A Goldbug's Life

The Daily Reckoning PRESENTS: The great “gold vs. paper money” debate continues…in this DR Classique, first published in December of 2004, Bill Bonner takes a look at the long history of the yellow metal and tells us why our loyalty should lie with this steadfast currency…

by Bill Bonner

Mr. James Surowiecki wrote a wise and moronic piece on gold in the New Yorker. His wisdom is centered on the insight that neither gold, nor paper money are true wealth, but only relative measures, subject to adjustment.

“Gold or not, we’re always just running on air,” he wrote. “You can’t be rich unless everyone agrees you’re rich.”

In other words, there is no law that guarantees gold at $450 an ounce. It might just as well be priced at $266 an ounce, as it was when George W. Bush took office for the first time. That was just four years ago. Since then, a man who counted his wealth in Kruggerands has become 70% richer.

But gold wasn’t born yesterday…or four years ago. Mr. Surowiecki noticed that the metal has a past, just as it has a present. He turned his head around and looked back a quarter of a century. The yellow metal was not a great way to preserve wealth during that period, he notes. As a result, he sees no difference between a paper dollar and a gold doubloon, or between a bull market in gold and a bubble in technology shares.

“In the end, our trust in gold is no different from our trust in a piece of paper with ‘one dollar’ written on it,” he believes. And when you buy gold, “you’re buying into a collective hallucination – exactly what those dot-com investors did in the late nineties.”

Pity he did not bother to look back a little further. This is, of course, the moronic part. While Mr. Surowiecki has looked at a bit of gold’s past, he has not seen enough of it. Both gold and paper dollars have history, but gold has far more of it. Both gold and dollars have a future too. But, and this is the important part, gold is likely to have more of that too.

The expression, “as rich as Croesus,” is of ancient origin. The king of historic Lydia is remembered, even today, for his great wealth. Croesus was not rich because he had stacks of dollar bills. Instead, he measured his richness in gold. No one says “as poor as Croesus,” do they? We have also heard the expression, “not worth a continental,” referring to America’s Revolutionary-era paper money. We have never heard the expression, “not worth a Kruggerand.”

Likewise, when Jesus said, “Render unto Caesar that which is Caesar’s,” he referred to a denarius, a coin of gold or silver, not a paper currency. The coin had Caesar’s image on it, just as today’s American money has pictures of Lincoln, Washington or Jackson on them. Dead presidents were golden back then. Even today, a gold denarius is still about at least as valuable as it was then. America’s dead presidents, whose images on printed in green ink on special paper, lose 2% to 5% of their purchasing power every year. What do you think they will be worth 2,000 years from now?

A few years before Jesus, Crassus, who had made his fortune on real estate speculation in Rome, decided to put together an army to hustle the east. Alas, such projects almost always meet with disaster; Crassus’s was no exception. He was captured by the Parthians and was put to death in an unusually cruel and costly way. But he did not end his days with paper money stuffed down his throat…and certainly not dollar bills. No, they poured molten gold down his gullet – or so the story has it.

Gold has a long history. And during its history, many was the time that humans were tempted to replace it with other forms of money – which they believed would be more convenient, more modern, and most importantly, more accommodating. After all, gold is hard to find and hard to bring up out of the earth. As a result, its quantity is always limited – by nature herself. Paper money, by contrast, offered irresistible possibilities. The list of bright paper rivals is long and colorful. You will find hundreds of examples, from assignats to zlotys. But the story of paper money is short and always sad. Since the invention of the printing press, a new paper dollar or franc can be brought out at negligible cost. Nor does it cost much to increase the money supply by a factor of 10 or 100 – simply add zeros. It may seem obvious, but adding zeros does not add value.

Still, the attraction of being able to get something for nothing has been too great to resist. That is what makes goldbugs so irritating: They are always pointing it out. Even worse, they seem to enjoy saying that “there ain’t no such thing as a free lunch,” which comes as a big disappointment to most people.

Once people were able to create “money” at virtually no expense, no one ever resisted doing it to excess. No paper currency has ever held its value for very long. Most are ruined within a few years. Some take longer. Even the world’s two most successful paper currencies – the American dollar and the British pound – have each lost more than 95% of their value in the last century, with is especially remarkable since both were linked by law and custom to gold for most of those years. For the dollar, the final link to real money was not cut until August 15, 1971. That was when the world found out what the greenback was really worth – nothing much.

Whatever promises the Feds made with regard to the dollar, they could unmake whenever they wanted.

