A Letter: Money and Conspiracy
Part 1 — Money
[Editor’s note: The following is a letter written in 2004 responding to an article by Mr. Rittenouse in Countryside. This letter has been divided into two parts: Part 1 — Money and Part 2 — Conspiracy.]
The following are a few comments on Mr. Rittenhouse’s article “Commodities, Fiat, and Theories,” which appeared in the July/August issue.
In defining money, Mr. Rittenhouse gives three components that an item must meet to be used as money. It is used as a medium of exchange, a store of value, and a unit of account. Federal reserve notes, which are what passes for money today, meet only two of these three criteria. It is not a store of value. Since the beginning of the Federal Reserve System in 1914, which has a governmentally protected monopoly on issuing (creating) money, the dollar has lost 95 percent of its value. Over this period, an ounce of gold is still worth an ounce of gold. In dollar terms, an ounce of gold equaled about $20 in 1914; today, it equals about $400 [at the beginning of 2019, it buys about $1280 in federal reserve notes]. Thus, gold has retained its value. It is far superior to federal reserve notes as a store of value.
Furthermore, if federal reserve notes, which are instruments of debt, were the market’s first choice of money, the government would not have to make them legal tender. The legal tender law requires people to accept the governmentally declared money, federal reserve notes, in payment of debt or to forego payment of the debt.
What made gold and silver money, along with the other items that Mr. Rittenhouse lists that have been used as money, is that they had other uses. Gold and silver are commodities that can be used for something other than money. That they can be used for other things gives them intrinsic value. Before we became so sophisticated, people would never have thought of voluntarily using paper for money because paper has such low intrinsic value. (The paper that was used for exchange was redeemable in gold or silver.) The intrinsic value of a $10 bill is the same as that of a $100 bill. They both use the same amount of paper and ink and cost the same to make. The lack of intrinsic value necessitates legal tender laws.
Mr. Rittenhouse identifies problems with counterfeiting gold coins or stamping gold coins with a higher weight and purity than it actually has. Paper money has the same problems. There are licensed counterfeiters, which in the United States is the Federal Reserve System. There are unlicenced counterfeiters, who are the people that the Treasury Department goes after. In a society accustomed to a gold coin monetary system, detecting a counterfeit gold is easier for more people than detecting high-quality counterfeit money. (This is especially true when a situation like the one that occurred at the end of World War II. At the end of World War II, the United States gave the Soviet Union the plates and paper needed to print U.S. occupational currency.)
What Mr. Rittenhouse writes about the Federal Reserve controlling the money supply as a matter of law is true. His claim that federal reserve notes are fiat currency and that people are required to accept them under the penalty of law is also true. The Federal Reserve may be doing a good job of controlling, i.e., increasing the money supply, but any good counterfeiter could do that. However, it has been an extremely poor steward of the dollar having destroyed 95 percent of its value.
Mr. Rittenhouse goes on to describe the Kondratiev Wave. Like him, I am not sold on this theory. The stories that I read today arguing that we are in the trough the Kondratiev Wave are similar to those that I read in the 1970s. (When corrected for inflation, a bottom in real terms occurred in the 1970s, but was masked by inflation.) If the bottom occurred in the 1970s, then according to the timeline of this theory, the next bottom should not occur until circa 2020. Many of the current advocates of the Kondratiev Wave are predicting that gold like everything else, except the dollar, will decline in value.
Paper money always loses value over time and eventually becomes worth no more than its Btu content or toilet paper. (In Zimbabwe, a roll of toilet paper has 720 squares and cost 10,000 Zimbabwean dollars. So, if one changes his $10,000-note in the one thousand $10-notes, he has 720 sheets for wiping and $280 left over for spending. [This was in 2004 before Zimbabwe’s hyperinflation began really to accelerate.]) An ounce of gold remains an ounce of gold forever. Paper money loses value because the government, through its surrogate central bank, can print money easier than it can raise taxes.
My outlook on the dollar is pessimistic. The dollar is going down and gold up. Debt is going to drive the dollar down. Before this run is over, which will last another five to ten years, gold is going to $5000 an ounce assuming things do not get really bad [my timing was off considerably for the dollar amount or for the years]. (The run is not over until the DJIA can be bought for an ounce of gold, which means stocks have a long way to fall and gold has a long way to rise.) If things get really bad, then gold is going beyond anyone’s wildest speculation. The wildest speculation that I have come across made by a person who follows the gold market is $111,000 per ounce. This should be a floor. If things get really bad, Mr. Rittenhouse is correct in that all our lives will be in great danger.
Gold is probably the hardest market to trade or to invest in. In stock, bonds, real estate, and all other markets, the trader or investor has to fight his greed or his fear — never both together. In gold, he has to fight both at the same time. When gold is sky-high, greed enters as it does in other markets. Yet, when gold is sky-high, it is there because of fear.
The bottom line is spend your federal reserve notes but save your gold. Use federal reserve notes as a purchasing medium, and use gold as a store of value.
Copyright © 2004, 2019 by Thomas Coley Allen.