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In this article I want to approach the idea of a gold
standard from a more “regular people” perspective rather than from a “high
academic” economic/finance and, sometimes, legalistic perspective. I
constantly read books and articles full of mathematics written by the
economic academia, trying to show why a gold standard is a relic of
Antiquity, undignified of the modern world.
As a physicist, still, I would like to remind economists
that they would not be able to write their papers on a PC, communicate with
an iPhone, drive a car or fly on a plane, if it weren’t for two relics of
Antiquity essential to scientists and more than 3,000 years old that barely
changed since then: algebra and geometry.
When I was a child, my father, an engineer, used to tell
me over and over again, “If you can’t explain it in simple words, it’s
because it makes no sense or you don’t understand it yourself”, and “keep it
simple”.
Recently, while researching for an article on the gold
standard, I stopped and thought about a “new” (not from Antiquity) standard:
the metric system. I realized how exceptional and how humble those scientists
were when they created it. I just couldn’t believe it. Here is a system
designed to correct a problem faced only by scientists, which is to measure
quantities at the angstrom level (10−10) and at the astronomical level (1010)
that the old system couldn’t handle. They could have designed a system that
only they can understand. Who cares if the common people don’t? Too bad for
them… They will have to hire us to do the calculations. However, look at the
system they designed. It allows those highly educated “rocket” scientists to
work in fields like particle physics and astrophysics but at the same time so
simple that even an analphabet can learn it fast. They used the base 10,
which is the easiest to learn and use. Don’t need a diploma to multiply or
divide by 10. For temperature, they chose as limits the freezing point as zero
and boiling point as 100. Again, base 10 and the range humans deal most of
the time. No need to do sophisticated calculations to understand it.
Why do I tell you this? Because every time I talk to an
economist (except Austrian) about a new monetary standard he comes up with
complicated formulas of triple integral of a basket of 100 commodities,
weight adjusted, etc. No, I don’t exaggerate much. I am also often asked
after presentations why gold and not oil or water? The Ph.D.proudly
remarks to me that they are much more valuable and useful than gold. I
usually tell them that if I brought a 10 year-old analphabet from the streets
of Cairo or Los Angeles he would have no problem answering this question
without hesitation. After thousands of years of trial and error, gold has
always been preferred. Gold is almost perfect for money. Even during the last
100 years of fiat paper currency, gold remained in the background and in
crisis brought back into the limelight with the speed of light (2008
financial crisis).
Some economists argue that the unit of account is the most insignificant
aspect of money. Well I don’t think so. Try to go to a store not knowing how
much a kilogram or, for the Americans, a pound is from place to place and
from one day to another. But that is what we have now with fiat currency and
more recently electronic currency.
For thousands of years coin clipping was a crime punished by death. Today
under a very academic name of inflation, it is a very high monetary policy
instrument in the management of the economy and the international monetary
system. Recently it was replaced by a “higher level language” of QE
(Quantitative Easing). I am surprised they didn’t call it Quantum
Electrodynamic Easing (QEDE). Sorry, professor Feynman, for degrading your
theory (which by the way I understand better than professor’s Bernanke’s QE).
Also, for those of you who didn’t study economics and wasted your time in
medicine or engineering, in plain and common English, inflation is coin
clipping and, for thousands of years, equivalent to stealing, often
punishable by death.
Recently there has been talk of an international monetary standard based
on a formula called P-gold, and another based on a basket of fiat currencies
called the SDRs (Special Drawing Rights). Jim Grant, publisher of the Grant's
Interest Rate Observer, says about it that, “… Gold is instantly and
optically recognizable as money. SDRs, like a bad joke, have to be
explained.” I couldn’t say it better. P-gold (Paper-gold) is linked to
Friedman's k-percent rule. I am not going to explain k because then I would
have to explain GDP, and then on and on.
