Wednesday, January 31, 2007

All That Glitters...

Yeah, I know, it should be "glisters", not glitters, 'cause that's what Shakespeare wrote in "The Merchant of Venice." But hardly anyone uses "glisters" anymore; the word has been abandoned as surely as the USA abandoned the gold standard on this date 73 years ago. So what does this historical tidbit have to do with the price of beans in Greenwich today?

Well, everything, actually. When FDR criminalized the private ownership of gold by American citizens and recalled all the gold coins in circulation, our currency no longer had any objective value. Rather, it was backed by "the full faith and credit" of the United States - whatever you may choose to think that means. Can you take it to the bank? Well, you really don't have a choice.

The Gold Reserve Act, passed 73 years ago today, effectively devalued the dollar to 69.3% of its value the day before. And the dollar has continued to fall in value ever since.

On April 4, 1933, you could walk into any bank in the country and obtain a one-ounce gold coin with a face value of $20. The next day, FDR signed Executive Order 6102, and the landscape changed forever. The Order did allow a private citizen to keep up to $100 in gold coins, but anything over that had to be sold back to the government. Which on this date in 1934 raised the official price of gold to $35 per ounce. Hence the overnight devaluation.

Let us suppose, dear reader, that our grandparents has been smart enough to put aside those five double eagle $20 gold pieces in 1933. And that you and I went down to the bank today to get them out of the safe deposit vault. What would they be worth today?

Well, gold this morning is about $650 per ounce, so multiply that by 5 and you get $3,250. But wait - weren't most of the gold coins returned to the Treasury melted down into ingots? Yes, they were. So there's also a collector's premium that attaches to these coins. If our grandparents had happened to put aside bright new uncirculated coins of 1931 or 1932, they each would easily be worth $30,000 or more, for a total of $150,000+. If they were lucky enough to put aside scarcer dates or mint marks, you and I could easily be holding a million dollars' worth of numismatic treasure.

Well, we all know that our grandparents weren't that smart, or that lucky. And that's why we tend to eat beans more often than filet mignon.

By my reckoning, just the bullion value of that $20 gold piece is now 32 1/2 times higher than it was in 1933. I'm no math genius, but to me that seems to suggest that today's dollar is worth only about 3% of a 1933 gold-backed dollar. Ouch.

Well, I suppose that anyone who bought real estate in Greenwich in 1933 has made out pretty well, since, like gold, the price has gone up many-fold over the decades. But I doubt it has matched the increase of those uncirculated garden-variety 1931 or 1932 gold pieces, which have enjoyed a phenomenal 150,000% appreciation (well, they're worth over 1,500 times as much as in 1933 - did I do the percentage math right?).

What's the moral here? Our amazing shrinking dollar is worth only 3% of its gold-backed forebear. Gold has proven a much better investment, as has local real estate. But the "full faith and credit" of the United States has fallen by 97% over the past seven decades, and is still on the way down. Tens of millions are missing or misspent in Iraq, say today's headlines; and that's just a drop in the bucket. One thing is certain: the dollar's value will continue to decline in the months and years ahead. And that will surely affect the price of beans in Greenwich.


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