It's often hard for someone who is not familiar with the debate about hard currency (gold-based currency) vs dollars (Federal Reserve Notes) to understand the issue. This website has seen a lot of discussion of the issue over the past few months, but for the average reader a lot of it might be confusing.
In an effort to clear up some confusion, and for the purposes of this article, I've invented a new currency for comparing gold to dollars. I shall call it the Gold Dime, which I shall abbreviate as "gd" just as dollars are abbreviated as "$".
I derived the value of the Gold Dime from the word "dollar" itself. The word "dollar" derives from the German word "thaler." It meant one-twentieth and referred to the fact that the original dollar was equal to 1/20th of an ounce of gold. This is why the original pegged price of gold was $20 an ounce before the Federal Reserve System was dumped in our laps in 1913. Using our current naming system for a "dime" which is 1/10th of a dollar, I've decided that a Gold Dime is 1/10th of a Gold Dollar, or 1/200th of an ounce of gold.
The reason I like using Gold Dimes is that they provide a relatively decent numerical comparison to dollars. In 2000, the average price of gold was about $275 an ounce. Translated to Gold Dimes, it means that one gd = $1.38 in dollars from the year 2000. I like the idea that $1 and $1.38 are relatively close to each other numerically, because it makes it psychologically easier to make 2000 a baseline for comparison of these two currencies.
Coming up with average pricing for various items we commonly buy is difficult. Prices are constantly in flux, and it's often hard to find pricing data that compares "apples to apples," so to speak. I did the best I could using various sources I found around the Internet. I'll grant that none of this price data is necessarily 100% accurate, but I think it's accurate enough for the purposes of comparing $ and gd.
Let's start with a table showing average prices, in dollars for items of common interest:
| Year | 2000 | 2007/8 | Increase |
| Gold Dime (gd) | $1.38 | $4.88 | 255% |
| Gasoline | $1.50 | $3.10 | 107% |
| Houses (median) | $169,000 | $246,900 | 47% |
| Eggs (wholesale) | $0.47 | $1.60 | 240% |
| Milk | $2.79 | $3.91 | 40% |
| Bread (white, per pound) | $0.93 | $1.28 | 38% |
As you can see, prices have increased on some of our most basic purchase items over the past eight years. The harder concept to grasp is that these price increases, while driven by a wide range of factors, are primarily influenced by Fed "pump priming" over the past 10-15 years. All those little stimuluses added up to some significant price increases, which is what most people recognize as inflation. However, the real inflation was from the pump priming itself.
Now, let's look at the same picture, but this time let's look at it from the point of view of our newly invented currency, the Gold Dime. If the gd had been around starting in 2000, here's the way the same pricing would look, but this time priced in Gold Dimes:
| Year | 2000 | 2007/8 | Increase |
| Dollar | gd 0.72 | gd 0.20 | -72% |
| Gasoline | gd 1.09 | gd 0.64 | -42% |
| Houses (median) | gd 122,463 | gd 50,594 | -59% |
| Eggs (wholesale) | gd 0.34 | gd 0.33 | -4% |
| Milk | gd 2.02 | gd 0.80 | -61% |
| Bread (white, per pound) | gd 0.67 | gd 0.26 | -61% |
Now we see an entirely different picture. When Gold Dimes are used for currency, prices actually drop substantially across the board. Only the cost of eggs declines modestly over the eight year period. Even gasoline is down nearly 42%!
Notice how the retail price of homes drops over 50%, thereby showing the true decline in real estate prices during that same period. How is this possible, you ask? After all, we all know there was a huge housing boom. Yet, that entire boom was driven by Federal Reserve pump priming. It wasn't a real housing boom at all. Yes, housing contractors made barrels of money, but that was because there was a greater market for homes. A greater market demand does not necessarily mean higher prices if the number of contractors also increases, and that is exactly what happened! In fact, we're going to see a number of contractors go out of business (many have done so already). They thought that there was a huge, ongoing new demand for housing and that it would make them rich. In fact, all that happened is that the market easily met the new demand. There was no need for the huge spike in housing prices as measured in dollars in order to meet that demand. The only reason that spike happened was because it was an illusion created by the Federal Reserve System and the hidden devaluation of the dollar.
