English: Adoration of the Wise Men by Murillo (Photo credit: Wikipedia)

Merry Christmas and Happy Holidays to all.  During this time of joyous celebration, of gift giving and receiving, I ask, “What is the one gift that best represents a prosperous New Year?”

Thinking back to the original Christmas gifts, I couldn’t help but notice a powerful economics lesson contained in the story of the Three Wise Men.  They traveled great distances from Asia, North Africa and Western Europe to get to Bethlehem.  Lacking sophisticated navigation systems, they followed the Bethlehem Star, a reference point fixed in the heavens.  If not for this heavenly gift, the Three Wise Men would not have found Jesus.

All other measurements of time and distance have evolved from, and are made possible by, this fixed reference.  The more complex a society, the more it depends on fixed standards of measure.  In our highly advanced society, consider what life would be like if we had to check the news channel to see if an hour closed at 60 minutes or if a foot was still 12 inches.  Life would be  chaos.  An equally important unit of measure, the dollar, is not fixed to any standard of value.  As a result, we have financial chaos.

Markets do not determine the value of the dollar, politicians do.  Markets simply react to their policies, so blaming markets for a weak dollar is hypocrisy of the highest order.  It is the equivalent of throwing sand in the gears then blaming the engine.  What do you expect from politicians?

US Gold Standard Balance

US Gold Standard Balance (Photo credit: hyperion327)

This brings me back to the Three Wise Men.  Is it a coincidence that one of them brought gold?  Just as the Bethlehem Star is a fixed reference in the galaxy, Gold is a fixed reference point among the galaxy of prices.  It has held its purchasing power relative to other goods for more than 400 years (and probably longer if we had the data to prove it.)  When a currency has been defined as a specific weight of gold, it too has retained its purchasing power.  Some call this “sound money” or “hard money”.  Alternatively, under the “paper dollar standard”, which began in 1971, the dollar has lost over 90% of its value.  That’s right, nine-zero!

The most solemn pledge a government can make to its citizens is to maintain the value of its currency.  Doing so preserves the income, savings and living standards of the people, while failure means confiscation.  Think of it this way:  The government issues two types of obligations, one is interest bearing (Treasury securities) and the other is non-interest bearing (Federal Reserve Notes, or currency).  Recall the ruckus that occurred around the debt ceiling fiasco with the mere mention of the possibility that the U.S. would even consider defaulting on its interest bearing obligations.  Compare that to the silent default that occurs routinely when politicians diminish the value of the dollar.

If you ordered a drink and it was watered down, you would speak up.  If you ordered the 12 oz. steak and received the 8 oz. instead, you would speak up.  With gold convertibility, you can speak up.  If the Fed watered down the money supply, citizens could take delivery of the underlying collateral, thereby reducing the money supply and preserving the value of all dollars.

A gold-standard 1928 one-dollar bill. It is identified as a United States Note rather than a Federal Reserve note and by the words Will Pay to the Bearer on Demand, which do not appear on todays currency. This clause became obsolete in 1933 but remained on new notes for 30 years thereafter. (Photo credit: Wikipedia)

History is clear.  Economic growth is strongest and unemployment is lowest when the dollar is defined as having a fixed value.  Further, the rise in oil prices is fully explained by the decline in the value of the dollar.  Defining the dollar in terms of gold will result in lower and stable gas prices.  Finally, a return to sound money also means the Fed would have to end the amazingly stupid policy of raising interest rates every time wages started to increase.  Memo to the Fed:  wage growth is a sign that prosperity is about to be enjoyed by every corner of society and that is a good thing.

The only winners under a paper dollar standard have been the Progressives who want to systematically transfer power and liberty from the people to the government.  And make no mistake, there are many big government Republicans who might as well be Progressives.

My favorite Wise Man is the one who brought gold.  Let’s be wise and demand a return to sound money.  It will be the greatest gift we can give each other. This will represent the largest transfer of power from the government to the people in the history of the republic.  If we stick together we have them outnumbered.  If we bring the heat, politicians will see the light.  It’s your turn to speak up.  Wishing all of you a prosperous New Year!