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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary. Each article or essay is selected on the basis of its long-term relevance for understanding the role gold plays in the individual's portfolio, the overall political economy, or both.
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Gold is Shining Again
by Hans Senholz
It has been awhile since we checked-in with the renowned economist, Dr. Hans Senholz, on the subject of gold. What he thinks about gold now is what he has thought about it for a very long time, but nevertheless, there are some new twists and nuances worth noting. At the same time, for those new to the gold arena, the short essay below offers some very good grounding. Probably most salient is his thesis toward the end of the piece that the weakness in the dollar we are seeing now could be the beginnings of a 'crisis in confidence' which could 'precipitate the end of the dollar standard.' The primary portfolio defense against such an event and all it portends, as we have stated in many different ways on this page, is a strong diversification into gold. Dr. Senholz has written another article which dovetails nicely into this analysis titled "The Perils of Deflation." We will publish that here next week and move this piece to our Gilded Opinion page for future reference. Both essays are reprinted with Dr. Senholz' kind permission. --MK
It is difficult to argue with gold. To men everywhere, gold is a desirable economic object. It can be used for the manufacture of jewelry and ornaments. It is a corrosion-resistant element, the most malleable and ductile metal, ideal for plated coating on a wide variety of electrical and mechanical products. It is a good thermal and electrical conductor. It is durable and storable, can be easily hidden from partakers and predators, and readily shipped to other places. Gold is very marketable. In fact, gold may be the most marketable commodity around the globe.
The value of gold is determined
by the same considerations as that of all other economic goods.
Individuals give it value according to the enjoyment and satisfaction
they expect to get from its possession. Economists explain this
fact in terms of utility and scarcity. Value rises or falls in
accordance with the utility which people ascribe to an object
and the scarcity they perceive. Like that of any other economic
good, the value of gold changes according to changing perceptions
and situations. This must be emphasized because there are many
goldphiles who wax eloquent about the eternal, immovable value
of gold. They obviously have never experienced, and cannot think
of, a situation in which basic essentials that sustain or safeguard
human life do soar in value while that of gold in any form plummets.
In fact, in desperate situations people may prefer a pound
of bread to an ounce of gold, essential clothing and shelter to
a pound of gold and, when their lives are at risk, their lives
to a ton of gold.
The supply of gold is plentiful. For thousands of years it has been mined and accumulated; very little is consumed or lost. Existing supplies in the form of coins, jewelry, decoration, and plated coating are greater by far than current production. No matter how much gold is produced in South Africa or Russia, current output is rather negligible when compared to the quantities in individual possession throughout the world. This characteristic, in which it differs from all other metals, reduces the risk of sudden changes in quantity and, therefore, sudden changes in its value. Even silver, which has many characteristics similar to those of gold, is subject to great changes in production and consumption that may affect its value.
The special characteristics which man ascribes to gold have made it the most marketable economic good of all, the popular medium of exchange and unit of economic calculation and account; they have made it man's money. For more than 2500 years, from ancient Greece to modern USA, gold coins have served as money and the standard of calculation and account.
Throughout the ages governments have had a love-hate relationship with gold. Most of the time they sought to amass it in their treasuries and monopolize its use. They claimed and brutally enforced a monopoly of the mint. At other times governments waged war on gold, seeking to ban it under penalty of fine, imprisonment, or even death. During the French Revolution hundreds of businessmen died on the guillotine because they had dared to calculate prices in gold or ask for gold. In the United States of 1933 to 1975, it was a crime punishable by fine and imprisonment to own standard gold coins. At the present, the U.S. government, while clinging to a sizeable hoard buried in Fort Knox, seeks to disparage it and make little of it as an unimportant metal.
We are living in an age in which
all governments, regardless of the system of political and economic
organization, whether interventionistic, socialistic, democratic
or dictatorial, are occupying an economic command post. Most of
them work through central banks issuing legal-tender notes and
through government mints manufacturing coins. In 1971 they all
suspended gold payments and made the most important and most stable
currency, the U.S. dollar, take the place of gold. The world has
been on a dollar standard ever since.
For the federal government the dollar standard has been a magical
guide to cheerful spending and soaring debt. It released the Federal
Reserve System from the shackles of gold and set it free to finance
federal deficits no matter how large.
In 1971 the federal government
deficit amounted to $23.033 billion and the federal debt stood
at $409.5 billion. By now, the 2003-2004 federal budget calls
for expenditures in excess of $2.1 trillion and a debt of some
$7 trillion.
Since 1971
the American dollar has lost almost 70 percent of its purchasing
power and is losing more every day.
It makes it difficult to project future debts and deficits, but
it is likely that the
dollar standard will disintegrate if foreign investors should
ever lose their confidence
in the U.S. dollar.
For the American people the world dollar standard has been, and continues to be, both a welcome boon and a dreaded affliction. It is pleasant and beneficial as it permits the Federal Reserve System to engage in massive credit creation that generates unprecedented trade deficits now running at a rate of over half a trillion dollars a year. At some five percent of gross national product (GNP), the trade deficits actually have lifted the levels of consumption of the American people while they depressed the levels in creditor countries. Moreover, the dollar standard has enabled the U.S. Treasury to place much of its new debt with foreign investors and thereby shift much of the burden of debt to foreigners.
The dollar standard also has been a dreaded affliction as it allowed the Fed to depreciate the American dollar every year and finance a frightful expansion of government functions and powers. Dollar savings have lost some 70 percent of purchasing power while the number of government rules and regulations probably has risen by a similar proportion. Many economists are convinced that the current pattern of Treasury deficits and Federal Reserve money and credit expansion is not sustainable. They call for large tax increases or drastic spending cuts that would allow the Federal Reserve to decelerate its money fabrication. But they also are aware that large tax increases at this time of economic stagnation and rising unemployment would depress economic activity even further. Spending cuts, on the other hand, probably would bring relief to the ailing economy but undoubtedly would be unacceptable to the political forces that benefit from the spending. They usually cite old notions and theories that advocate deficit spending as a panacea for economic evils and difficulties.
The huge budget deficits may yet be solved in another way: the Federal Reserve may continue to cover them with new money and credit, which may depreciate all dollar debt as fast or faster than it can be added. A five-percent inflation depreciates the purchasing power of a $7 trillion federal debt by $350 billion a year. At the 1980 rate of inflation of 12.5 percent the federal debt would shrink by $875 billion in purchasing power, and at the 1990 rate of inflation of just 6.1 percent by $427 billion. But such a solution may cause a crisis of confidence in the integrity of the American dollar and precipitate the end of the dollar standard.
For most of a generation the
almighty dollar has been a great object of confidence and trust
throughout the world. It brought honor, friends, influence, and
possession to the United States. As a symbol of power and prestige
it answered all things. Although we do not know what the future
has in store for us, we are fearful that the age of the world
dollar standard may some day draw to a close. Huge federal government
deficits and chronic Federal Reserve inflation may destroy it.
The deficits force the Fed to generate ever more money and credit
which in turn weaken and erode the dollar's trustworthiness in
the eyes of the world. Its present weakness toward many other
currencies, such as the euro, the Swiss franc, and the British
pound, is an early symptom of the erosion.
No other currency, national or international, can conceivably
take the place of the American dollar. They all suffer seriously
from the same ideological malady: they are the creation of political
concern and authority. Whatever we may think of gold, it always looms in the background, beckoning to be used as money, as
it has been since the dawn of civilization.
by Hans Senholz
June 4, 2003
Copyright © 2003. All Rights Reserved.
Reprinted by USAGOLD with permission of the author. Further use without consent is prohibited.
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