This is a reminder that prices really do decline over time in a truly free market economy with a stable currency. It also shows how much damage has been done to our wallets by being forced to use Federal Reserve Notes rather than being permitted to use alternative currencies, such as our imaginary Gold Dime currency. It also shows that consumers actually benefit from a truly free market with a solid currency, because the value of their currency remains strong. This creates incentives to save money rather than go into debt spending money and makes a much healthier economy for all concerned.
I also do grant that the period 2000-2008 has been a particularly good time period for gold compared to the dollar. However, even if we were to stretch out our comparison to the Gold Dime over a longer period of time, we would still see similar patterns. The degree of change would be less, but the overall pattern would remain the same.
In other words, free market forces operate to the extent that they're allowed to operate by the government, but when the government interferes, the price distortions are nearly unbelievable, except to people who have grown up and lived with this kind of nonsense all their lives. The plain fact is that average Americans should be significantly richer than they are now. Their personal budgets should be much more under control. They shouldn't have to face constantly rising prices, and the main reason they're struggling so significantly to try to keep up is because of the Federal Reserve System, which is literally ruining us all, slowly and painfully, over time.
Source data:
U.S. Department of Energy: All Grades, All Formulations, Retail Gas Prices
Wikipedia: Gold As An Investment
U.S. Census Bureau: Median and Average Sales Prices of New Homes Sold in United States
UNITED EGG PRODUCERS Statement Before the House Committee on Agriculture, March 22, 2001
The Poultry Site US Poultry Outlook Report - January 2008
U.S. Census Bureau: Nearly Half of our Lives Spent with TV, Radio, Internet, Newspapers
American Farm Bureau: Retail Food Prices Decline Slightly at End of 2007
Economagic: U.S. city average; Bread, white, pan (cost per pound); 2002 base; NSA
©2008 Walt Thiessen, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Sunday, March 2, 2008
Last modified: Wednesday, March 5, 2008
The views expressed in this article are those of Walt Thiessen only and do not represent the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: Kipper Mathews
Date: 2008-03-02 10:56:22
Gold closed Friday @ $974 an ounce as the dollar plumets.
Those in the know of gold expect it to go up to $1500 with-in the next few months and rise close to $6000 by 2011.That will make the dollar worth less than one silver dime.
Posted By: Ivan from Oregon
Date: 2008-03-02 16:11:08
Walt, I'm glad to see you're finally on board with this. You beat me to the price comparison article which I have one third or so done. The "gd" unit is an interesting twist - however in reality that kind of coin is too small to be practical. The comparison I was working on was in silver coins, used widely in our first 150 years or so. As of last Friday, a pre-1964 dime (90% silver) had a melt value of $1.40.
The historic ratio between gold and silver was 15:1 through this time, and prices fluctuated about +/- 1%. I'm old enough to remember 25 cents per gallon gasoline, about the same as today's worth of a "roosevelt quarter". I also remember when Pepsi went to a 12 oz bottle for six cents.
Having a currency that represents some real, recognized value, promotes slowly declining prices in the longer term, making everyone wealthier over time, promoting saving (capital accumulation) and more liberty.
To paraphrase Lenin: The best way to destroy capitalism is to debauch the currency.
Posted By: Christopher Espinal
Date: 2008-03-02 16:17:23
I understand that alot of you care about the poor....and always make excuses that "debauching" the currency hurts the poor the most. Imagine what would happen to the poor with deflation - especially those who hold loans - and imagine how much the cost of college will sky rocket!
Posted By: Ivan from Ortegon
Date: 2008-03-02 17:19:36
Christopher, you don't get it. There is a difference between asset deflation and price deflation. A slow price deflation is good for the lowest classes because it allows for an increasing standard of living over time. I don't see how you suddenly arrive at a higher cost of education - in fact what has happened is the opposide of what you posit. I remember a time when one wage earner could support a family, have a vacation and save money to send his brighter kids to college (without borrowing money).
A sudden "deflation" in assets, such as caused by the artificially -induced "housing bubble" is not a good thing.
Posted By: Walt Thiessen
Date: 2008-03-02 18:22:24
Ivan: you're right that a Gold Dime would be too small to carry as a coin. I was thinking of it as being an electronic unit of currency. It could also be represented with paper receipts. After all, there's nothing inherently wrong with using paper to represent money. The problem is with pretending that paper is the actual commodity itself, as with fractional reserve banking. So long as the law holds that the issuers of paper receipts for gold can't engage in fractional reserve banking, paper is not a problem.
