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It's A Gray Area: It's as 'sound as the dollar'

October 30, 2010|By James P. Gray

I still remember my parents commenting during the 1964 presidential election about the silliness of Barry Goldwater's recommending that we go back on the silver and gold standard for our nation's monetary system. But now I know that Sen. Goldwater was right, and had we followed his recommendations, we would be the most economically healthy country in the world today.

The problem is that as soon as a country goes away from securing its currency with gold or silver — which it actually pledges to redeem to anyone who bears its paper currency — that country can almost never resist the temptation simply to print more money to pay its obligations. The rationale is, of course, that "we are only borrowing money from ourselves," but this immediately reduces the value of the currency. And, as I read from economist Mark Skousen's book "A Tale of Two Dollars" (Investment Rarities Inc., 2010), this is what we have starkly seen in our country since the middle 1960s.

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During the Revolutionary War, our fledgling government printed lots of "Continental" dollars, which resulted it them losing more than 90% of their initial value. This also gave rise to the phrase "Not worth a Continental." Having experienced this result, the Founding Fathers responded by mandating in Article I Section 10 of our Constitution that no state could "make any thing but gold and silver coin a tender in payment of debts."

From about 1815 until the beginning of World War I, all of the world's major currencies were on the gold and silver standard. Thus the British "pound" was literally the equivalent value of a pound of sterling silver. That also meant that inflation simply was not a problem, because before a country could print more of its currency, it had to obtain and store the equivalent amount of gold or silver to back it up.

Other than during the Civil War years when the federal government issued inflated "greenbacks" that were based only upon the "good faith and credit of the United States," our country was also on the gold and silver standard during that time. We mostly used Spanish silver coins that were called "thalers," which over time with our lax pronunciation we eventually called dollars. We also formed the practice of cutting those silver dollars into eight parts, which were soon called "pieces of eight." That is also the derivation of the term "two bits," which was what we colloquially called a quarter of a dollar.

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