Economic/societal change in the 1960s and subsequent decades have been fast. Almost every aspect of our life has been impacted by the increasingly undeniable march of technological growth and improvement. In terms of economics, the world during the 1960s is a drastically different place than it is now.
Throughout the decade, the gold standard was a stable and robust foundation for the financial system. During this period, the unemployment rate was low, and the saving rate was high. The gold standard ensured that wages stayed consistent by being linked to a scarce commodity and had lasting economic value.
HOW DID THE GOLD STANDARD FUNCTION IN THE 1960S?
The gold standard worked by ensuring printed dollars had the fixed equivalent value in gold, which could be redeemed for at any time. During the 1960s, 1 ounce of gold was worth $35. This system protected the currency from devaluing by law because the government had to give gold for an equivalent amount of paper money. However, over time, their level of debt was too high, and they could no longer resist issuing fiat currencies.
WHEN WAS THE GOLD STANDARD ABANDONED?
In 1971, the Nixon administration removed the gold standard due to escalating costs of war in Vietnam and a negative balance of payments linked to German and Japanese post-war manufacturing. This televised address from the oval office was a turning point in U.S. economic history which ultimately led to the creation of fiat currency and, thus, the current form of money exchange system. The freedom to print money as needed was an essential component for the United States, which makes dollar bills a staple in most people’s wallets to date.
HOW HAS MY INCOME CHANGED SINCE 1971?
In 1971, the median wage was $7805, and gold prices were about $40 per ounce. So each worker was being paid roughly 195 ounces of gold. In 2014, the median annual wage was $52,000, with gold prices at $1200. This equated to about 43 ounces of gold in wages. This shows that income from labor within ounces in gold has decreased by 77% since 1971. This startling statistic demonstrates one of society’s most pressing problems. The notion that one can “work your way into wealth” is complex without a system with sound monetary policies.
The traditional methods of saving and capital formation no longer exist. These are two of the essential elements that lead to increased success in society, not just for privileged ones. Instead, they have been replaced by speculation and gambling. Therefore, savings rates have fallen significantly, and the idea of having a savings account has become foreign to many.
Understandably, the purchasing power of wages has decreased and consumes less in comparison to 1971. This is mainly due to government policies such as welfare and social security, which increase income equality. However, our monetary system has not adapted to this. As a result, we are stuck with fiat currency and a financial system that does not work for ordinary people like you and me.
HOW HAS THE BUYING POWER OF MY SALARY CHANGED?
With the end of the gold standard, an average salary for a fiat currency now buys less health care, education, and housing. Middle-class people are struggling to afford everyday things that were once considered basic necessities. Housing which was once affordable, is now becoming a distant dream for many.
Our wages have not adjusted to compensate for these changes, and the gap between what we want and what we can buy widens each year at an alarming rate.
Historically, the average house price has been 3.6 times the average wage. This means that in 1971 you would have had to make three and a half times as much money to buy an average home. The House Price to Income Ratio in 2014 was 6.5 times, almost double during the gold standard. In other words, the cost of a house is twice as expensive today than it was in 1971 if measured in fiat currency.
SOME INTERESTING EVALUATIONS
In 1971, the House Price to Gold Ratio in the United States was 696 – meaning someone would need 696 ounces of gold to purchase an average house. In 2014, this ratio had dropped to around 283 ounces. In gold terms, housing has become less expensive since 1971. This alone shows the immense value of gold, where our labor fails miserably to keep up with the increasing debasement of money and time – but gold endures every test. Gold is a good investment over the long term because it can preserve the purchasing power of your income. This is not the case with the worst fiat currency in the history of humanity.
SO, WHAT NEXT?
Quantitative easing is inflating asset bubbles that only a small section of the population is benefiting from. As long as the mispricing of labor remains unresolved, we will continue to see an unsteady financial recovery anywhere in the world. As a result of these policies, public and private debt levels worldwide are reaching an unsustainable level. If not reversed, the affordability of living will continue to deteriorate, and society will become increasingly unequal. Income inequality and the entrenched poverty pockets within our society and worldwide will continue to swell.
As one of the few stores of value that has stood the test of time, gold can provide a sense of safety and security. Though price levels for gold fluctuate from day to day, the value of gold is always constant. Throughout history, manias and misallocations of capital have been a typical occurrence. Keep this in mind as you make your decisions regarding gold or any other investment.
If your great-grandchildren were to dig up a box you buried for them 100 years ago, what would you want in it? Anything but a fiat paycheck seems like the better option. The purchasing power of fiat currency coupled with the loss of purchasing power of your labor will continue to deteriorate as long as we are enslaved to a debt-based monetary system that no longer works for us. Don’t let this affect you or your loved ones negatively; store and protect wealth through precious metals. In the meantime, don’t spend money you can’t afford to lose; do your research and make well-thought-out decisions.