Money and Power

Who determines what your money is worth? There was a time when the American government did not have control over the nation's money supply. Should this be of concern to you?

If you want that $20 bill in your pocket to be worth $20 in a few years, you should pay close attention. At the heart of this issue - and something every citizen needs to understand - is that government-controlled paper money does not fit into the natural order of economics.

Through the phenomenon of gradualism, the government was able to replace intrinsically valuable commodities such as gold and silver with paper promises that were supposedly backed by those commodities. It was this sleight of hand that opened to the door to the price inflation to which we have become all too accustomed.

It took the government more than seventy years to nationalize all of the country's banks, and another fifty to start replacing the gold standard with fiat paper currency. Once the public began trusting the government to stand guard over the hard commodities backing that paper currency, it took barely ten years to abolish the gold standard and thus make every financial transaction dependent on the government's word that it would protect the value of its money.

How could a nation conceived in liberty allow itself to become completely dependent on the word of the government that it would protect the value of its money? More important, what can we do to reverse this situation and get back to a sensible system where paper money is 100 percent backed by precious metals?

Find the answers to these questions, and more, in this compelling series of articles.

A 1974 Datsun is not a financial asset (240z might be an increasingly valuable collectors item but it’s not a financial asset) the “someone else’s liability” point is related to: does the asset have value because someone else is making payments to you (eg bond coupon or bank interest or stock dividend). If they stop paying, your asset may be worthless - hence the someone elses liability (it’s a little tricky with non-div stock) Gold is like a really liquid collectible with an easily assessed value.

I think you're illustrating my point of confusion rather well. Why is gold (owned and managed) a financial asset but a car is not? Because someone has arbitrarily assigned it a "useful" status as an asset, right? In and of itself, a 200 pound block of gold is no more or less useful or valuable than the Datsun.

To your point about liability, if someone is making payments to me on gold, then they are the de facto owner, are they not? Why would someone pay me for something I own? Or are you proposing that someone would rent my gold? If that is the case, is not the Datsun analogy even more apropos? I may rent the Datsun to someone, however if they stop paying, the car is still mine.

As I have posted before, I am not trying to be difficult. I would just like a very simple explanation as to why gold (or silver, or granite, for that matter) is a more valuable holding than anything else. I see gold is worth $X/ounce, but that is still a relative value, to the dollar. Eliminate the dollar (or the yen, the ruble, whatever), and why is gold worth anything?

I think the difference is that gold has a multi-thousand year history as a store of value, it is compact, easily stored, easily assayed, everyone recognizes it’s value.

Also, no bankruptcy, repudiation or default can destroy its value (the only risk is physical theft). Companies can go bankrupt (their stock is worthless). Bonds can be defaulted on (they become wallpaper). Banks can become bankrupt (deposits become worthless if not insured, and then they are the liability of the insurer.)

The value of gold cannot be destroyed by some elses default.

I understand the confusion, because you can lease gold just like a car and a house. Cars/houses are rental of a real asset, you can go get it if the borrower defaults. (You can also go get your gold if the lessor defaults). Real assets still have value even if the debtor defaults.

I guess golds status as a financial asset (as well as a real asset) is due to it’s history. Under convertibility regimes, gold was a financial asset as it could be converted to currency at a fixed rate.

Today, i guess gold is a financial asset because it is seen by almost everyone as a financial asset (rather than just as a valuable collectible).

“As I have posted before, I am not trying to be difficult. I would just like a very simple explanation as to why gold (or silver, or granite, for that matter) is a more valuable holding than anything else. I see gold is worth $X/ounce, but that is still a relative value, to the dollar. Eliminate the dollar (or the yen, the ruble, whatever), and why is gold worth anything?”

I didn’t quite answer this part, but at the core, gold has value because people are willing to trade things for it. If the ultimate economic doomsday scenario happens, and all paper currencies return to their intrinsic values, gold will still have value because people will trade food, fuel, weapons etc for it, just like they did thousands of years ago.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.