Why A "Dollar" Should Only Be A Name For A Unit Of Gold

Tyler Durden's picture

Authored by The Mises Institute's Frank Shostak (annotated by Acting-Man's Pater Tenebrarum),

Once Upon a Time…

Prior to 1933, the name “dollar” was used to refer to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this means that the name dollar also stood for 0.048 ounce of gold. This in turn, means that one ounce of gold referred to $20.67.

 

US_Gold_Certificate

A 1922 20 dollar gold certificate – this note was actually redeemable for gold on demand, i.e., it was a money substitute. Today irredeemable banknotes are “standard money”.

 

Now, $20.67 is not the price of one ounce of gold in terms of dollars as popular thinking has it, for there is no such entity as a dollar. Dollar is just a name for 0.048 ounce of gold. On this Rothbard wrote:

No one prints dollars on the purely free market because there are, in fact, no dollars; there are only commodities, such as wheat, cars, and gold.

Likewise, the names of other currencies stood for a fixed amount of gold. The habit of regarding these names as a separate entity from gold emerged with the enforcement of the paper standard.

Over time, as paper money assumed a life of its own, it became acceptable to set the price of gold in terms of dollars, francs, pounds, etc. (the absurdity of all this reached new heights with the introduction of the floating currency system). In a free market, currencies do not float against each other. They are exchanged in accordance with a fixed definition.

If the British pound stands for 0.25 of an ounce of gold and the dollar stands for 0.05 ounce of gold, then one British pound will be exchanged for five dollars. This exchange stems from the fact that 0.25 of an ounce is five times larger than 0.05 of an ounce, and this is what the exchange of 5-to-1 means.

In other words, the exchange rate between the two is fixed at their proportionate gold weight, i.e., one British pound = five US dollars.

 

An Absurd System

The absurdity of a floating currency system is no different from the idea of having a fluctuating market price for dollars in terms of cents. How many cents equal one dollar is not something that is subject to fluctuations. It is fixed forever by definition.

The present floating exchange rate system is a by-product of the previously discredited Bretton Woods system of fixed currency rates of exchange, which was in operation between 1944 to 1971.

Within the Bretton Woods system the US$ served as the international reserve currency upon which all other currencies could pyramid their money and credit. The dollar in turn was linked to gold at $35 per ounce. Despite this supposed link to gold, only foreign governments and central banks could redeem their dollars for gold.

A major catalyst behind the collapse of the Bretton Woods system was the loose monetary policy  of the US central bank which pushed the price of gold in the gold market above the official $35 per ounce. The price, which stood at $35/oz in January 1970 jumped to $43/oz by August 1971 — an increase of almost 23 percent.

The growing margin between the market price of gold and the official $35 per ounce created an enormous profit opportunity, which some European central banks decided to exercise by demanding from the US central bank to redeem dollars for gold.

Since Americans didn’t have enough gold to back up all the printed dollars they had to announce effective bankruptcy and cut off any link between dollar and gold as of August 1971. In order to save the bankrupt system policymakers have adopted the prescription of Milton Friedman to allow a freely floating standard.

 

fried

Milton Friedman, Richard Nixon and then Fed chairman Arthur Burns. We’re not sure if they were fully aware what the adoption of a completely unanchored fiat money system implied. Today Friedman is famous for being a supporter of the free market, but he was actually a central planner when it came to monetary policy.

 

No More Limits

While in the framework of the Bretton Woods system the dollar had some link to the gold and all the other currencies were based on the dollar, all that has now gone. In the floating framework there are no more limitations on money printing. According to Murray Rothbard:

One virtue of fixed rates, especially under gold, but even to some extent under paper, is that they keep a check on national inflation by central banks. The virtue of fluctuating rates — that they prevent sudden monetary crises due to arbitrarily valued currencies — is a mixed blessing, because at least those crises provided a much-needed restraint on domestic inflation.

Through policies of coordination central banks maintain synchronized monetary pumping so as to keep the fluctuations in the rate of exchanges as stable as possible.

Obviously in the process such policies set in motion a persistent process of impoverishment through consumption that is not backed up by the production of real wealth.

Furthermore, within this framework if a country tries to take advantage and depreciate its currency by means of a relatively looser monetary stance this runs the risk that other countries will do the same.

 

1-US TMS-2

Printing money with gay abandon… US broad true money supply TMS-1 since 1986 – click to enlarge.

 

2-Euro Area M1

Euro area M1 (currency and overnight deposits) since 1980 (national currencies used prior to euro introduction) – more of the same. The main question seems to be which currency is going to be printed to oblivion first – click to enlarge.

 

Consequently, the emergence of competitive devaluations is a sure way of destroying the market economy and plunging the world into a period of crisis. On this Mises wrote in Human Action:

A general acceptance of the principles of the flexible standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations’ monetary systems.