Let me tell you the story of the gold prospector who met St. Peter at the
Pearly Gates. When told his occupation, St. Peter said, ‘Oh, I’m really
sorry. You seem to meet all the tests to get into Heaven. But we’ve got a
terrible problem. See that pen over there? That’s where we keep the gold
prospectors waiting to get into Heaven. And it’s filled – we haven’t got room
for even one more.’ The gold prospector thought for a minute and said, ‘Would
you mind if I just said four words to those folks?’ ‘I can’t see any harm in
that,’ said St. Peter. So the old-timer cupped his hands and yelled out,
‘Gold discovered in Hell!’ Immediately, the gold prospectors wrenched the
lock off the door of the pen and out they flew, flapping their wings as hard
as they could for the lower regions. ‘You know, that’s a pretty good trick,’
St. Peter said. ‘Move in. The place is yours. You’ve got plenty of room.’ The
old fellow scratched his head and said, ‘No. If you don’t mind, I think I’ll
go along with the rest of them. There may be some truth to that rumor after
all.’
This story from Ben Graham that Warren Buffett likes to tell is actually
about an oil prospector, but it’s just as fitting with a gold prospector. Why
am I telling you this story? Because inflation (coin clipping) has the same
effect on humans. Comes a time when even those who created the rumor
(inflation) end up believing in it and its beneficial effects. I have found
myself so very often with wealth managers, investment advisors or economists
who would mistake price rises due to changes in supply and demand with
inflation, which is a devaluation of the medium of exchange (dollar, euro,
etc.). Moreover, devaluation of the medium of exchange lets the State create
confusion, to the point that people no longer know how to protect themselves,
even those supposed to have created and studied it. After having created
inflation, they end up believing themselves in it and its nominal imaginary
benefits, like the gold prospector.
Recently, at the famous world central banks’ annual gathering in Jackson
Hole, USA, according to the Wall Street Journal, even “Central bankers aren’t sure
they understand how inflation works anymore”. As if they ever did.
Gold, while being so simple to understand, has the best physical
characteristics to be money as it has been recognized for thousands of years
by millions of people from every culture, level of education and on every
continent. No Ph.D. in economics or physics necessary. As the president of
France, General Charles de Gaulle, said it best, “The time has come to
establish the international monetary system on an unquestionable basis that
does not bear the stamp of any country in particular. On what basis? Truly,
it is hard to imagine that it could be any other standard than gold.
Yes, gold whose nature does not alter, which may be formed equally
into lingots, bars or coins; which has no nationality and which has,
eternally and universally, been regarded as the inalterable currency par
excellence.”
Robert Mundell, Nobel Prize of economics, said, “Gold has fulfilled the
role of a de facto universal money, a standard of value, the link between the
past and the future and the cement linking remote parts of the human race to
one another.” Alan Greenspan, former chairman of the Fed, said, “Gold still
represents the ultimate form of payment in the world. Fiat money, in
extremis, is accepted by nobody. Gold is always accepted.”
Gold is not perfect money but it is, in my mind, the closest to perfection
and simplicity you can get to. Many examples are given of the stability (even
if not perfect) of gold as a standard of medium of exchange, but I will just
mention one I like, because I have a simple brain, and that is of bread
priced in gold 2,500 years ago and today.
 
In conclusion, I would like to show you the evolution of the gold price in
nominal British pounds since 1260 and then in the next chart since 1560
versus inflation and inflation-adjusted price as beautifully prepared by Nick
Laird, of Sharelynx.com,
based on Roy Jastram’s book, The Golden Constant. What do you think happened in 1900?
Are we possibly in yo-yo economic times? Doesn’t inflation give you
dizziness? It certainly gives me. I would certainly feel better after some
acrobatic flying than I feel after QE to infinity.
So, why do I like a gold standard? Because it’s simple, logical and it
works.That’s why.
Dow Jones Industrial Average priced in Gold
The gold standard; no Ph.D.required
Buy Gold with GoldBroker
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