45 years ago as of this past Monday, the monetary system experienced a shock. Up until August 15th, 1971, the U.S. dollar had been directly linked to gold; at the time, one ounce of gold was worth — and was officially exchangeable for — $35, as it had been since 1934. Prior to that, gold had been valued at $20 per ounce since 1717. The importance of these values and dates is reflected in the current value of gold in U.S. dollars: $1,350 per ounce. This is an increase of 3,800% over the course of 45 years, or an annualized 84% increase. Gold is a currency, though, rather than an investment. Thinking about it that way, the U.S. dollar has fallen in value by 98% when compared to gold. The question is: does this matter?
Rather than explaining the utility of gold or a gold-backed currency, is seems more worthwhile to illustrate the failure of fiat money — paper money that is printed by a government — through a specific, tangible example. One such example is the rising cost of a McDonald’s Big Mac during the last 30 years. In 1986, the Big Mac cost $1.60; today, it is three times as expensive in terms of the U.S. Dollar. In terms of gold, it has remained at about 0.13 grams during those same 30 years.
This is relevant for a few reasons, the first being that by default, prices should fall over time. As productivity increases alongside competition, the tendency is for prices to decline. The introduction of another variable — the ability to arbitrarily create money from nothing — distorts economic reality; with a stated inflation target of 2%, the Federal Reserve causes prices to increase through the manipulation of interest rates. Many people — particularly economists out of Ivy League institutions — argue that rising prices are not only acceptable, but essential for societal progress. The problem with such an argument, which posits that rising prices encourage spending today and thus provide ongoing economic stimulus, is that it assumes two critical things: that wages will rise alongside inflation, and that saving money in a bank account is not a legitimate manner in which to use money. The best way to test these two factors is to consider the percentage of income spent on “living” — food, shelter, clothing — each month, and to look at the interest earned on savings at a bank. Such an analysis is revealing, though it may also cause emotional distress. Most people find their rent increasing year after year, and they also see that they are gaining pennies in their savings accounts each year.
Assuming you buy into the argument that money should retain its value over time rather than experience a consistent decline over time, you may speculate as to the options available to protect yourself from such a mess today. Unfortunately, the Federal Reserve — the “private” central bank of the United States — has an implicit goal in weakening the dollar by seeking out inflation. This makes successful monetary maneuvers quite tricky. Besides complaining about a corrupt system of money and pleading for a gold-backed dollar, there are three somewhat reasonable avenues to at least slow down the declining value of your money. One is to buy gold — this is the easier, safer option. Another is to invest in companies that mine gold — this option is a great one if you believe that the price of gold will continue to rise in dollar terms. Finally, you should look into placing your money into a new savings account — there are a few available that yield 100 times the interest earned on ordinary savings accounts.
The key takeaway from this August 15th anniversary is that Nixon was one president in a still-growing list of presidents that regularly made and make tremendous errors that have long-lasting effects. It is also worth mentioning that even that bonehead Ryan Lochte acquired some gold in the last couple of weeks.
Also published on Medium.