Re: OT/Gold

Posted by Jeff B. on January 09, 2009 at 23:34:36 from (69.20.162.151):

In Reply to: Re: OT/Gold posted by trucker40 on January 09, 2009 at 10:13:58:

M1, the money supply, has to increase as population increases. One reason we went off the gold standard years ago was because there were more printed dollars around than gold to back it up.

This post by JMS/MN is a common myth and incorrect. An easy way so see past that statement is to ask: If I have an ounce of gold, how many dollars can I buy with it? It doesn't matter how much gold OR dollars there is in the world. One can always express the value of one to the other. Even if it takes a billion dollars to buy a gram of gold, that is what the gold would be worth in dollars.
Someone else wondered why the big deal about gold. This is why:
Gold is compact, easily divisible, useful in many industrial applications as well as jewelry and medical items. Is is relatively scarce, consistent in quality and does not tarnish or corrode. It's also impossible to destroy it. All the gold ever mined is still in existence. If gold were to suddenly become unfashionable as money, one could still exchange it for something of equal value with anyone who wanted it for its productive or enjoyment values.
Consider this also... Gold wasn't invented by anyone or any government. It's use as a store of value evolved over thousands of years, going way back before the Egyptians even, for the exact reasons put forth above. One could have and save gold for extended lengths of time and know that it would still have the same value when they wanted to buy something with it.
Because it became inconvenient to pack around quantities of gold, paper receipts for gold were invented that were exchangeable with gold at any time. That's how our monetary system came to be. Gold backed currency is unpopular with politicians, though, because you can't print more money unless you have more gold to back it up at the official price. Once the gold backing is removed, governments can print all the money they want, which results in inflation and rising prices.
That, in a nutshell is why gold is valuable and paper currency not backed by gold becomes worthless. One could read many books on the subject if they were interested.
Before I go, it might be interesting to note that in all of history there has never been a fiat currency (i.e. not gold-backed) that didn't fail at some point. Makes me wonder if our dollar is headed down that path today.

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