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hxc's picture

Free-floating exchange rates and paper currency (even fiat, technically) could exist in ancapistan, just not central banking. Good article but I feel like the guy is a newcomer to the Austrian school.

38BWD22's picture

 

 

A Gold Standard or similar is not necessary at all.

"Money" has three accepted attributes: Means of Exchange, Unit of Account and Store of Value.

Problem is, no single form of "money" can perform well all three roles.

Best to cut gold free, to be used just as a Store of Value (FOFOA).

*  *  *

Of course, should they use gold to back the dollar (which is probably a mistake), and they peg the price to $10,000 (approx. price level to have gold back the dollar), I will benefit.

Buy and hold gold.  Even at the bottom of a lake!

RedDwarf's picture

"A Gold Standard or similar is not necessary at all."

Yes it is.  Network effects means there will ALWAYS be one standard for 'money' outside of a group's control.

"Problem is, no single form of "money" can perform well all three roles."

Yes they can, just not optimally.

"Best to cut gold free, to be used just as a Store of Value (FOFOA)."

Well, I agree with that.  Gold is the best store of value.  BitCoin and other blockchain tech is currently our best medium of exchange.  What is needed is a monetary 'system'.

 


SuperVinci's picture

Not just probable. Definitely a mistake to try and dictate (central plan) a certain price for gold.

As you say, let the monetary functions split. Gold can sit off to the side as SOV and fiat currency, which is a phenominal economic lubricant, can do its thing via free floating exchange.

Womb Service's picture

"let the monetary functions split"

If the market wants them to, which it probably doesn't. Or does this split get dictated to us by some "benevolent" dictator?

"...fiat currency, which is a phenominal economic lubricant"

No it isn't. It leads to boom and bust cycles, malinvestment, perpetual warfare, environmental destruction and an ever growing gap between the rich and poor. If it were any good, it wouldn't be by decree, and backed by coercive force.

You statists are all the same, deciding what is best for the rest of us. How about a free market for money? Let the market decide which competing currencies get used for what function. Why are the FOFOA crowd so stuck on dictating?


O C Sure's picture

O C Sure is banned from posting at the Mises Institute.

But I hope their usual probes are here.

The problem with Frank's analysis, as with LVM's is that it does not reduce their premise to the fact.

To know WHAT money is, requires that one know WHY it is.

Therefore, Mises and the very disciplined school has not a leg to stand on anymore. The counterfeiters (counterfeiting of what?) are dancing on his grave.

SuperVinci's picture

You've just shown your misunderstanding of not only gold and money, but of the fofoa crowd. It doesn't get any more free market than a free floating exchange for currency!

Whats more, as history shows, the whole wolrd is heading to free float. exchange pegs have been falling worldwide for decades. the progress and direction shouldnt be hard to discern.

Gold  as savings, used by savers world wide, is dictating nothing.

 

On the contrary, a gold standard is central planning/ statism and has never worked for long.

RedDwarf's picture

"a gold standard is central planning/ statism"

A government declared gold standard is certainly central planning and statist.  A market chosen gold standard is not.  Standards can develop voluntarily.

Womb Service's picture

"You've just shown your misunderstanding of not only gold and money, but of the fofoa crowd. It doesn't get any more free market than a free floating exchange for currency!"

FOFOA position: Fiat (by decree) currency as the medium of exchange. Gold (with price discovery) as the means to store wealth.

Can you not see the absurdity here? If we had price discovery in Gold, all fiat currencies would evaporate into hyperinflation. Who would hold fiat when you have an alternative in unlevered honest to goodness Money?

Management of the Gold price is a requirement for debt based fiat to exist. Don't even get me started on FOFOAs ludicrous position on Silver. You people show a stunning lack of financial knowledge.

N2OJoe's picture

The functions are already split. How's that workign out for you now?

RedDwarf's picture

I commented too fast.  You said 'well' and I said 'optimally'.  That's a nitpick.

MalteseFalcon's picture

Bringing the gold standard back means the end of the American empire.

So a catastrophic event would have to precede a return to the gold standard.

Unfortunately Hitlery is just the babe to precipitate that event.

VWAndy's picture

 Gold is barter. Its just not the only thing we can use. As a store of value its great. As the sole store of value its not all that great.

SuperVinci's picture

Not just probable. Definitely a mistake to try and dictate (central plan) a certain price for gold.

As you say, let the monetary functions split. Gold can sit off to the side as SOV and fiat currency, which is a phenominal economic lubricant, can do its thing via free floating exchange.

VWAndy's picture

 Yes kiddies gold is barter. Thats how it must be valued to. You cant value it in fiat because fiats true value is a big fat 0.

  Barter also ties a fixed value to our labor. That my friends is what all these money games are all about. This is the most important aspect of any MOE and the thing the banksters are sidestepping. Gold as a MOE fixes nothing if its not going to assure our labors value going forward. Its all realative to every other item we trade. Tie golds value to all other trade goods and we are solid in values of our labor.

