Inflationomics

When the Convenience of Money isn’t Worth It

When a person wants something, food for example, he must give something of value to the seller of the food to buy the food, or else the seller won’t sell it.  Money was invented to facilitate this trade.  Money is simply a medium of exchange making it possible for people to trade their goods and services for other goods and services conveniently.  The best money, of course, is something that holds its value (relatively speaking), is easily divisible, and is accepted by as many people as possible.  Traditionally this has been gold and silver.  More recently, pieces of paper have been used as a substitute for the best money, again, for convenience.  Unfortunately, pieces of paper can be printed, using ever larger numbers on them, without any backing or any relation to the value that is given in exchange for that paper.  The recipients must have faith that the next person will accept that paper when it’s time to pass it along and buy something else with it.  And when people realize that the paper they are receiving for their goods won’t hold its value, they will discount its value, unload it more quickly, and eventually refuse to accept it.

This will make the people who issue that paper currency very angry.  At that point, either the paper currency issuers will have to become forceful in requiring people to “accept” their depreciating currency, or they will have to reform their ways and back their paper currency with something of value.  Historically, force has been tried first and then, when that failed, the latter was tried, sometimes two or three times.  Would it be possible to back the U.S. dollar with something of value today?

Let’s assume the U.S. Treasury attempts to back the U.S. dollar with gold.  In the United States, the U.S. Treasury supposedly holds 147.3 million ounces of gold, while the U.S. government debt is roughly $16,444,539,782,187.78 (as of January 15, 2013).  (This figure doesn’t count future commitments like Social Security and Medicare, Obamacare, or future bank and corporate bailouts.)  When we divide the total debt by the number of ounces of gold held by the U.S. Treasury, we find that each ounce of gold would have to be worth roughly $111,639.78 for the total debt to be backed by the Treasury’s existing gold (and that doesn’t count the currency in circulation!).  That’s a far cry from the current market price of $1,667.30.

If we look at the flip side of this coin, we see that the U.S. dollar is grossly over-valued when compared with the amount of backing the U.S. Treasury has behind it.  This means that if the U.S.-dollar holders out there were to lose faith in the value of the U.S. dollar and demand something of value in exchange for their goods (and existing debts), the U.S. Treasury would only be able to cough up about 1.5% of what it owes.  That’s quite a discount for the convenience of using the U.S. paper dollar as a medium of exchange!

Gold (and silver), on the other hand, requires no discount.  And it has historically been the money of free choice.  Why?  Because it is:

How much longer will it be convenient to use a substitute instead of the real thing?

Robert Jackson Smith

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