Chris, you're completely wrong about what makes college costs skyrocket. Tuition rates are 50 times higher than they were 50 years ago...far exceeding the rate of inflation. This is because of guaranteed school loans, which were caused abnormally high demand rates and allowed schools to ratchet up tuitions at an accelerated rate (similar to what's happened with health care).
People who are in debt with school loans bought that debt in the form of Federal Reserve Notes. That means they pay them back in Federal Reserve Notes. So if there's an alternative currency based on gold, and that currency holds value better than Federal Reserve Notes, all the borrower has to do is use gold currency for awhile while the Federal Reserve Notes continue to be inflated until they have no real value, thus allowing the debtor to pay back the loans at vastly reduced relative prices.
No Chris, it's the note holder who suffers the most in that scenario, not the debtor. That's why banks will be the biggest opponents of allowing a competing currency. They have the most to lose.
Posted By: Christine Smith
Date: 2008-03-02 18:26:45
Excellent article, Walt. Very well explained - both your article and follow-up comment. If only people would wake up and realize this - it's really very simple to understand. You did a great job with the example.
Posted By: MikeFoster
Date: 2008-03-02 19:34:05
Great stuff - very instructive!
Posted By: John Kusumi
Date: 2008-03-03 02:40:34
Thank you for that, Walt. The example clarified greatly, and I think that you and Ron Paul have served to jog me on this issue.
But: the result of deflation should not be surprising; it is built in to the situation. Population and productivity will grow faster than the world's stock of gold. A larger quantity of goods being chased by the same amount of money means deflation.
It would seem that a balance would be better -- that a modest growth of the money supply (not to excess) makes sense. In the case of a fixed stock of money, then wealth is a zero-sum game, and the accumulation of it in one place means the diminishment of it in another place.
Should we feel guilty about being entrepreneurs? Under your monetary plan, if we get rich, mustn't that necessarily mean that someone, somewhere else, goes more hungry? I think yes, and this invites the return of class struggle a la Marx, Lenin, and Mao.
In other words, today's Washington and your proposal may be two extremes -- wretched excess, and zero-sum. Wouldn't we all do better to find a balance in the middle?
Posted By: Ivan from Oregon
Date: 2008-03-03 06:01:11
John, you have it exactly backwards. A slow deflation over time makes prices go down, increasing the standard of living for everyone, especially the one at the bottom of the totem pole. That was the state of our Republic for its first century and a half or so, when the currency was defined by gold and silver. The supply of gold and silver kept pace with the growth, so the value of the dollar over that period of time fluctuated very little, +/- 1% or so.
Posted By: World
Date: 2008-03-03 13:59:21
Walt -
Any chance you or Ivan could do a followup article with more time points. The trend of gold since 2000 is disproportionately large. Maybe time points from when we went off the gold standard and when the FED was created. It would probably lead to a similar conclusion - that gold as a currency would be less prone to inflation.
It would also be interesting to see how the inflation in prices of your selection of commodities (relative to gold price) matched up with federal statistics on inflation.
I also wonder how the price of gold would be change if a nation as large as ours went back to a gold backed system - the demand for the nearly fixed supply of gold would be huge overnight - maybe doubling or tripling its price. That effect would also alter your results from your analysis above.
Thanks for the article.
Posted By: John Kusumi
Date: 2008-03-03 16:28:26
World (and Ivan) -
I get it - I am not arguing - that "gold as a currency would be less prone to inflation." And yes, inflation is a bad thing. (There is a side bar quibble to ask the question "Why gold? Why not silver, or something else entirely?" Because ultimately, it is the mind of man vesting value into an inanimate object. If you want something with a fixed stock, not rising, why not land?)
My real point is to say that deflation is also a problem for some. To move from fiat dollars to gold would swing the pendulum all the way from one extreme to the other - from money supply growing too fast to not at all. In between, there is a balance point in which I am interested.
Could gold solve the inflation problem? Yes. But, at what price? It brings along a new problem: deflation. (You may not see it as a problem, because your purchasing power could rise simply from standing still. But, it's a problem at other levels, for those concerned with wealth maintenance.)