  We really really need to stop thinking in fiat terms. Start thinking about the MOE as a lobor value system because thats what it is once you scrape off all the bankster BS. 

 The stall and bartering is the only way we are going to kill the fiat magic. Not by force but by all of us letting them sleep in the fiat beds they made.

 I would love to debate any banker tool on a level field about this. For those that may wonder if I am qualified to talk about this? I sure am simply because I actually work for a living. Unlike the kurgster.

 

 

SuperVinci's picture

Not just probable. Definitely a mistake to try and dictate (central plan) a certain price for gold.

As you say, let the monetary functions split. Gold can sit off to the side as SOV and fiat currency, which is a phenominal economic lubricant, can do its thing via free floating exchange.

JohnG's picture

 

I buy a lot of gold and silver.  Consistently about $2000 to $2500 a month, and have since gold and silver swan dived in 2013.  I didn't buy so much in that run up, I sort of smelled a trap.

But, since earlier this year, I am waiting longer and longer to get my gold.  I buy about 1/2 and 1/2 in dollar terms gold and silver.  Silver is no problem, I can get as much as I want really quickly.  I buy eagles and 90% coins.  Again, no problem, usually delivery within a week.

Gold seems a different story.  I used to just buy Eagles, ounces mostly, but I have been buying smaller coins this year.  Specifically maples in gram coins.  Delivery has just been getting slower and slower, and right now I have an order that's been sitting for three weeks.  96 grams just sitting with no expected ship date.

I don't know if this is just my sellers, there are two that I buy from usually.

Has anyone else had any gold delivery problems?

GunnerySgtHartman's picture

I haven't had any problems getting gold or silver eagles.  I place my order and I have it in three days.  Sorry to hear that you're having problems - hope you're able to get it resolved quickly!

JohnG's picture

 

I'm hoping it's just my dealer or maybe the RCMP having problems.  I'm going to try a different dealer and see what happens.

Silver is no problem, it's just been gold.....

F22's picture

Do not continue to buy from dealers that don't deliver immediately.  A reputable dealer will not do this!!

Buy from someone that will not sell you anything that they don't have in stock.

Texas Precious Metals texmetals.com has exactly this kind of integrity.

If you buy from a business that delays your delivery you run the risk of never getting your gold.

Caveat emptor

eclectic syncretist's picture

Because it can't be conjured by any mortal. That is why gold should be money.

Four chan's picture

get ready to die if you take back the money system for we the people from the hands of the tribe.

VWAndy's picture

 Yep. Im thinking there is only one way that will ever happen. The global stall and bartering. Then maybe some real justice could be had.

 

ronthefisherman's picture

The Tribe were the world's goldsmiths for years until they founded the Bank of England - that's when they really hit their stride.

alexcojones's picture

USA taken off the gold standard in '33

And then USA taken off the silver standard about 33 years later.

Silver up again today and ZH ponds fillin up everywhere I hope.  

HRH of Aquitaine's picture

Silver is the bargain of the century.

JohnG's picture

Hell yes.  I've been loading up for over a year now.  I think it's about 1/5 of where it should be, maybe less.

Spartacus Rex's picture

Hey Zoomie (Alex) you are correct, however what most are unaware of, is that Congress & LBJ took the Banksters off of their Gold Reserve Requirements with an Act signed into Law in 1968 thereby allowing the Banksters to go full on ape sh*t, printing ponzi counterfeited fiat a**wipe, flooding the Economy w/FRN IOUs with complete abandon to allegedly finance LBJ's "Great Society" War on Poverty, &  his Vietnam Clusterfu*k, (Guns & Butter)

And whereas Americans were not permitted to redeem those fiat FRN IOUs back into their Gold held @ Ft Knox, Foreign Countries & Foreign Central Banksters nevertheless still could at the by then ridiculously low price of 35 fiat FRNs per Ounce, causing the massive drain on our Treasury, which forced Nixon to finally slam shut the "Gold Window" on 15 August, 1971, and telling the Counterfeiting Banksters: "We're ALL Keynesians Now", otherwise there would not have even been a single ounce of Gold left in our Treasury by the end of his first term in 1972, and America would have become a Third World Country at that time.

All these decades later,most people still cannot figure out, or grasp how the "fractional reserve banking" counterfeiting ponzi scam works, and who it benefits/ works for.

 

Still waiting for your next indy film Alex.

 

Cheers,

S. Rex

VWAndy's picture

I like a coin with a real measureble value. Energy valued coins should be part of any of stable MOE.

tricorn teacup's picture

What form of energy would the coin be denominated in, and how delivered when the coin is redeemed?

