GOLD: Sovereign of Sovereigns

By: Douglas V. Gnazzo | Mon, Jun 27, 2005
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MONEY & BARTER

Some say that gold is not money; perhaps they are right, perhaps not. Money is a funny thing, an odd sort of duck, as no one seems to know for sure, just what it is - and what it isn't. Who invented the stuff; and for what reason; from whence did it come and whither does it go? Even Sir Alan when asked what it is, replied he didn't have the foggiest idea.

Is it this or is it that?
Whatever it is,
It gets pulled -
Out of a hat

So let's try to decipher this most inquisitive puzzle, just what is this thing, we all call money? Perhaps it would be best to go back in time, before there was any money. How did man survive before the invention of this most peculiar intention?

History shows that early man either took what he needed from others by the conquest of war; or traded with them for life's necessities. Traded what? - Stuff, things: goods and commodities, items that he desired and needed for survival: food, water, shelter, and clothing.

I will give you a dozen eggs for a pound of butter; barter it was called. Whatever goods an individual could grow, hunt, build, farm, or mine - could then be exchanged with other individuals for something he needed but did not have; and the two would come together and trade or exchange one good for another.

MARGINAL UTILITY

As society grew more complex, it wasn't always easy for an individual who needed or desired certain goods, to find other individuals with which to trade those exact items that he needed, and the other had. And even more troubling was the requirement that the second must also want what the first had to offer in exchange - the coincidence of wants it has been called.

When people come together to trade, a market is naturally formed. People trade for things they desire or need, for things they find most useful; that have the most utility. When an individual exchanges goods with another, they offer items that are of less use or utility to them, in exchange for other goods, considered by them to be of more need and use. Some refer to this as the theory of marginal utility.

In any exchange, a definite quantity of one commodity, good or service, is exchanged for a definite quantity of another: one cow for three pigs, a bushel of wheat for a dozen eggs.

Thus in every exchange there is a ratio of two numbers or quantities. This ratio represents, and is the measurement called by some value, and by others - price. But it is not always determined strictly quantitatively - quality also enters the mix.

Some say that value cannot be measured. I leave it for the reader to decide, from the evidence or lack thereof that follows.

SUBJECTIVE VALUE

When a person desires something, a subjective decision is made, a personal choice or valuation based on the need or usefulness of one commodity, as compared to the subjective use value of another commodity that is under consideration for exchange. They subjectively determine and compare the use value of one item to another. Need and desire give rise to usefulness, which in turn gives rise to value.

Only that which is useful, or is determined to have a potential future use, is considered to have value. Water is very valuable to all, as we all must have water to drink; it is one of life's necessities.

But does a man that lives next to a mountain lake, value water the same as a man stranded in the desert that has no water? Water is water, wherever it is, but it can be valued differently, according to the need and want of the situation - the demand compared to the supply.

All action first requires a thought; all thought requires desire; all desire requires feeling; all feeling requires sensation. Sensation is experienced through the senses, the ambassadors of man's inner court to nature - of that which is beyond nature with nature, the above with the below.

A feeling is not feeling, nor is a desire - desire. Events occur, by thought exteriorizing as action, as a point becomes a circle: 2 points form a line, 2 lines form an angle, 4 squared angles doth a circle make.

It is the desire for the continuance of life that drives man to desire the necessities needed to sustain his life. Desire and need turn the miller's stones, the subject in pursuit of the object - of desire. All is grist for the mill. So men come together to trade by necessity, to fulfill a want, a need or desire.

But what is one to do if he has but chickens to trade and the market is saturated with chickens. Chickens are not in demand, as there is too large of a supply, and his item of exchange is not saleable or marketable.

From this we see that it is very important when trading to bring to market goods that are saleable and marketable; things that others want and desire. But how can one determine what goods are most wanted and in demand?

DIRECT & INDIRECT EXCHANGE

Man, being ever resourceful, finds a commodity that can mediate the problem presented when one or more goods are not saleable or marketable, by choosing a third commodity that society deems to be the most useful commodity for such exchanges - a common measure or denominator of usefulness and value.

This commodity becomes the common medium by which all goods can be exchanged. The medium of exchange is the commodity that is most saleable or marketable; that according to marginal utility is most constant in its usefulness to procure other goods.

This type of trade is called indirect exchange; it uses a third common media, as opposed to direct exchange, which is simple barter of one good for another. With the advent of indirect exchange and the use of a common medium, the division of labor was greatly facilitated and commerce was able to further expand.

Indirect exchange creates a buyer and a seller, where previously with direct exchange, only two traders or parties existed without the distinction of buyer and seller.

