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What's up with gold?

September 09, 2011|By GEORGE MICHAEL

What’s up with gold? Mostly, the price. Right now, a troy ounce of gold is worth more than $1,800. Just two years ago, it was $950, a spike of nearly 90 percent.

Gold has always been a store of value in uncertain times. And we definitely are in uncertain times. Because of its rarity, gold holds its value whereas a paper money system is subject to inflation and depreciation.  

Gold measures the real value of goods. In real terms, gasoline prices are lower now than in the 1920s. A $5 gold piece, which contains just less than a quarter-ounce of gold, would have purchased 33 gallons of gasoline in 1925.  Today, that quarter-ounce of gold would purchase about 130 gallons of gas, almost four times as much. It’s not that the price of gas has risen. Rather, it is that the value of the dollar has declined — by a whole lot. Gold removes the mask of the monetary inflation by our government.

The United States government still holds more than 390 million troy ounces of gold, some at the depository at Fort Knox, but most in the underground vault of the Federal Reserve Bank in New York City. At current market value, it is worth more than $700 billion. This accounts for about 6 percent of all the gold mined in history. Many nations still have large gold reserves in their vaults, though the U.S. has more than twice as much as anybody else.

John Maynard Keynes, the liberal icon of the Great Depression and confidant of President Roosevelt, referred to gold as a “barbarous relic.” He and other New Dealers wanted to greatly expand currency and credit. Gold stood as a barrier to this agenda since it demanded some accountability. If citizens suspected depreciated currency, there would be a run on our gold reserves.   

Gold did not fail as money. What failed was the fixed exchange rate of gold to the dollar of $20.67 per ounce. As the Federal Reserve expanded money and credit, gold’s value went higher than $20 per ounce. Now, the gold in the coins was worth more than the coin itself. Since a “Twenty Dollar” gold piece was worth more than $20, it would soon disappear from circulation.  

The solution? FDR made it illegal for Americans to take gold out of their banks or even own gold. All gold was to be turned in to the government. The legal tender clause, printed right on the paper money at the time said, “is redeemable in lawful money.” Our government broke its promise to pay in gold. It violated the contract with the American people that had been in place since 1792.

FDR also changed the value of the dollar to $35 per ounce and later to $38.50, a 41 percent devaluation of our currency. It had been $20.67 for the previous 141 years. But while Americans could not hold gold, foreign banks were allowed to receive gold in payment for their goods or in exchange for dollars. The devaluation was needed to keep foreigners from draining our gold reserves to zero.

A similar fate befell our silver coins and silver paper certificates three decades later. During the 1960s, the U.S., under President Johnson and his “guns and butter” program, again inflated the currency with large federal spending. The predictable results were a declining dollar and rising gold and silver prices.  Silver was removed from our coins in 1965 and the “sandwich” coins appeared.  These coins had a copper core but with a zinc outer layer to give the appearance of silver.  

Finally, President Nixon ended the gold standard once and for all in 1971. In terms of international trade, we have been off the gold standard for only 40 years.

Gold’s big negative as money has always been its density. It’s not bad for small purchases, but larger transactions make gold inconvenient to carry around. That is where paper money comes in. Paper can be used as substitute for gold as long as the holder of the paper can redeem it for gold at their choosing. For Americans, that option expired 78 years ago.

Gold stands in testimony to the mismanagement of governments around the world. The more the dollar, or any currency, is devalued by government action, the more brightly gold shines as evidence of the depravity of a bankrupt social and political policy. Gold is sending a message right now loud and clear: Your currency, both dollars and Euros, are in danger of further debasement and perhaps collapse.  

It is not clear if such a collapse is imminent. There is time to turn things around — if we have the political will to do so. The question is: Do we have the fortitude to get our governmental spending under control? If not, then watch gold continue to shine.

George Michael, who lives in Williamsport, is a former principal of Grace Academy. His email address is

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