Some paper currencies are destroyed almost absent-mindedly. Others are ruined intentionally.

But all go away eventually. By contrast, every gold coin (and silver, for that matter) that was ever struck is still valuable today – and the coins almost always have more value than when they first came out of the mint.


Bill Bonner
The Daily Reckoning
December 8, 2006

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt – now available in paperback – just click on the link below:

The Most Feared Book in Washington!

It’s over.

The words came back to us yesterday. We were meeting with a man who advises wealthy Indians on what to do with their money.

“It’s all changed here…especially in the last five years. I mean the attitude…everyone is so ambitious. There is no social stability…because everyone is trying so hard to move up.

“You know…one thing that is nice about India is that a middle-class family can get a lot of household help, because there are so many people at the bottom willing to work for nothing. But we may be the last generation to enjoy that advantage. Those people that you see sleeping on the sidewalks, for example. They are probably not going to do that forever. They have jobs. They are probably from the country…they’ve come into town recently because this is where the opportunity is.

“There really aren’t any unemployed people. If you’re unemployed in Bombay, you starve to death. No, everyone finds work. And these people come from the country…and they get little jobs. And they sleep on the pavement and look for other opportunities. And then they get jobs here and there… maybe they’ll learn to drive a car and become a driver for a middle class family.

“But here’s the big change. He won’t stop there. He’ll bring his family into the city. And he’ll want his children to learn English. And the next thing you know they’ll be going to some technical college…or even going to the United States or England for their educations. And then…well, it’s a different world.”

Yes…very different. Because he’ll be competing with engineers, doctors, lawyers, and patent examiners from all over the world.

But wait…as soon as they enter this international professional class, their wages rise. One thing we’ve learned – and we are already practically an expert; we’ve been here 18 hours – is that, at the top, there isn’t that much difference between prices here and prices in the West. A financial analyst here can cost as much as one in the United States. A hotel room at a top hotel is about the same as in London. Even office space is not that much different. And property generally – can be more expensive than in downtown Baltimore.

The big difference is this huge pool of striving, groaning, sweating labor. It keeps coming in from the country – where there are said to be some 750 million people in the countryside…whose work is gradually being made superfluous by multinationals moving into the market and globalized commerce. They sleep on pavements…in railway stations…in mean tenements with a dozen to a room….in crowded shanty towns in the slums on the fringes of the big city. Where will they go? What will they do? Will they not continue to rub down the American working stiff’s salary? Will they not continue coming into town…and scratching their way into the middle classes? Will they not push and shove their way into direct competition with the West…and maybe even surpass it?


More news:


Byron King, reporting from Pittsburgh…

“…But in the late 17th and early 18th centuries, these lands had been claimed in the names of respective regents by both the recently arrived French and by the more recently arrived British…”

For the rest of this story, see the latest issue of Whiskey & Gunpowder


And more views:

*** Ooh la la…economist Robert Shiller studied housing prices back to 1890. They follow certain patterns, he noted…just like everything else. When they depart too far from the long-term trend – roughly the same trend as GDP growth – they regress to the mean thereafter.

Well, today they are farther from the long-term trend line than ever before. They have a lot of regressing to do, in other words. If you project pass corrections into the future you get a 43.5% fall in housing prices coming…which will take until 2011 to accomplish.

*** Remember ‘Freedom Fries,’ dear reader? Who can recall them without embarrassment? Americans were so outraged when the French refused to go along with the attack on Iraq that they practically declared war on them. The French were traitors, said some pundits. The French were cowards, said others. The French were worse than the terrorists, said still others. Fantasist Thomas L. Friedman declared in one of his lame columns that we were actually ‘at war’ with France!

To their credit, the French thought the war would end in a messy disaster and didn’t mind saying so.

Here at The Daily Reckoning, we guessed that the French were probably right. And now we find that a former U.S. president – Jimmy Carter – agrees. So does a Marine Corps intelligence report; the United States is ‘no longer capable’ of defeating the insurgents militarily, says the report. And along comes the new Secretary of Defense…and he too says the whole thing has become a big mess.

And now the papers are full of explanations for what went wrong. Two popular lines are being proposed:

1.)            The Democrats: war was a good idea, but was mismanaged by the White House

2.)            The Republicans: the war was a good idea…we did the best we could, but those Iraqis just can’t get their act together.

Well, we offer an irritating third alternative: the French were right. The war was a mistake from the get-go. The gods of war were never on our side; they rarely favor the attacker.

The Daily Reckoning