Thus it can be seen that society by trial and error, utility and value, supply and demand, chooses and determines by consensus, the commodity most accepted as the common medium of exchange - the most saleable or marketable commodity.

Individual members of society make free choices; based on subjective desires; that through the collective social interactions involved in a free market over time, determine what the most common medium of exchange is.

Remember the point of free choice, it is most important and will soon be revisited. Free choice and free markets go hand in hand - much as light is to day, darkness to night.

Some have said that although subjective use values are the determinant by which indirect exchange occurs, the subjective use value is concomitant with the subjective exchange value of the media as well. This is but a reference to the anticipated use value of the goods that are to be exchanged.

PURCHASING POWER

From the subjective use value of money to the subjective exchange value of money comes objective exchange value - the expression of the purchasing power of the medium of exchange in regards to the ratio or amount of goods that can be purchased with it.

The objective exchange value of money is the purchasing power of money; it expresses the amount of goods that can be exchanged. The purchasing power of money is the quality of money, and is distinct from the quantity of money.

The quantity theory of money alone is not sufficient as a complete theory of money; the quality theory of money is just as, if not more important. It is not the quantity or number of units of money that one has that is most important, but what the quality or purchasing power of the money is - the amount of goods that can be exchanged for the money.

Money is useful for only one thing - to exchange for the procurement of others things. The more things you can get with the same amount of money, the greater is your purchasing power. When one buys goods with money, they are selling their money. When one sells a good, they are buying money.

The quantity of money is the number of units of money that one has, say for example $10 dollar bills or Federal Reserve Notes. The quality of money is the purchasing power that money has or represents.

Would you be better off to have $10 dollar bills or Federal Reserve Notes that have retained 20% of their original purchasing power, or $8 dollar bills that have retained 50% of their original purchasing power, given that all the dollar bills had the same original purchasing power?

In the first instance you would have the purchasing power equal to $2 dollars bills of the original money (20% of 10 = 2). In the second example you would have the purchasing power of $4 dollar bills (50% of 8 = 4) of the original money.

So although in the first example, the quantity or number of units of dollars is greater than in the second example ($10 versus $8), you actually are better off with the lesser quantity of money ($8) as it has retained more purchasing power - it has more quality and ability to procure or exchange for a greater amount of goods.

THE QUALITY THEORY OF MONEY

The quality theory of money focuses on the purchasing power of money, not on the supply or quantity of units of the money, but on the quantity of other goods that the money can be exchanged for, as that is the only thing that money can do - exchange for other things.

The more goods your money can procure, the better off you are. The greater will be your wealth. The quality theory of money emphasizes the function of money as a standard of value through time, and especially as a store of value over time.

A lender of money or credit wants to be repaid with money that will be worth as much in the future as it was when he lent it. He wants the money he is repaid with to retain its purchasing power or quality.

If a lender of money does not have faith that the money he lends will retain its value or purchasing power in the future, he will charge extra to loan the money out, to make up for the perceived or expected loss of future purchasing power of the money.

He will have a greater interest in being made whole, and will charge accordingly. The interest or cost of money increases to make up for the perceived future risk of loss of purchasing power.

A saver of money over time also knows the importance of the quality of his money versus the quantity of it. The prudent man saves his money for the future, for his later years in life, when he will not be able to work as hard to earn the money needed to pay for life's necessities, when his income will be less.

In the later years of life, man uses his saved money or accumulated wealth to turn back into income to obtain the necessities of life: food, clothing, shelter, and many times healthcare.

The more the saver's money has retained its quality or purchasing power, the wealthier and better off he will be. He will be able to procure, by exchange, more of the things he needs to maintain his survival and life. This is why savings is so important. This is why the quality of money is so important, although there are other reasons as well. For now these will suffice.

GOLD & SILVER MONEY

Different societies have at various points of time, chosen different commodities as the common medium of exchange. Some have used seashells, others tobacco, salt, or cows - from whence cattle, chattel and capital have come, as well as many other choices to numerous to list.

History is replete with the use of gold and silver in ancient, medieval, and modern societies; in most geographic locations over the world; during most periods of time; as being the most universally accepted common medium of exchange - money.

During ancient times in Egypt, 4000 years before Christ, gold was used as the medium of exchange. The symbol of the eye, a point within a circle, is the Egyptian symbol of both the Sun and Gold. Interestingly, our dollar bill has the eye of Osiris staring out from atop of the pyramid. A most curious design.

It seems the designers of our Federal Reserve Notes were familiar with the ancient way, whichever way that might be. They might even have been an aspirant of one of those damned international banker's guilds - the ones the Medici's were so good at spreading across Europe.

