Overconfidence in Paper Currencies

Yesterday, the Dow shot up more than 200 points, for no apparent reason. Gold backed down below $1,600 for a very obvious reason.

Nothing goes up in a straight line, not even gold. After such stunning gains over the last few weeks, the stuff that Ben Bernanke does not regard as money, gold, needed a rest.

But if gold isn’t real money, what is?

Pieces of paper that a private bank and the US Treasury say is real money?

“This,” they insist, “is a dollar. You shall use it as money.”


“Because we say so.”

“Because we say so” is good enough for most people most of the time. But there are times when it’s not. Such as when the financial authorities are up to no good. Then, smart people turn back to gold.

There’s no magic to money. It works as a medium of exchange and a store of value when, and only when, its quantity is strictly controlled. That’s what’s nice about gold. Its quantity is controlled by nature herself. People have been trying to get around it for centuries. Alchemists labored long and hard to turn base metal into gold. None succeeded.

The only way you can increase the supply of gold is by mining it…which is expensive and time consuming. Of course, technology helps. But technology tends to advance with the economy itself. So when the economy is growing at 1% a year…the quantity of gold tends to increase at about a 1% rate too.

What a miracle! Prices remain stable because the quantity of gold increases at almost the exact rate necessary. This is why you can reach about as far back in history as you want, you’ll find that gold was just about as valuable a thousand years ago as it is now.

In the 19th century, paper money was backed by gold. People had learned their lessons in the panics and bubbles of the 18th century. They didn’t trust pure paper currencies. Lincoln fiddled the dollar during the War Between the States…inflating the currency to pay for his killing campaigns – but it was put right soon after. Apart from that, for the whole period…from the beginning of the 19th century to the creation of the Federal Reserve in 1913…the dollar was stable and reliable; people trusted it because there was real money – gold – standing behind it.

But now, the chief of America’s central bank says that gold is not money; the dollar is supposed to be money now. And now, the feds don’t worry too much about how many dollars they issue. Their primary goal is no longer preserving the purchasing power of the buck – it’s lost 95% of its value since the Fed was set up. Now, they’re more concerned with the stock market, with the housing market, with consumer spending, and with the next election.

So, what do you think, dear reader? Can you have confidence in these men? Do they know what they are doing? Did they see the crisis coming? Did they understand what was happening? Have their efforts to fix it been successful so far? Is protecting the value of your money – and the financial health of the nation – their number one goal?

Five years from now, which do you think will be worth more? The dollar without gold behind it? Or gold, without the dollar?

The dollar, you say?

Well, good luck to you!

Meanwhile, a few people in Congress are trying to protect the dollar and America’s credit. The more the US government spends, they reason, the more dollars it will have to borrow…and print. Many of these debt-fighters are determined to hold the line against a debt ceiling increase. Others are hoping to cut a deal that will reduce America’s borrowing needs. And still others just want to cause trouble for the Obama administration.

Here’s the latest:

WASHINGTON (AP) – Defying a veto threat, the Republican-controlled House voted Tuesday night to slice federal spending by $6 trillion and require a constitutional balanced budget amendment to be sent to the states in exchange for averting a threatened Aug. 2 government default.

“Let me be clear. This is the compromise. This is the best plan out there,” said Rep. Jim Jordan, R-Ohio, head of a conservative group inside the House known as the Republican Study Committee.

The legislation, dubbed “Cut, Cap and Balance” by supporters and backed by tea party activists, would make an estimated $111 billion in immediate reductions and ensure that overall spending declined in the future in relation to the overall size of the economy.

But watch out. The Wall Street Journal warns that cutting spending suddenly could backfire. Don’t forget, about one of two voters is a zombie:

Republicans who have refused to compromise with President Barack Obama to avoid a US debt default are heeding the anti-tax wishes of their conservative base but are also risking isolation from many independent voters as public opinion shifts in favor of getting a deal done, a new Wall Street Journal/NBC News poll finds.

The poll of 1,000 adults, taken July 14-17, found a dramatic shift in attitudes toward the debt-ceiling debate as the public tunes in to the issue that is consuming Washington. A plurality of Americans – 38% – said the debt ceiling should be raised, against 31% who said it shouldn’t…

How this brings back memories! We don’t like to talk about it. It is embarrassing. But as a young man we drank from the cup of politics…and felt the heady brew go to our head. And then it made us sick!

Just out of college, we got a job helping a friend on Capitol Hill. He worked for a group called the National Taxpayers Union. NTU. Frequently calumnied as NUT.

Long before the Tea Party, our goal was to reduce the burden of government, to move the nation back towards the liberty imagined by the founding fathers, and to reduce the power of the jerks in Congress.

It was a shoestring operation with no real hope of success. We didn’t know it then, but the great tide of history was moving against us. We could swim as hard as we wanted; we still wouldn’t get anywhere.

At first, we thought we might get big support from very rich business people – who had a lot to gain by cutting Washington down to size. We recall our first meeting with one of these people – Jack Eckard of Eckard drugstores.

A nice man with an earnest desire to make the world a better place, he came to our humble office on East Capitol Street. ‘Humble’ does not do it justice. It was a dump…with peeling wall paper, no air-conditioning, raggy carpeting, and mice. We paid $250 a month in rent.

On our desks, we had the essential supplies of the time – a bag of cookies, a pile of letters, an electric typewriter, a bottle of White-out, and a roll of toilet paper.

“I see you have everything you need,” he said in good humor.

“We could also use $100,000 of your money,” we wanted to reply…but, we were somewhat in awe. He was the most successful man we had ever met. We didn’t know how you went about ‘fund raising,’ so we just hoped to make a good impression.

We rolled out our best chair…a tall-backed office chair on casters, with a cracked naugahyde seat. It was a chair that we had found in the alley behind the office.

“Here, sit here,” we suggested.

Mr. Eckard took the seat, sat down, and leaned back.

In a flash, we knew exactly what was going to happen. But there was nothing we could do to stop it. Mr. Eckard had passed the point of no-return before we could react. He leaned over. The chair’s wheels rolled forward, while the seat tumbled backwards. Poor Mr. Eckard hit his head on another desk on his way down. He was never the same. At least, not to us.

But what gives rise to these memories is mention of a balanced budget amendment. That is exactly the measure we pushed 35 years ago. The idea came to us from a Maryland State Senator, Jim Clark, a descendant of Johns Hopkins.

Jim had been watching the US budget for years. He looked ahead. He knew what was coming. And he came up with a way to prevent the US from going broke.

“Congress will never do this on its own,” he explained. “They like spending other peoples’ money. But state legislators typically have to balance their own budgets and they don’t see any reason Washington should not be required to do the same thing.”

Besides, there were fewer zombies back then to stop us.

The Committee to Balance the Budget was formed. It worked, state by state, getting state legislatures to approve an amendment to the constitution forbidding deficits. How the world might be different if it had been enacted!

We left Washington and political activism for the world of publishing in 1980. At that point, the amendment was very close to passage. But then, in came Ronald Reagan and people stopped worrying about deficits. “Deficits don’t matter,” said Dick Cheney.

If the Republicans weren’t going to worry about debt, the Democrats certainly weren’t going to sweat it either. Budgets got bigger and bigger. Deficits soared under Reagan, declined under Clinton, and then soared again under Bush and Obama.

And here we are, deeper in debt than Jim Clark – who died a few years ago – ever imagined. And here’s the Balanced Budget Amendment…back again!


Bill Bonner,
for The Daily Reckoning