Mining, mining and more mining

  

Gresham's law -- "bad money drives out good"

Lately all anybody is talking about is mining.  There are new mines in Ontario, new mines in BC, new mines in the Yukon.  Most of my memorable life mining has been a dying trade so why all the sudden is everybody going mining?

Could this be the start of the Gold Standard’s return?  It's definately making a lot of news lately, so what does that mean to you and me?

Once upon a time people traded grain for goats and daughters for land.  Then different cultures evolved and created different types of money.  It was somewhere between 30 BC and 14 AD that Augustus Caesar reformed the Roman monetary system and started issuing gold and silver coins as a primary means of trade.  Augustus brought Rome out of a century of civil war and into a golden age of history.

Fast forward about 1500 years and whole world wanted gold.   Columbus discovered America; Spanish pirates plundered the sea, we had the California gold rush.  And by the mid-1800’s most countries had adopted the Gold Standard as a way to standardize monetary transactions.

The gold standard meant that all paper money was backed by gold; you didn’t have to carry around actual pieces of heavy gold or silver.  However, paper money was guaranteed by something real, the government could only issue as much paper money as they had gold in storage to back it up with.

A brilliant and secure idea – no government could allow spending beyond their means because the GDP was spread evenly and you could only trade until the backed money was gone.  This created a golden era, which worked wonderfully until World War I happened.  During World War I countries spent a lot of money on warfare, more than they had gold in their vaults to support.  So they said, “Let’s forget the gold standard and just print what we need”.

Unfortunately when a county prints money without backing it up – hyperinflation happens.  There is more money out there and it is easier to get so it is then worth less; and the less it is worth the more it takes to buy the same product.  Kind of like the housing market back in 2005.  If mortgages are easy to get then there are more buyers and less houses available so prices explode. 

If the government can print as much money as they want it is easy for people to get, product demand is high so supply is low and prices on everything skyrocket.  Of course if proper controls are put into place, such as a Federal Reserve to ensue a government doesn’t just print as much as they want it should be fine for money not to be backed by a precious metal.

Money not backed by gold of course is called Fiat money.  With Fiat money, a government has the ability to control its own destiny by controlling the amount of notes in the market simply printing more or less and keeping that limit in check.

The Fiat system is wonderful in that the economy can be controlled; and if managed correctly recessions can be avoided.  Unfortunately most countries have no need to switch to a Fiat system unless they are deep in debt, in which case they are just creating their own inflation.

The US has switched back and forth several times to avoid recessions:

1785-1861 – Gold Standard

1862-1879 – Fiat System

1880-1914 – Gold Standard

1915-1925 – Fiat System

1926-1931 – Gold Standard

1931-1945 – Fiat

1945-1968 – Gold

And back and forth a couple more times, until the Fiat system in 1973 which stands today.

Why do they need to keep switching? Because human nature says if we can get away with it we will.  Countries always start a fiat system with good intentions, but as times get tight the temptation to print a little extra always seems to creep up until finally their dollar is devalued.

So here we are today.  The US dollar is in the toilet, the world is in recession and everybody is talking about Gold. 

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8638644/Return-of-the-Gold-Standard-as-world-order-unravels.html

So what does this mean to us?  A lot more mining – we need gold!

Going back to Columbus, the pirates and the gold rushers a gold backed currency means “he with the most gold has the best standard of living”.

The biggest disadvantage is that the wealth of the nation is depended on their supply of gold.  This restricts the government’s ability to manage the economy, and growth is limited.

I’m not sure going to a Gold Standard is even possible given the amount of debt in the global market today.  The US owes more money to China than they have in Gold reserves by about a couple trillion dollars.  But there is definitely a push by some to look at this.

I suppose what it really means to us, only time will tell.  I think lending will be harder to come by and we will be forced to live within our means a little more.  However looking back in history the most enlightened times were those under a gold standard.

http://economics.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=economics&cdn=education&tm=40&gps=443_389_1020_550&f=00&tt=2&bt=0&bts=0&zu=http%3A//www.ex.ac.uk/%7ERDavies/arian/amser/chrono.html

http://useconomy.about.com/od/monetarypolicy/p/gold_history.htm

http://kwaves.com/fiat.htm

http://useconomy.about.com/od/monetarypolicy/p/gold_standard.htm

http://homes.chass.utoronto.ca/~floyd/dickbook.html