VWAndy's picture

 100proof whiskey works for me. It ties its value to labor pretty dam well simply because I can also make it myself. Talk about locking in its true value? That would do it very well. A specific amount of diesel fuel works well also. I can confirm its value/quality with a diesel engine pretty accuratly in just a few moments. Both are rather easy to prove up.

 A gold coin on the other hand is not as easy to prove. Its also way to easy for a guy like me to screw with gold coins. Silver not as easy but I could.

 Thank you for an exellent question.

Conax's picture

The Constitutional dollar is in grains of Silver.

But let's just forget about that, it's so icky.

Redhotfill's picture

On 6 July 1785, Congress unanimously "Resolved, That the money unit of the United States be one dollar."32 Almost another year elapsed until, on 8 April 1786, the Board of Treasury reported to Congress on the establishment of a mint:

 

 

Congress by their Act of the 6th July last resolved, that the Money Unit of the United States should be a Dollar, but did not determine what number of grains of Fine Silver should constitute the Dollar.

 

 

We have concluded that Congress by their Act aforesaid, intended the common Dollars that are Current in the United States, and we have made our calculations accordingly.

 

 

* * * * *

 

 

The Money Unit or Dollar will contain three hundred and seventy five grains and sixty four hundredths of a Grain of fine Silver. A Dollar containing this number of Grains of fine Silver, will be worth as much as the New Spanish Dollars.33

 

 

Shortly thereafter, on 8 August 1787, Congress adopted this standard as "the money Unit of the United States.34

N0TaREALmerican's picture

Ok, fine,  nice fantasy.  But, now tell me how you keep the smart-n-savvy people (like those guys in the picture) from doing exactly what they did?

SimpleJackBlack's picture

So a $35,000 investment in gold in 1970 would now be worth $1,340,000 now. That's +3828%

Guess just a barbaric relic.

Fucking money changers!

FireBrander's picture

1970 = gold at $35 an ounce in 1970 dollars.

2016 = gold at $223 an ounce in 1970 dollars.

$1300 gold in 2016 means your $35k investment in 1970 went up 582%...with average annual, compounded, return of 4.1%...investing in a checking account would have returned more...

Not saying gold has no value; just that the last 46 years haven't been as great as you think there were for gold; the next 46 years...well, we'll see.

One-Eyed-Thong's picture

and what does the rate of inflation do to your checking account return on investment ???

 

it's simple math:  paper "dollars" lose value, gold "dollars" do not

 

i would rather have +4.1% than -5%, but hey, i'm weird

Bryan's picture

I've been equivocal on whether owning physical precious metals is something a non-banker should do.  You can't eat gold, you can't keep anyone away with gold, you can trade with gold and can attract thieves with gold.  I think before being concerned with storing wealth, one should be more concerned with basic human needs -- sources of food, water and shelter, and a way to protect it from thieves.  Once you have all of that covered, then maybe storing extra wealth in gold might make more sense... although liquor and cigarettes might become equally as valuable in trade.  That is, if TSHTF.

HRH of Aquitaine's picture

Wrong. In 1970 if you bought 100 ounces of gold @ $35 an ounce it would have cost you $3500.

Today that 100 ounces of gold is worth $130,000. That is an increase of 3714%. I would say that it a pretty good fucking investment for a supposed relic.

gcjohns1971's picture

Dear Firebrander,

"2016 = gold at $223 an ounce in 1970 dollars"

 

Your problem is that you assign equal validity to a bureaucraticly governed, politically influenced formula to determine inflaton - and hence deflate to "1970 dollars", as you do to simple Arithmetic.

Politicians and bureaucrats are people.

People Err.

People LIE.

When the two disagree arithmetic is always right.

And in this case there's no question about the arithmetic.   You see Congress' power to set weights and measures applies explicitly to the National currency, and always has.

Congress never repealed their last specified weight.

The Dollar is either the specified weight, or it is nothing at all.

Not My Real Name's picture

Thank you, gcjohns. I was going to give a similar reply, but you saved me the trouble.

 

Agstacker's picture

How's your Enron stock doing?

FireBrander's picture

1970 = $35,000 in an S&P index in 1970 dollars.

2013 = $415,000 is the value of your S&P investment in 1970 dollars.

 

1970 = $35,000 in gold in 1970 dollars.

 

2016 = $203,700 worth of gold in 1970 dollars

Kirk2NCC1701's picture

In 1970, $35,000 git you a really nice house in Vancouver.

That now sells for $35,000,000.

Remember the 3 laws of RE: Location, location, location. Then wait 30-40 years.

HRH of Aquitaine's picture

Vancouver is an anomaly. Unlike PMs.

Consuelo's picture

 

 

"Printing money with gay abandon…"

I was gonna say that it was nice to see the term 'gay' used in its proper form (light-hearted, free-spirited), but then I remembered the statistically published Facts regarding homosexuals and their predilection to multiple partner escapades, and well - I guess the context sorta fits here too...