Gold and the Gold Standard Gold and the Gold Standard Nathan Lewis - - PowerPoint PPT Presentation

Gold and the Gold Standard Gold and the Gold Standard

Nathan Lewis Principal, Kiku Capital Management LLC Author, Gold: the Once and Future Money (2007) www.newworldeconomics.com

Why have people used gold as money for 5000+ years? Why have people used gold as money for 5000+ years?

• The most desirable aspect of “money” is that its

value is stable.

• Gold’s value is stable.
• Thus gold makes the best money.
• Currencies whose values are pegged to gold are

stable in value.

• That’s it!

People have understood this for hundreds (thousands!) of years… People have understood this for hundreds (thousands!) of years…

“Coinage is imprinted gold or silver, by which the prices of things bought and sold are reckoned … It is therefore a measure of values. A measure, however, must always preserve a fixed and constant standard. Otherwise, public

• rder is necessarily disturbed, with buyers and sellers

being cheated in many ways, just as if the yard, bushel, or pound did not maintain an invariable magnitude” Nicholas Copernicus, “Treatise on Debasement,” 1517

“The Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod

• f value, and cannot be efficient -- perhaps cannot survive
• - without one.”

John Maynard Keynes, “Social Consequences of Changes in the Value of Money,” 1923

“The first chief function of money is to supply commodities with the material for the expression

• f their values, or to represent their values as

magnitudes of the same denomination, qualitatively equal, and qualitatively comparable. It thus serves as a universal measure of value. And

• nly by virtue of this function does gold, the

equivalent commodity par excellence, become money.” Karl Marx, Capital, 1867

“The one essential quality that is needed in the article which we use as a basis for exchanging all

• ther articles is fixity of value. The race has

instinctively always sought for the one article in the world which most resembles the North Star among the other stars in the heavens, and used it as ‘money’ -- the article that changes least in value as the North Star is the star which changes its position least in the heavens, and what the North Star is among stars the article people elect as ‘money’ is among articles.” Andrew Carnegie, “The A B C of Money,” 1891

What a Gold Standard is NOT What a Gold Standard is NOT

• does NOT depend on the quantity of gold
• available. (It is a value link not a quantity link.)
• does NOT “balance current accounts”.
• does NOT prevent government budget deficits.
• does NOT disallow “fractional reserve banking.”
• does NOT cause panics, crashes, etc. No economic

problem in history was caused by stable money.

• A gold standard produces money that is stable in
• value. That’s it!

What happens when money is unstable? What happens when money is unstable?

• If money falls in value, you get a “Type A

monetary distortion,” (“inflation”).

• If money rises in value, you get a “Type B

monetary distortion,” (“deflation”).

• It really is that simple.

Japan: Yen per Gold oz. 1955-2005

with moving averages

10000 100000 1000000 50 55 60 65 70 75 80 85 90 95 00 05

JPY/gold oz.

20yr ma inflation 10yr ma disinflation inflation disinflation reflation gold standard deflation

OK, “Show me the money”! OK, “Show me the money”!

• Britain had a low quality currency (think Mexican

peso) until 1698. Then, the pound was pegged to gold (and silver). The pound maintained this peg to gold for 233 years (with some lapses), until 1931.

• The United States Constitution of 1789 mandated

a gold/silver standard. This was maintained (with lapses) for 182 years, until 1971.

• What were the results?

Britain: Yield on 2.5% Consol Bond 1700-2005 2 4 6 8 10 12 14 16 18

1700 1720 1740 1760 1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

percent

US: Annual Average Yield on 10yr Treasury Bond 1800-2005 2 4 6 8 10 12 14 16

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

percent

US: Dollars per Gold oz. 1800-2008

10 100 1000 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

USD per gold oz.

Value of $1000 in Gold oz. 1700-2008

1 10 100 1700 1750 1800 1850 1900 1950 2000

USD per gold oz.

US: Dollars per Gold oz. and CRB Spot Commodity Index 1940-1972

20 40 60 80 100 120 140 160 180 200 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 CRB Spot 10 20 30 40 50 60 70 USD/Gold oz.

CRB Index USD/Gold

US: Dollars per Gold oz. and CRB Spot Commodity Index 1965-2008

75 175 275 375 475 575 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 CRB Spot 200 400 600 800 1,000 1,200 USD/Gold oz.

CRB Index USD/Gold

Time to end the floating currency experiment? Time to end the floating currency experiment?

“The most important thing about money is to maintain its stability … You have to choose between trusting the natural stability of gold and the honesty and intelligence

• f members of the government. With due respect

for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”

• - George Bernard Shaw, The Intelligent Woman’s

Guide to Socialism and Capitalism, 1928.

Gold as a portfolio asset Gold as a portfolio asset

“Gold is money. That’s it.” -- J.P. Morgan

• It is stable in value.
• It is a universal form of “cash.”
• You don’t really “make money” with gold.

But, you don’t lose it (via inflation) either.

• That’s it!

Thank You Thank You

Nathan Lewis Kiku Capital Management LLC Author, Gold: the Once and Future Money (2007)