Inflationomics

Letter from a Reader

A reader recently posed an interesting question:

“What is the point of having our dollar backed by something physical such as gold? Ron Paul always talks about this.

“The Middle East sells us oil and we use it.... it is a wasting asset. 

“China sells us crap... we use it and after a year.... it is a wasting asset.

“I don’t understand why we would need to buy their oil or their goods that are wasting assets, and reward them with assets that appreciate in value.

“I don’t understand why we would need to buy their oil or their goods that are wasting assets, and reward them will assets that appreciate in value.

“Doesn’t the playing field seem more level when we buy wasting assets (products, or oil) with wasting assets (our currency which devalues)?”

I responded:

“Good question!

“The reason we want to have our dollar backed by gold is that gold is real money and our paper dollars are merely a money substitute.  Gold is money because it tends to last longer and is relatively rare and therefore maintains its value longer than most other things and yet it is plentiful enough for everyone to have some (I believe there is one ounce of gold for each person on this planet).  Furthermore, gold is difficult to destroy and most of the gold ever dug out of the ground is still around for use as money today. Because it lasts so long, because it is divisible, because it can’t be counterfeited, and because it is relatively rare, it has maintained its value as money (and purchasing power) for thousands of years and is still the money of choice by central banks and individuals around the world.  By using something that maintains its value for a long time (is relatively stable), it becomes possible to transfer wealth from one generation to the next.  It also makes it possible to plan for the long term.

“If you had a money that changed in value on a daily basis, it would be very difficult to plan for the long term. Fruit and lumber farming, mining, building skyscrapers and highways and many manufacturing jobs (to name a few things) would be impossible to plan (and implement) without a money that holds its value for a number of years. In fact, because the U.S. dollar has been losing its value over the years, much capital has left the United States in search of a country with a safer and more durable/stable money. (And it has taken lots of manufacturing [higher paying] jobs with it.)  In time, when the U.S. dollar becomes worthless, Americans will be living from hand-to-mouth and begging for food, etc. because no one will accept the U.S. dollar for the goods Americans will want to buy. See what has happened in Zimbabwe, where the government destroyed the local currency (Zimbabwe dollars) through inflation. In short, we must give something of value to get something of value (oil that can be used to go places and make things, for example) and paper money is just a wasting substitute for the real thing; i.e., gold.

“As for the notion that oil and the “crap” China sells us are wasting assets, it is true that we consume them; however, they do improve our standards of living. Why else would we want them? Of course, the same thing could be said about food; i.e., that it wastes away, in fact, it quite literally turns to waste after we consume it, but it is nevertheless vital to our well-being and standard of living. You wouldn’t want to short-change someone who was willing to sell you food by giving them a wasting asset (the U.S. dollar) would you? What if he didn’t want to give you any more food in exchange for your wasting dollars? What if he insisted on receiving something of value for his food? Imagine what our lives would be like if the Middle East refused to exchange their oil for our paper dollars…our mobility and therefore our productivity would be severely limited. How much longer would it take you to get to work on a horse than in a car? I guess we are fortunate that China and the Middle East are willing to trade us something tangible that we want for the paper dollars we currently offer that aren’t backed by anything of value.

“Lastly, there is the question of which came first, the wasting assets (as you call them), or the wasting money? Which begets which? Are the Chinese only selling us crap because we are giving them crap, or are we giving them crap because they are sending us crap? When I was a kid, many things were made in Japan (there was even a song that referred to the phenomenon—Indian Reservation by Paul Revere and the Raiders). And that crap fell apart by the time I got it home. But 10 years later, Japan made some of the best stereo equipment around and another 10 years later, they made some of the best automobiles around. Yes, it takes time to become the best at something, but it also takes saving and investing in the things that make us more productive (capital). As we consume our capital in the United States, our standard of living and productivity decline. But then why save and invest in the long term if the money isn’t going to buy as much tomorrow as it does today? Again, we need a sound money to improve our productivity and invest in the long term if we hope to stay competitive in a global economy.

Robert Jackson Smith

For comments, suggestions, or replies to the author, please e-mail