It is said that the Lydians were the first to take raw gold and to shape and form it into little disks or coins. The Lydian King, Croesus, was supposedly the first whose stamp was struck thereon. The word money is derived from the word moneta - to mint or coin. Once gold was minted or coined it became the most favored medium of exchange - money.

With the development of society, man grew from a simple life of basic survival, centered on hunting, to an agrarian lifestyle of planting crops and the herding of livestock. To obtain the basic necessities of life man traded or bartered with his fellow man.

As the division of labor increased, trade and barter expanded and became more complex, requiring a common medium of exchange. Direct exchange developed into indirect exchange, to better facilitate trade and commerce.

FUNCTIONS OF MONEY

Once society chooses a common medium of exchange, which also has a secondary function as a common measure of value, commerce increases to the point that people want to borrow or lend the common medium of exchange, money, to increase their ability to trade goods and expand commerce.

With the advent of credit man takes a leap into the future. What had originally began, as direct exchange in the present, now became indirect exchange, not only in the present, but in regards to the future as well.

This involves present goods and future goods. Needless to say, money involves time preference - the present and the future, as man's life involves the present and the continuance of the present into the future as survival or living.

Some say that a redeemable bank note is a present good, I disagree. A bank note is a receipt, an obligation, that has yet to be redeemed or fulfilled. It is to be fulfilled in the future, hence it is a future good. But this is a complex issue, best left for another time.

Money also functions as a standard of value, the common denominator by which other commodities are compared, to determine their value.

When one lends an item to another on credit, he obviously wants to be repaid in the future, with a commodity or medium of exchange, which is as valuable then as now.

Money is a standard of value by the consensus of society as being that which is most likely to continue to exchange in the future, at the present ratio or value, thus retaining its purchasing power. This is part of the quality theory of money.

With the continued growth of commerce and the division of labor, the economy oscillates between supply and demand; buyers and sellers; producers and consumers; borrowers and lenders.

When through the course of wise and prudent commerce, one produces more than one consumes, an individual will begin to accumulate the excess production - the fruits of his labor. The same holds true for the group, society, nations, and world.

The accumulation of an excess production of goods, over the consumption of goods, is called savings, or the accumulation of wealth - be it the accumulation of land, forests and lumber, metals in the ground, crops, livestock, silks and linens, goods of any kind.

Excess goods are saved, stored or hoarded for future use. The value of the common medium of exchange for all these goods, money, now fulfills another role or function: it is a store of value. Thus money is stored or hoarded for future use, to transfer from savings back into income, to exchange for what is needed - later in the future.

With the development of commerce, money evolved out of the desires and needs of society. Money functions as a common medium of exchange and measure of value; a standard of value; and finally with saving and the accumulation of wealth, it functions as a store of value. Money performs four basic functions:

1. A medium of exchange
2. A measure of value
3. A standard of value
4. A store of value

As a common medium of exchange and measure of value, money transfers value through space. Money as a standard of value transfers value through time. Money as a store of value transfers value over time. These are all important functions of money. They are all attributes of the quality theory of money.

Some say these functions are secondary; be that as it may, they still exist and serve a purpose, be it primary or secondary, concomitant or sequential. Even the casual observer must acknowledge their importance. To disregard the different functions of money is to disregard what are perhaps its most important qualities.

It has been said that value being subjective, that it cannot be measured. Others believe money acts as a price index, which measures the ratio or quantities exchanged.

Call it what you like, and place the measure where you will; the fact still remains that when two people make an exchange, at some point in time before the transaction is completed, it must be decided what quantities of goods and monies are to be exchanged.

GOLD STANDARD & GOLD EXCHANGE

Some say that since 1914 in Europe, and since 1933 in the United States, that gold has no longer been money. These are important and significant dates, but just what occurred during these times?

Prior to the First World War, most of the world was on the gold standard. During the War most of the major industrialized countries, with exception of the United States, went off of the gold standard, which allowed them to print tons of paper fiat money needed to finance the war.

After the war, most major nations wanted to return to the classical gold standard, England did not. The British currency had been heavily debased by the issuance of paper fiat. The pound's purchasing power had been greatly reduced.

So the international bankers concocted the scheme of a central bank for the United States. They wanted to get their foot in the door of the new player on the world stage of trade. The bank would be in control of the nation's money supply, which at that time was still redeemable in gold.

By inflation, the international bankers had purposely destroyed the purchasing power of most of the currencies of the older industrialized nations of Europe. But the United States was still young and thriving, its currency had not yet been debased to its full potential.

The elite collectivists of the world saw a large, and as of yet untapped supply of natural resources, wealth waiting to be taken; an apple to be plucked. The Federal Reserve collected the apples for them.

