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A few people have remarked how their
understanding of the relationship of the dollar and gold was helped by last
week's comment, in which we showed that $20 used to be, essentially, another
name for an ounce of gold. From this we can measure very precisely the
decline in dollar value since that time, simply by ascertaining how many $20
bills it now takes to receive an ounce of gold in return.
Actually I was being a little loose with
history to make the basic point. That step now behind us, we can look a bit
at how it came to be that $20 was a troy ounce of gold.
The Constitution of 1789 determined gold and
silver to be the sole monies of the new country. In the Coinage Act of 1792, the dollar was defined
as 371.25 grains of silver -- the weight of the Spanish silver dollar, which
was commonly in use in the United States at the time. (A "grain,"
by the way, was originally the weight of a grain of barley from the middle of
the ear.) In these days most money was metal, and since gold was of high
value and useful only for large-scale transactions, most day-to-day
transactions were done with silver. Silver was co-defined, under the
bimetallic conventions of the day, as having a 15:1 value ratio to gold,
roughly its normal free-market price. Thus, a dollar was also 371.25/15 =
24.75 grains of gold. The market ratio of silver to gold was about 15.30:1,
so in practice it was a little cheaper to discharge your debts in silver
rather than gold. A troy ounce contains 480 grains of gold, so: 480/24.75 =
$19.39/ounce of gold. In 1816 Britain went to a monometallic gold standard,
and perhaps this was some impetus to put gold on top in the US as well. In
1834 the ratio of silver to gold was changed to 16:1, or in other words the
dollar was worth 371.25/16 = 23.203125 grains of gold. That makes
$20.69/ounce. The market ratio was around 15.625 at the time, so this made it
cheaper to discharge debts in gold rather than silver, thus also making gold
the preferred metal for transactions. The Gold Standard Act of 1900 put the
monetary system on a monometallic basis (no more silver) and redefined the
dollar as 23.22 grains of gold, or $20.67/ounce. Thus, the $20 coin was
actually just a bit heavier than a troy ounce of bullion before 1834, and a
bit lighter afterwards. (Actually, the coins of that time, like the coins of
today, had a bit of silver and copper alloyed to improve wearability,
since gold is too soft even to make coins of. The gold bullion content of the
coins, then and now, was as indicated however.)
The troy ounce derives from the British
monetary system, introduced by Henry II (1133-1189). The British pound was originally
a Tower pound (5,400 grains) of silver. In 1528, the standard was changed to
the Troy pound (5,760 grains). The term "troy" comes from the
French city of Troyes, an important trading center in the Middle Ages, where
troy measures were in use since before 1000 AD. A troy pound contains 12 troy
ounces. Each troy ounce contains 20 pennyweights. Thus, the troy pound had
240 pennyweights. The British pound was subdivided into 20 shillings each
containing 12 pennies, or 240 pennyweights per pound. Why didn't they make it
12 shillings/ounces per pound and 20 pennies/pennyweights per ounce? Hey,
it's Britain. The British system in turn derives from the Roman system. The Roman pound was
about 327 grams and divided into 12 ounces. The Roman word for the pound was libra, which also means "scales,
balances" in Latin. Thus, the use of "lb" or the "curly
L" to denote "pound." The shilling derives from the Roman solidus,
and the penny from the denarius, which is why British pence were
traditionally abbreviated with a "d" rather than a "p".
The Founding Fathers were real serious about
the importance of maintaining a stable currency value. In Section 19 of the Coinage Act of
1792, they indicated the penalty for messing with the monetary system:
Sec. 19: And be it further enacted,
that if any of the gold or silver coins which shall be struck or coined at
the said mint shall be debased or made worse as to the proportion of fine
gold or fine silver therein contained, or shall be of less weight or value
than the same ought to be pursuant to the directions of this act, through the
default or with the connivance of any of the officers or persons who shall be
employed at the said mint, for the purpose of profit or gain, or otherwise
with a fraudulent intent, and if any of the said officer or persons shall
embezzle any of the metals which shall at any time be committed to their
charge for the purpose of being coined, or any of the coins which shall be
struck or coined at the said mint, every such officer or person who shall
commit any or either of the said offences, shall be deemed guilty of
felony, and shall suffer death.
"History records
that the money changers have used every form of abuse, intrigue, deceit, and
violent means possible to maintain their control over governments by
controlling the money and its issuance." -- James Madison
"If the American
people ever allow private banks to control the issue of their money, first by
inflation and then by deflation, the banks and corporations that will grow
up around them, will deprive the people of their property until their
children will wake up homeless on the continent their fathers
conquered." -- Thomas Jefferson
"Give me control of
a nation's money and I care not who makes the laws." -- Mayer Rothschild [1744-1812]
"I care not what
puppet is placed on the throne of England to rule the Empire. The man who
controls Britain's money supply controls the British Empire and I control the
British money supply." -- Nathan Rothschild [1777-1836] son of Mayer
Rothschild
Nathan
Lewis
Nathan Lewis was formerly the chief international economist
of a leading economic forecasting firm. He now works in asset management.
Lewis has written for the Financial Times, the Wall Street Journal Asia, the
Japan Times, Pravda, and other publications. He has appeared on financial
television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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