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The World’s Supreme Test for Gold

2011-AUG-29

gold is money“Gold is now at its supreme test of desirability. Either it will become much more valuable, or the trend will be away from it altogether. And today economists are not agreed on which will happen; but the opinion is strong that there will be a drastically revised conception of the virtues of gold.”

This excerpt comes from The Vancouver Sun of October 1933. It is a fascinating article. I strongly recommend that you read it in its entirety here. (It should take you no more than 3 minutes to do so.)

The article wrestled with one economically-perplexing question: Did gold become money because people wanted gold in a “special way” or is gold wanted by people just because gold is considered (legal) money? The article remarked that some economists believe it is the former, while others believe it is the latter.

The article---and its question posed---must be understood in context, however. In April of 1933, U.S. President Franklin D. Roosevelt ordered that all gold held by American citizens was property of the United States Treasury and, as such, by May 1933 all American citizens must turn in their gold to the Federal Reserve and/or an affiliate banks.

In other words, gold was no longer deemed (lawful) money in the United States. The article, therefore, pondered the question: Would the demand for gold remain even though the metal was no longer considered money?

The article’s author took the position that, regardless of if gold is deemed legal money, people want gold and that is what ultimately drives its demand. But gold was still considered money in other countries like France, Italy, Belgium, Germany, Holland, and Switzerland. In fact, the author noted that “Frenchmen” were regularly entering into the London Gold market to purchase gold even though it cost those business men a heavy premium compared to simply redemption at their own Bank of France. Why pay this premium?, the author asked. No need to ask why; just note that it is happening, the author said.

But what if the above-mentioned countries followed suit with the US and Britain and made gold “not money” anymore? What then for the demand for gold?

Time will tell, the author concluded.

Let us hope that if [the test of gold] materializes we shall profit by its lesson, for that lesson will be of great importance in clearing people’s minds upon some fundamental principles concerning the nature of “money”---and its “management.”

The author would be satisfied to know that history has answered this question and, in addition, has vindicated his position---that gold is desired and wanted by the people not because it is deemed legal money but because it is the truest money. After 70 years, history has proved that people desire gold regardless of what governments call it or deem it.

And right now---at a gold spot price at about $1900 per ounce---the people are showing their strong desire for gold is only beginning to be rekindled. The “supreme test” of gold has been completed. But it has not ended. Not until, that is, gold has been deemed “legal” money once again.

Gold is money.