as the government decides to just print more of it in the face of an economic slowdown?

My cousin’s husband and many others have answered that question by buying gold. To them, that is only currency that is worth anything in the long run.

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