I don't deny the inflation problem, but I sense that new and different problems would arise from having the pendulum at the other extreme. The plan of moving to gold should only be put into effect if we have thought through the new problems of the new environment - and by thinking that through, we might come to prefer a pendulum at rest in the vertical position.
Posted By: World
Date: 2008-03-04 15:47:42
John -
It is true that gold has not magic ability which gives it great value. It is just a commodity like silver, oil, or even rock salt for that matter. Why it is useful as a currency is that it has a long history of being used as a valuable commodity, much longer than the american dollar - a history which predates America itself extending back hundreds if not thousands of years. There have been countless currencies over this same time period which once held great value, only to eventually become worthless when the nation which backs the currency was destroyed militarily or simply through poor fiscal policy. The value of the fruits of your labor should not be tied to decisions on fiscal policy made by our elected officials, let alone the private FED.
You make the argument that the money supply needs to grow. I would ask why. Increases in productivity and real gains in income would result in a decrease in prices over time (deflation). If the cost of goods became low enough, you could create a new denomination of coin that is a fraction of the current lowest denomination, solving that problem. Salaries could even decrease, just less that the rate of deflation and still have a net growth in the economy. Currently a growth of the money supply just fuels inflation - that inflation results in increased incomes, but marginally so because you have to subtract inflation. Taxes keep increasing however and changes in tax brackets, etc often are years behind inflation curves. I could go on, but I wager you get my point by now.
Posted By: John Kusumi
Date: 2008-03-04 16:38:17
World -
In re/"the money supply needs to grow" and you "ask why," I said above that "Population and productivity will grow faster than the world's stock of gold." Suppose for the sake of argument that we start with $60,000 for each of the world's people, and then the population doubles. Suddenly, there is only $30,000 for each of the world's people. The gold standard includes a "deflationary environment" and I hear you extolling this as a virtue of the situation.
Today, if you or I merely sit still with our money, our purchasing power goes down. On the gold standard, if you or I sit still with our money, our purchasing power goes up. Either way, there is a consequence for sitting still.
I'm interested in a stable, hence sustainable, situation where our hypothetical man sitting still (or say, Rip Van Winkle taking a 20 year nap) is not presented with purchasing power consequences upon re-engaging society. I see value in stable expectations. I don't like the idea that standing still cannot really be standing still; that it is still motion, moving forwards or backwards. Either way, it's like room spins. (I guess I would like a stable, orderly, and well-behaved room!) :)
Posted By: Doug
Date: 2008-03-04 22:15:35
Hi Walt,
Good analysis! I've been a huge proponent of gold for quite sometime now. We're also in agreement on the Fed...
Just a statistical point and then you can erase this comment...
You wrote:
Houses (median) $169,000 $246,900 479% The increase from 169k to 246k is about 47% eh?
Peace,
Doug
Posted By: Walt Thiessen
Date: 2008-03-05 10:55:39
Thanks for pointing out the typo Doug! It's fixed.
John, when you wrote, "A larger quantity of goods being chased by the same amount of money means deflation," you're actually wrong. Deflation is a reduction in money supply, not pricing. True, deflation usually leads to lower prices, but the two concepts are not equivalent. As your example shows, the money supply can remain the same while demand remains steady and supply increases, thereby resulting in lower prices. That's not deflation. That's simply lower prices, and it's what a free market does best.
It's also why you don't have to worry about money supply keeping up with product supply.
Posted By: John Kusumi
Date: 2008-03-06 21:50:26
Walt, there are two main points I'd have in response. The first is where you're saying that deflation is a word that applies to money supply and not prices. Is that true while at the same time, inflation is a word that applies to both? I think that in everyone's understanding of inflation, prices go up. But if they go down, you're telling me that it is a misnomer to apply the word deflation. --Are you sure that this isn't a quibble about semantics, and a distinction without a difference?
My second point is more major, in my view. It is that with no growth in the money supply, wealth is entirely a zero-sum game. It suggests that to get rich is to make others poor. It suggests that every bite of lunch is taken out of the mouths of babes (or of less fortunate people around the world). It invites class struggle if not class warfare. These are the attendant consequences of A ZERO SUM GAME.
A zero sum game suggests a harsher and more hard-scrabble world than that which the U.S. has seemed to enjoy. I don't like the invitation to class warfare. Things get really stark in a zero sum game.