Saturday, July 17, 2010

Gold & Fiat Money

"I do not under any circumstance favor raising the price of gold. It would perpetuate that "barbarous metal" in international monetary use. We have quite rightly broken the link between gold and our domestic money.

We should also break the link between gold and international money. The supply of money, neither domestic nor international, should not be dependent over the long run on the accidents of supply and demand in the marketplace for just one commodity."

July 12, 1968 - Darryl R. Francis, President of the Reserve Bank of St. Louis.

And so it came to pass not long after the speech by Mr. Francis that in August 1971 US President Richard Nixon unilaterally broke the US$/gold peg and declared the US$ no longer convertible to gold.

The convertibility of US$'s to gold was the last tenuous link between fiat currencies pegged to the US$ and gold.

I pick up the tale of Gold and Fiat Money in January 1971 and will tell this tale with graphs. Graphs of fiat money; of consumer inflations and asset inflations; interest rates; central bank activities; gold prices; and official gold movements.

Placing the fiat money year of 1971 in the context of gold requires a pit stop at inflation. Often we are lulled into a sense of security by looking at the inflation rate. This time perhaps we should first look at the traditional inflation index, the CPI.

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Why Gold?

Centuries ago Aristotle said gold and silver were money because they fit the five properties of money.

Kings and governments used gold for international transactions.

JP Morgan, 100 years ago, said gold was money and nothing else.

If Gold has no use or utility, then why do central banks own it? Why does the US own gold and no paper reserves?

It is because gold is money and the ultimate backstop to our monetary system.

Throughout history no currency other than gold and silver has kept its value.

You can't get a stock bull or gold bear to admit to this, because it defeats their central argument against gold.

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