Hello,
Welcome to another post from Serfdom Road.
I thought it would be worth explaining why I own gold (and why you should too!).
Here, I want to dive into a fantastic book by economist, historian, and author, Murray N. Rothbard (b. 1926, d. 1995) - What Has Government Done To Our Money, first published in 1963.
Let’s begin.
The Value of Exchange
Rothbard starts by explaining - “why do men exchange at all”?
“Without exchanges, there would be no real economy and, practically, no society. Clearly, a voluntary exchange occurs because both parties expect to benefit. An exchange is an agreement between A and B to transfer the goods or services of one man for the goods and services of the other. Obviously, both benefit because each values what he receives in exchange more than what he gives up.”
We exchange goods and services, voluntarily, because we value what we receive more than what we give up.
“Specialization permits each man to develop his best skill, and allows each region to develop its own particular resources. If no one could exchange, if every man were forced to be completely self-sufficient, it is obvious that most of us would starve to death, and the rest would barely remain alive. Exchange is the lifeblood, not only of our economy, but of civilization itself.”
In other words, do what you do best!
Then voluntarily exchange your goods and services for those of others.
Barter (Direct Exchange)
“If A has a supply of eggs for sale, and B has a pair of shoes, how can they get together if A wants a suit?”
In a barter system, it is difficult to find someone that has what you want, and you have what they want in exchange.
Any society needs to overcome this problem if it is to become civilised.
Indirect Exchange
“Under indirect exchange, you sell your product not for a good which you need directly, but for another good which you then, in turn, sell for the good you want.”
“Consider the case of A, the farmer, who wants to buy the shoes made by B. Since B doesn’t want his eggs, he finds what B does want—let’s say butter. A then exchanges his eggs for C’s butter, and sells the butter to B for shoes.”
Now, let’s say, in this society, everyone uses butter on a daily basis but not everyone uses eggs every day. Butter would then be a more marketable commodity.
Once everyone is confident butter will be sold quickly (many daily users of butter), there will be high demand for butter and it will become a medium of exchange.
The most marketable goods - easier to transport, easier to divide, and the most durable - will be selected as the media for most exchanges.
These highly marketable goods are also known as money.
“Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks. Through the centuries, two commodities, gold and silver, have emerged as money in the free competition of the market, and have displaced the other commodities.”
Gold and silver have historically been more durable, divisible, and transportable than any other commodity.
The key insight here is that money is a commodity, and gold and silver are the most marketable of commodities - hence why they were used as money.
The Monetary Unit
“Weight is the distinctive unit of a tangible commodity, and so trading takes place in terms of units like tons, pounds, ounces, grains, grams, etc. Gold is no exception. Gold, like other commodities, will be traded in units of weight.”
For example, the British “pound sterling” was originally defined as a pound weight of silver, and then 1/4 of a gold ounce. While the American “dollar” was originally 1/20th of a gold ounce.
To be clear, it is not that one pound sterling was equal to 1/4 of a gold ounce, it is that one pound sterling was a 1/4 of a gold ounce.
Money Warehouses
Rothbard goes on to explain the obvious problem of engaging in large transactions with gold coins.
“Even in the convenient shape of coins, gold is often cumbersome and awkward to carry and use directly in exchange. For larger transactions, it is awkward and expensive to transport several hundred pounds of gold.”
“Gold, in the first place, must be stored somewhere, and just as specialization is most efficient in other lines of business, so it will be most efficient in the warehousing business.”
Rothbard then explains how a warehouse receipt, backed by the gold stored in a warehouse, can be used in exchange for goods and services.
“As in the case of all warehouses, the owner’s right to the stored goods is established by a warehouse receipt which he receives in exchange for storing the goods.”
“…convenience inevitably leads to transfer of the warehouse receipt instead of the physical gold itself.”
Now, think of these money warehouses as banks and the warehouse receipts as currency (a money substitute).
Currency only has value if it is backed by gold held in reserve.
Why own gold?
“Since the Bank of England’s (the ‘Bank’) foundation in 1694 the Bank has issued notes promising to pay the bearer a sum of money. For much of its history the promise could be made good by the Bank paying out gold in exchange for its notes. The link with gold helped to maintain the value of the notes, although the link was sometimes suspended, for example in wartime.
The link with gold was finally broken in 1931 and since that time there has been no other asset into which holders have the right to convert Bank of England notes. They can only be exchanged for other Bank of England notes.”
The statement above from the Bank of England clearly states that gold was held in reserve to support the value of the bank notes they printed.
Today, bank notes can only be exchanged for other bank notes!
All bank notes (cash) today only have value because we believe they have value - and of course, each government mandates taxes must be paid in their own currency.
Most governments have been on a near century-long mission to ensure the public believes their own currency, not backed by any gold, is as good as gold - but why?
Let’s take the US as an example. In 1971, US President Richard Nixon removed the ability for foreign governments to exchange their dollars for gold (this was done to the US public in 1933 - it was even illegal to own gold!).
Take a look at the chart below. Notice, how the gold price and the national debt start to increase after the early 1970’s.
Now that the US government was not constrained by a gold standard, they could print as many paper dollars as they wanted to fund warfare and welfare. No gold was required to support the value of US bank notes (or paper dollars).
Each newly printed dollar, that funded any vote-winning warfare/welfare policy, was devaluing all the previously printed dollars, including those in the hands of the public - an increase in supply leads to a decrease in value.
Gold then increases in value, when priced in dollars, not because gold is increasing in value (an ounce is an ounce) but because more and more dollars are needed to pay for gold - or any commodity.
Think about any commodity, product or service (gold, oil, rent etc.) - they have all increased in price, because the currency they are priced in is losing value, with each new currency unit that government and their central banks print.
The currency you are holding is losing it’s purchasing power every year.
To maintain your purchasing power, you need to own real money - gold.
Still don’t believe me?
In 1971, the US median house price was $25,000 and one gold ounce was $40 - 625 ounces of gold were needed to buy the average US home.
At the height of the US housing crisis in 2007, the US median house price was $240,000 and one gold ounce was $650 - 369 ounces of gold were needed to buy the average US home.
If in 1971, you had kept $25,000 in gold, and not bought a home, you could have bought two homes at the height of the biggest housing boom ever!
Or, if you had stayed in cash, and not bought a home, in 2007 you would have only been able to buy 1/10th of a home!
This is the power of gold. Government has taken it away from you. Take it back.
Buy gold!
I hope you have found this article insightful and helpful!
Please feel free to comment below.
Kind regards,
Le Libérateur
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