"Some wicked men are rich, some good and poor,
we will not change our virtue for their store:
Virtue's a thing that none can take away;
but money changes owners all the day."
[Solon]

In 1922, the bankers came up with another scheme, the Conference of Genoa; a coming out party for the gold exchange system as opposed to the classical gold standard system. Murray Rothbard explains it in detail:

"The gold-exchange standard worked as follows: The United States remained on the classical gold standard, redeeming dollars in gold. Britain and the other countries of the West, however, returned to a pseudo-gold standard, Britain in 1926 and the other countries around the same time. British pounds and other currencies were not payable in gold coins, but only in large-sized bars, suitable only for international transactions.

This prevented the ordinary citizens of Britain and other European countries from using gold in their daily life, and thus permitted a wider degree of paper and bank inflation.

But furthermore, Britain redeemed pounds not merely in gold, but also in dollars; while the other countries redeemed their currencies not in gold, but in pounds. And most of these countries were induced by Britain to return to gold at overvalued parities.

The result was a pyramiding of U.S. dollars on gold, of British pounds on dollars, and of other European currencies on pounds - the "gold-exchange standard," with the dollar and the pound as the two "key currencies."

Now when Britain inflated, and experienced a deficit in its balance of payments, the gold standard mechanism did not work to quickly restrict British inflation. For instead of other countries redeeming their pounds for gold, they kept the pounds and inflated on top of them.

Hence Britain and Europe were permitted to inflate unchecked, and British deficits could pile up unrestrained by the market discipline of the gold standard. As for the United States, Britain was able to induce the U.S. to inflate dollars so as not to lose many dollar reserves or gold to the United States.

The point of the gold-exchange standard is that it cannot last; the piper must eventually be paid, but only in a disastrous reaction to the lengthy inflationary boom. As sterling balances piled up in France, the U.S., and elsewhere, the slightest loss of confidence in the increasingly shaky and jerry-built inflationary structure was bound to lead to general collapse.

This is precisely what happened in 1931; the failure of inflated banks throughout Europe, and the attempt of "hard money" France to cash in its sterling balances for gold, led Britain to go off the gold standard completely. Britain was soon followed by the other countries of Europe." [Rothbard]

GOLD CONFISCATION

The gold exchange standard was one of the elite international banker's crowning jewels of accomplishment. It was not had by accident, but by design, including the accident of its "seemingly" failure. This point has been overlooked by most, as it has purposely been hidden from the light of day. There are no accidents, only unseen causes.

But more coups were yet to come. In 1933, the bankers convinced Roosevelt to call in all private holdings of gold within the United States, confiscating the money of We The People.

Gold ownership was outlawed, if that is possible, but so it seems, but appearances can be deceiving, yet believed. Another illusion of making the unacceptable - acceptable. Paper money was no longer redeemable in gold. The cast was dyed.

Society determines by the trial and error of free choice within a free market, what the most accepted common medium of exchange or money is to be. Money does not require the sanction of the government for it to exist.

But now money or gold was being directly tampered with, it was literally taken from the People and declared to be unlawful to own or use gold.

Was the confiscation of gold a free choice of We The People?

Is this how free markets work? Was the confiscation of gold in keeping with the constitutional right to own private property?

Or is this governmental intervention of the State, within the supposedly free market, which by the decree of legal tender laws mandates what is to be, or not to be, money?

GOVERNMENT INTERVENTION

With the advent of Bretton Woods in 1945, the bankers grew closer to their goal: the removal of gold from the world monetary systems.

The Federal Reserve Note or dollar bill of the United States was the reserve currency of the world; and since the dollar was no longer redeemable in gold; the world was essentially on a paper fiat currency system. One tie to gold still remained: central banks of foreign nations settled their accounts with one another in gold.

In 1971 Nixon did away with this last remaining connection to gold. No longer would the United States honor its foreign obligations in gold. The gold window was shut.

This amounted to the United States reneging on its debt to the rest of the world - a clandestine declaration of bankruptcy. We will pay you said the United States, but only with these funny little paper tax coupons - not with gold.

So when some say that gold is no longer money, does this mean that society has by their own free choice, exercised within a free market without governmental intervention, decided that they no longer want gold to be money?

Or has the government and the world's elite international bankers decided for us, declaring by legal tender laws and confiscation, what is to be accepted or not?

Since the creation of The Federal Reserve the dollar has lost 95% of its purchasing power. This is due to the proliferation of paper debt as money that debases the currency.

Money is supposed to transfer value through space and time, and over time. Is a currency that has lost 95% of its purchasing power a store of value over time, or a mechanism of wealth transference and redistribution?

