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Fred Bates III Instructor: Malcolm Campbell English 1103 November 7, 2012 Fools Gold: Could Gold Perform Better Than The U.S. Dollar as a Currency?

Arguably the biggest issue facing the United States of America today is the possibility of an economic down fall. The national debt has reached an astronomical level and there is no present solution to that problem. Over $16 trillion in debt seems like a point of no return, but this number could possibly get worse. Millions of Americans want some peace of mind on what will become of their country in the years to come. We look to our government for answers but in recent years there have been no agreeable plans for reform. Even in a presidential election, how do we know that any decisions will be made? The truth is our economy needs a strong long-term solution that can balance the budget and allow for growth. In order to move forward, popular belief is that we must look to the past for answers. Before the Great Depression, the United States of America was in an economic surge. People had jobs, businesses boomed, and the American people were generally happy. If America was so well off then, could we just do the same as they did and be successful? This seems like the easiest and best option when it comes to fixing our economic issues. When we take another look, however, we find that what appeared to work then would leave us in a much worse state. The major problem with the Great Depression was that it was influenced by gold.

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Gold Standard Before the Great Depression all U.S. currency was backed by gold. This gold standard did a good job of keeping a solid value of the dollar and allowing a stabilized amount of cash. The problem, however, was the amount of gold America had. The U.S. owned almost 50% of the worlds gold supply in 1930. This caused our export prices to increase so that many countries were no longer able to purchase our goods. Basically, we were too rich and our prices were so expensive that the demand for our goods drastically decreased which caused the U.S. bubble to burst. This national inflation soon hit the American people and caused many to lose jobs and go bankrupt. At the time, only few countries including England and France used gold as currency, which created a very unbalanced global economy (Gold Reserve Act of 1934). The few countries that participated in the gold currency were hit with substantial economic woes. Since America was the most involved and had the most in stake, we of course felt the worst of the shock. Although there were some benefits with gold, such as a highly valued U.S. dollar, the cons outweighed the pros. Monetary Policy Monetary policy is a big issue in Washington because it has a big influence on Wall Street and the major indices such as the Dow Jones Industrial, Nasdaq, and S&P 500. Every decision made by the Federal Reserve is followed by a reaction on the stock market. The Federal Reserve is basically the national bank of the United States. The bank is responsible for assisting the President in making monetary policy and providing analysis of the countrys financial growth. They also manage interest rates and taxes as they see fit. There is no doubt that the currency battle between gold and the dollar started at the Federal Reserve but is the battle over? Recent comments by Republican Ron Paul suggest that it is not. Going back to the gold

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standard will cut down on printing money, says Paul(Paul). Although his statement is very true, it is not a valid solution because there are no other countries currently on the gold standard. Going to the gold standard would not only hinder foreign policy by causing the prices of our goods to rise too high for other nations to buy, it could also cause another depression. It was also noted that few other Republicans sided with him in this argument. Although their opinion is not proof of the validity of Mr. Pauls statements, it is a good overview of the lack of support he has attained from the Republican community. If we plan on fixing Americas economic situation, our monetary policy must be effective. Recession Although a recession is not something to look forward to, we can use it as something to judge history and make decisions. In many cases learning from the past can keep one from making the same mistakes over again in the future. According to Mark Kordoba, a recession is considered, A big drop in consumer spending ending in a loss of jobs, personal income and business profits (Koba). Economists study recessions to predict when the next ones will occur so that individuals can prepare for an economic downturn. This is also effective when trying to determine the best monetary path to go in for our nation. The National Bureau of Economic Research has done a study that shows the impact of the gold standard on the economy. In the first 168 years of this country, 79 years were spent on the gold standard and 89 years off of it. A chart was created based on the number of recessions that occurred and amount of months each one lasted. The data shows that while on the gold standard, America experienced 20 recessions that lasted an average of 21.65 months whereas without the gold standard our nation only experienced 14 recessions that lasted an average of 11 months. The two largest recessions lasted a total of 65 and 43 months while on the gold standard.

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Imagine living through a five year or three year recession. If something like that was ever to happen today America might not be strong enough to survive. That could possibly be much worse than the Great Depression. This is a tough idea to grasp because it is so devastating and unreal. A recession of over two and a half years could cripple this nation to the point of no return. Off the gold standard, however, the two largest recessions only lasted 18 and 16 months. This amount of time is not only much more manageable, but it gives us hope of a faster upturn. The chart below shows this data.
Gold 18 8 32 18 65 38 13 10 17 18 18 23 13 24 23 7 18 14 13 43 21.65 No Gold 13 8 11 10 8 10 11 16 6 16 8 8 18 11

Chart by NBER.gov.

