Column by Paul Hein.
Exclusive to STR
Perhaps you saw the video clip of Bridget Brown, who is a “markets reporter” declaring that gold is not backed by anything, whereas the U.S. dollar is backed by the American government. She apparently considered this a shortcoming of the precious metal. The mind boggles.
The late Merrill Jenkins, the original Monetary Realist, often spoke about “backing,” and its significance. Not being an economist, Jenkins merely saw things as they were, and described them without the prejudicial outlook of someone with an ideology. He often used the analogy of the hatcheck and the hat in describing the role of “backing” of money.
When you check your hat at a restaurant or theatre, you receive a hatcheck as a sort of receipt for your “deposit” of the hat. Interestingly, no one confuses the one with the other, so that you never see someone wearing a hatcheck on his head, or claiming that he has his hat, when he only has the hatcheck. Sadly, however, almost everyone confused the bank note for the deposited money for which it was a receipt, almost invariably referring to the note as “money.” But, of course, the paper “money” wasn’t money at all, but was “backed” by the money which had been deposited to justify its issuance. (Today there is no money, only bank notes, or bank credit, issued without requiring the deposit of anything.) The money was gold, or, more usually, silver. It didn’t need to be “backed” by anything; it WAS the money, not a receipt or claim check. Ms. Brown is, therefore, entirely correct when she states that gold isn’t backed by anything. Unfortunately, she doesn’t seem to realize the absurdity of her regarding this as some sort of defect of gold.
Nor does Ms. Brown realize the absurdity of claiming that the U.S. dollar is backed by the American government. She is not alone, however, in associating “backing” with the U.S. dollar. Many otherwise intelligent commentators bemoan the fact that the dollar isn’t backed by anything. Claiming that the dollar isn’t “backed” by anything is analogous to lamenting that the quart isn’t backed by milk, or the pound by bread. The confusion arises from the fact that the bank notes, which most people regard as money, bear the words “dollar” or “dollars” in large letters, leading to the understandable but erroneous conclusion that the “money” is “dollars.” That’s not true, and never was. In the days of money, the dollar was a specified quantity of a specified quality of it. Thus, when the term had meaning, the dollar was 412.5 grains of standard (90% pure) silver, in coin form. It was a term of measurement. Today, obviously, the “dollar” is no particular amount of any specific substance. The term is without meaning. We have billions of hat checks--but no hats.
It is not surprising, therefore, that the U.S. mint is coining legal tender coins of gold, designated 50 dollars, for which the purchaser must pay 1,899 “dollars.” It is coining one dollar coins of silver, which cost 40 “dollars.” Would Ms. Brown think it peculiar that one “U.S. dollar” won’t buy a (silver) U.S. dollar? Probably not. It amazes me that this significant fact goes unremarked by our financial pundits, although it explains a great deal about our impending financial meltdown. The Emperor is strutting about in his underwear, and has been doing it for so long that it’s accepted as normal.
With few exceptions, stupidity reigns when the subject is money!