Perhaps the question that should be asked is not whether Federal Reserve Notes can be said to be as good as gold, as money, as obviously they cannot; but whether they are just tax vouchers similar to the wooden tallies of old?

When the State is allowed to intervene in the market and confiscate our gold, to decree that money is no longer the constitutional system of gold and silver coin, and to then put into place a paper fiat currency that is created by the issuance of debt, our money is placed on the road to worthlessness.

It becomes worth less, and less, until eventually it is worthless. Its purchasing power is continually debased and lessened by the very act of creating it.

Wealth cannot be created out of thin air; it must be produced by the labor of man. Otherwise it is a vile and pernicious thing, an abomination that walketh the earth.

"It is the clouds that make the snow and
and thunder comes from lightning without fail;
The sea is stormy when the winds have blown,
but it deals fairly when 'tis left alone."
[Solon]

GOLD IS MONEY

Gold as money is a measure of value. Gold as money is a standard of value. Gold as money is a store of value. The quality or purchasing power of money is more important than the quantity or supply of units of money.

Paper fiat has lost 95% of its purchasing power since the Federal Reserve took control in 1913. How can fiat paper currency be considered money or a store of value if such is the case? It cannot, and more importantly - it should not be so considered.

Gold retains its purchasing power through time and over time. Gold cannot just be printed up or made to appear on the ledger by the mere flick of a computer key, it must be mined from the bowls of the earth, by the sweat, blood, and tears of man. Almost all the gold that has been mined is never used up or consumed, it still exists above ground.

One quality that makes gold so valuable is the fact that it is not consumed. This is best shown by gold's "stocks to flow ratio" - the above ground stock of gold divided by the annual production rate of gold.

This ratio is approximately 50 to 1. In other words, it would take 50 years at the present rate of world gold production to produce the present stock or supply of gold.

This is an important reason why gold is deemed to be so valuable - it is not just because of subjective valuation.

There is also a cumulative process of subjective market valuation that has taken place over centuries of market behavior that has, by freedom of choice within the marketplace, determined that gold is the most marketable commodity.

This cumulative process has caused gold to be saved and hoarded over time because it retains its purchasing power; it is a store of wealth.

Gold has thus obtained an objective form of valuation based on its stocks to flows ratio of 50 to 1. Such a stocks to flow ratio is unheard of except in the precious metal commodities.

Perhaps this is why the Bank For International Settlements, the central bankers central bank, until recently, only accepted gold from one another to settle their accounts. Now special drawing rights representing a basket of paper currencies is used.

And what was the reason why gold was the only accepted means of payment until very recently?

"Because central bankers don't trust each other - the same reason why the public prior to 1914 used gold coins and IOU's to gold coins. The central bankers don't want to get paid off in depreciating money. At the same time, they do want to retain the option of paying off the public in depreciating money."

Why does the International Monetary Fund's Articles of Agreement, Section 4-2b, still demand that no member country can have a currency backed by gold?

What is the purpose of such a decree? Cui Bono - Who benefits? Just follow the yellow brick road - follow the money.

First our currency was silver and gold coin, the original constitutional system of hard money. The standard was the silver dollar. Then it was changed from silver to gold, back and forth a number of times.

Paper money was supposedly backed by specie. The classical gold standard was changed to the gold exchange system. Then our gold was confiscated and outlawed.

Next our paper fiat Federal Reserve Note was declared to be the reserve currency of the world. And finally the gold window was shut, severing the last remaining tie with gold.

The above is a history of monetary devolution, not evolution. Is this the kind of monetary system you want to leave to your children and their children?

Why have the powers that be, messed with gold and silver so much? It is as if they are afraid of the precious metals being used as honest money.

Perhaps Alan Greenspan knew what he was talking about, when in his 1967 he wrote, "Gold and Economic Freedom" in which he said:

"Gold and economic freedom are inseparable. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. Gold stands as the protector of property rights. If one grasps this, one has no difficulty in understanding the statists antagonism toward the gold standard."

So Is Gold Money? Of course it is - always has been, always will be. Gold is the Sovereign of Sovereigns, and will be returned to its rightful place. Gold will not be denied.

But the powers that be, the elite collectivists and international bankers of the world, are trying to fool us into believing otherwise - in believing in fairy tales of paper fiat and debt, that enriches them by wealth transference; as We The People pay the cost and shoulder the burden. They would do well to remember that when gold speaks, all tongues are silent.

"Gold can make its way through the midst of guards,
and break through the strongest barriers more easily than the lightning bolt."
[Horace, Carmina III, c. 20 BC]


 

Douglas V. Gnazzo

Author: Douglas V. Gnazzo

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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