The Gold Standard Myth

[jeffrey]

Many people believe that the money they spend is backed by gold reserves protected at Fort Knox. While it's true that at one time US currency was, the US government stopped backing the dollar with an actual gold supply in 1971. Since then all other major currencies have also stopped backing their money with gold (this is commonly referred to as "leaving the gold standard"). The belief that the dollar and other currencies are backed with gold is nothing more than a myth.

If there is no gold to guarantee the US currency, then what is it worth? his is an interesting question and basically it's worth nothing more than the paper that it's printed on.

Of course, that statement is a bit deceiving. While a dollar may not literally have any value, the US currently has a stable monetary system in place where people are willing to trade these dollar bills for goods and services. Could this change to where people no longer are willing to do this? Yes, there is that possibility, but it doesn't seem likely to happen in the near future.

Then again, since the entire system is currently based on a widely held belief among everyone, it isn't guaranteed the system will last forever. As economists Milton Friedman and Anna Schwartz say in A Monetary History of the United States:

“Each accepts them (the pieces of paper - dollars) because he is confident others will. The pieces of green paper have value because everybody thinks they have value, and everybody thinks they have value because in his experience they have value.”

This is certainly something to remember...

[PRICEPLUS]

All value is in the mind!

[Bookie]

Originally Posted by PRICEPLUS

All value is in the mind!

That's what you think.

Actually, you're pedantically correct. "Value" is a judgment, which constitutes an opinion and, therefore, a mental artifact.

"Things are neither good nor bad; 'tis thinking makes them so."

.

[Broken Arrow]

This is very true, but nothing to get alarmed about just yet.

Please remember that, relative to other countries, America is still considered a strong economy. America is also a huge consumer base in the global economy. What that means is that it is in no one's interest for the American economy to collapse. That also means that it is extremely unlikely for the dollar to collapse.

In light of this, I think this makes the dollar a superb forex investment for the contrary investor... as opposed to, say the Pound Sterling. A deflated dollar also has the ironic and unintented consequence of lowering one's overall debt... be it an individual's credit card or the national debt.... Please remember that the market is cyclical, and in Buffetology anyway, the best investment buys are in underappreciated markets.

Of course, because the dollar is based on "full faith and confidence" of the U.S. government, it is also vital for our said government to do whatever they can to maintain such faith. In that sense, I am disappointed with our current administration. Please keep in mind that I do respect the office. However, that doesn't mean I agree with, say, initiating the War on Iraq. What I will say is that at least our President is talking about fiscal responsibility now. Better late than never.

[poundwise]

Of course, if you want to get down to it, money is valuable because people think money is valuable, while in reality it is just paper (cloth actually) but, then again, gold and diamonds (etc.) are just rocks. All these types of things have value based on the same premise.

[tinapbeana]

Originally Posted by poundwise

Of course, if you want to get down to it, money is valuable because people think money is valuable, while in reality it is just paper (cloth actually) but, then again, gold and diamonds (etc.) are just rocks. All these types of things have value based on the same premise.

exactly!! only thing a gold standard really gives us is something shiney and pretty to call our money, rather than a flat linen-paper blend.

question: if monetary value were based on actual practical use, what do you think would be the most valuable commodity? water? oil? i'm voting water...

[Broken Arrow]

Now might be a good time to resurrect this article again.

In short, the best kind of fiat currency is one that is both stable, nearly impossible to counterfeit or modify, preferably in limited quantities, and is easy to use and carry.

[tinapbeana]

Originally Posted by Broken Arrow

In short, the best kind of fiat currency is one that is both stable, nearly impossible to counterfeit or modify, preferably in limited quantities, and is easy to use and carry.

in short? the minutes/hours i'm willing to work for a particular good or service, all tied to something intrinsicly mine like a finger print. big brother, here i come!

prices could (and likely would) fluctuate based on class status in life: a garbageman might be willing to work a few more hours in order to receive a rolex than a lawyer or a doctor would (part of that whole 'buying things to look rich' mentality). therefore the garbageman would 'pay' more 'credits' for the same good or service. the reverse might not always be true, though; someone may not be willing to sell the rolex to a lawyer for fewer hours of work than the garbageman, because s/he might desparately need the city's trash removed but has no current need for a lawyer... so the garbageman might get his rolex for 1 hour of work whereas the lawyer might have to put in 10...

sorry, things like this fascinate me!

[Elgin526]

I was taught in school that money is backed by faith in the government. The more people believe that the government is stable, the more sound the monitary system is, the more people believe in the value of the money said government prints. Of course other factors contribute to money's "worth", but this is a pretty good way of thinking about it, IMO.