Cold Hard Cash Since America left the gold standard in 1971, what is the value of the cash we carry around each day? Surprisingly, the cash we use everyday is not backed by anything, therefor it

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is truly worth nothing. The only reason we spend this cash is because it is given a regulated value by the government. Dr. Ted Amato, an economics professor at the University of North Carolina at Charlotte, has great knowledge of the current monetary system in place. Todays monetary system is based on fiat money, checkable deposits, and entries on ledger (Amato). Fiat money is simply money that is not backed by anything. Checkable deposits are just checks that can be given to a bank in exchange for cash and an entry on ledger is basically credit, explains Dr. Amato(Amato). If an individual were to buy a baseball online they would naturally pay with either credit or debit. When your bank sends that money to the baseball company, it is sent as an entry on ledger and not cash. Cash is only used when people buy products or services in person. Gold Gold has not been completely taken out of the picture; however gold is still bought by many investors today. It is considered a safe haven during rough economic times. As of November, gold prices are settling around $1,700 an ounce in the wake of the presidential election but Charles Jeannes, President and CEO of Goldcorp, predicts a price range of about $2,000 in the coming months (CNBC). Although gold is not a currency, its role as a commodity is a very important one. It technically is not able to purchase anything until it is turned into cash but if a person were to cash in their gold, they would receive a large sum of cash. Commodities such as gold and silver can be bought and sold in order to make money. The values of theses commodities are based on supply and demand and are calculated per once of each metal. When there is major uncertainty in the stock market commodity prices rise because there are very minimal risks involved. Gold has proven to be a solid investment in the past ten years as it has almost tripled in value. The chart below shows the rapid increase of gold prices in

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the last ten years. Chart supplied by goldprice.org.

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(goldprice.org)

Gold v.s. U.S. Dollar The U.S. Dollar and gold do not mix very well. They not only conflict when the gold standard is involved but they also conflict in the currencies and commodities markets. These situations most likely occur due to volatility in the global market. Most countries buy and sell both gold and currencies from each other in order to boost their own currency power and make a profit. The problem with this practice occurs when one country does not believe they are being treated fairly. Different governments will agree to fixed or floating exchange rates. Fixed rates are just as implied in the name. It is one set rate that two countries agree on. Floating exchange rates, however, are not fixed and fluctuate from time to time, Amato explains (Amato). Currency prices are very volatile and can be very costly if traded incorrectly. If a floating exchange rate is used, both parties agree to take on heavy risks. Trading currencies and commodities can certainly be a tricky business but with the right strategies and expertise a large sum of money can be made. What is True Wealth? With all this talk about gold and cash, the question of wealth comes to mind. How much money is enough to self sufficient in the U.S. today? In my own personal opinion, true wealth begins with being out of debt. If my definition of wealth were the same as societys then the United States of America would not be considered a wealthy nation. Although this nation was founded on the principles of capitalism, the government itself has not done a very good job in recent years applying these concepts. Being in debt is one thing but being in so much of it that our grandchildren may not get out is another. Something must be done swiftly in order to sustain

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the way of life that we all know and love. If our government can put aside its differences and work together on a common solution the people will be more at ease. In the past, our government has made some very good decisions but also some very bad ones such as going into the Korean war without paying for it. Today, it seems like those bad decisions have come back to haunt our economy. In order to move forward, we must make decisions that not only affect the present but also the distant future. We do not want our children cleaning up the mess our parents made. There must be a way to get out of this but it will not happen over night. New monetary policies could be a step in the right direction but a gold standard will never bring about positive results. What America does about spending and taxes will make the difference, while investors manage their portfolios based on these new monetary policies. All we can do is wait and hope that a change will come soon.

Works Cited

Amato, Dr. Ted. Personal Interview. 27 Sept. 2012. Goldprices.org. 10 Yr. Gold Price in USD/oz, 2012. Web. 6 Nov 2012. Jeannes, Charles. Interview by CNBC Analysts. Gold to $2,000 in 6-12 months. CNBC. CNBC, Nov 2012. Web. 6 Nov. 2012. Koba, Mark. What Is a Recession: CNBC Explains CNBC. CNBC, 21 Jul 2011. Web. 6 Nov. 2012. NBER.org. U.S. Business Expansion Cycles and Transactions. NBER. 20 Sep. 2010. Web. 27 Sep. 2012

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Gold Reserve Act of 1934. Serial Set Vol. No. 9769, Session Vol. No.1. 73rd Congress, 2nd Session S.Rpt. 201. Web. 24 Sep. 2012