April 15, 2007
Not surprisingly, there have been a few comments about my habit of expressing everything in terms of gold. I do it because gold is money; there is no better benchmark of value. People today have been so brainwashed (on purpose, by the way) to believe that gold is "just another commodity" that this ancient concept has become quite foreign. For them, I might as well be expressing the value of corn or equities in terms of lead or lumber or the famous "pork bellies."
These people seem to have no difficulty accepting government statistics of value, such as the CPI -- that's what happens to people educated in government schools, I suppose. Sometimes, you'll see charts expressed in "2000 dollars" or "1960 dollars", which are adjusted for devaluation by the government's CPI.
The purpose of using the CPI today is to estimate (or, sometimes, to obfuscate) the degree of decline in dollar value over time. There is a simpler way: I look at everything in "1854 dollars". What's an 1854 dollar? Let's take a look:
There it is, 1/20th of an ounce of
gold. It was a
very small coin, about 1/4th smaller than today's dime. The
Double Eagle had -- you guessed it -- 20 times as much gold, or a troy
Just the same as today's Krugerrands. (Actually, the $20 coin had
0.9675 of a troy ounce, or $20.67/oz., but let's just round up for
And what about this 1796 Quarter-Eagle? Well, if the Double Eagle had one ounce of gold, and the Eagle had a half-ounce, then the Quarter Eagle must have had 1/8th of an ounce, right? That is roughly correct:
The 1854 $20 Double Eagle had one troy ounce of gold. The 1922 $20 Saint Gaudens Double Eagle had, you guessed it, one ounce of gold.
The value of money didn't change in those days.
There was paper money as well -- but the paper money was redeemable for gold. If you took your $20 paper note to the bank, you would get a $20 coin in return, containing one full ounce of gold. This 1882 banknote says right on it "Twenty Dollars in Gold Coin". And we know what that means, right?
This $20 bill from 1928 -- looks familiar, no? -- was also payable in gold coin. One troy ounce, namely, the $20 Saint-Gaudens shown just above. It's a little small, but it says right there under Jackson's fine visage: "Twenty Dollars in Gold Coin Payable to the Bearer on Demand."
So, we can see that the $20 bill of 1928 was worth an ounce of gold.
Now, we also know the value of a $20 bill of today. At $680/oz. of gold, you have to hand over thirty-four $20 bills to get an ounce of gold. The value of the $20 bill today is 1/34th that of 1928. Or to put it another way, the value of today's $20 bill is about $0.59 in 1928 dollars.
And what of the Dow Jones Industrial Average? It's 12,612 today. In 1928 dollars, that's 370.9. Which is less than the peak of 381 in September 1929. Well, at least there were dividends, right?
At some point shortly, we may see "gold prices rise dramatically." Many people would interpret this as some weird backwater of speculation, not much different than trading Beanie Babies on eBay. I propose that the value of the $20 bill would be falling dramatically, compared with the $20 bill of 1928, worth one ounce of gold. This affects everything. In the 1920s, you could buy a decent man's suit for about $20, or one ounce of gold. "But a man's suit doesn't cost $680 today," you say. That's true. More like $400, or about the average dollar/gold value for the last twenty-five years. About twenty $20 bills. If it takes fifty $20 bills to buy an ounce of gold in the future ($1000/oz. gold) -- and the value of the dollar maintains that level on average for about twenty years -- then I would expect the price of a man's suit to rise to about $1000.
This is inflation.
It takes a long time for the market for men's suits to adjust to the new value of the currency. All other markets are adjusting at the same time. The result is a tendency for prices of everything to rise.