Dear Chairman Meow,
Is gold real money? – Janet, Washington, D.C.
Ah, thank you for your question, Janet. Chairman Meow is a very knowledgeable and observant cat with a healthy distrust for human governments. Allow him to teach you about a concept called, “entropy,” that is pervasive in our world, and tell you why it matters to your savings so that you may always provide a warm home and salmon treats for your kitty.
The Concept of Entropy
Entropy is the tendency of systems to move from order to disorder. Entropy is all around us. For examples of entropy, watch an ice cube melt in hot tea, or observe a burning campfire deteriorate into ash.
Chairman Meow is reminded of the movie Jurassic Park.
Do you remember when the obese, greedy, human turns off the security system for his own financial gain? The park quickly falls into disorder as the dinosaurs break out of their cages and start eating people.
After entropy takes hold, returning a system to its original state of order becomes difficult or impossible.
Humpty Dumpty & Entropy
The concept of entropy is also illustrated by the famous story of “Humpty Dumpty.”
Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king’s horses and all the king’s men
Couldn’t put Humpty together again
You see, the corpulent anthropomorphic egg fell off the wall, and he landed with a sickening splat. He made a disorderly mess on the ground, and could not be reassembled, even by the most powerful figures (all the king’s horses and all the king’s men) in the land.
So, allow all-knowing Leader Chairman Meow explain how this relates to your money.
Entropy, Currency, & Gold
A system of currency (like the dollar or the Japanese Yen) not tethered to gold is subject to the laws of entropy; like a bike left outside in the rain, or a giant egg-man perched precariously on a wall. You see, when currency is not anchored to something of intrinsic value, it gradually deteriorates and falls into disorder because of entropic forces acting upon it.
While these entropic forces change over centuries, today they involve currency devaluation, interest rate manipulation, and stimulus efforts. Just read today’s economic headlines in the news and you’ll see entropy at work.
But, Why Is Gold Money?
Gold and silver have what is called, “intrinsic value” which means that humans and raccoons will always believe they are precious, and worth hoarding.
Under a gold standard, paper money was simply an IOU that could be redeemed for actual gold or silver at any time.
Gold is ideal as hard money because it’s easily measured, doesn’t deteriorate or rust, and can’t be reproduced or engineered in a lab. The world’s gold supply is consistent, and never increases by more than about 1% each year, even with all of the newly mined gold.
Because of this intrinsic value and stability, gold and silver served as the foundation of money for thousands of years.
(*The traditional gold standard was a simplistic system lacking the flexibility needed for the 21st Century, but at least it established a solid foundation for currency, and demanded collateral for debt)
A New Science of Alchemy?
Men called, “Alchemists” tried for many years to create gold from lead without success. (meanwhile, cats spent their time on more noble pursuits.)
However, if money couldn’t be created from base metals, then perhaps it could be created from paper, or even by computers?
This was attempted many times throughout history, and all of the attempts were doomed to end in failure. A couple of well-known examples include when France severed the tie between gold and the French currency, leading to chaos and the French Revolution.
Or, Janet, consider when Germany lost WWI and suspended the gold standard. Their paper “marks” soon became worthless as a result of hyperinflation due to their crushing debt, leading to the rise of Hitler.
A Starbucks tall latte would cost 20 billion German Marks!
However, as they say, “those who don’t learn from history are doomed to repeat it.”
In 1971 Richard Nixon formally took the U.S. off the gold standard, replacing the dollar’s tether to precious metals with a foundation of nothing but faith and trust in the U.S. government.
That’s also the year that Disney World opened to the public, charging $3.50 per ticket. Today that same 1-day park ticket will cost you over $100. Do you see where wise leader Chairman Meow is going with this, Janet?
You might say that August 15th, 1971 was the birthday of the monetary “Humpty Dumpty” we depend on today.
The Law of Entropy Suggests this Won’t End Well
Did president Nixon and the Federal Reserve succeed where alchemists had failed for centuries? Or, is something more valuable and tangible than faith needed to support a currency?
Perhaps an egg on a wall is a good metaphor for where we find our monetary system today. Even though the ability to create limitless debt has brought us growth, and even lifted us out of financial crisis, humanity will eventually learn that it is still subject to the laws of entropy and gravity.
So, Janet, when debt and stimulus finally reach their limits and Humpty falls, will all the king’s horses and all the king’s men be able to put Humpty back together again?
A Post-apocalyptic Future of Cat World-Rule?
Although Chairman Meow was looking forward to a 21st Century of flying cars, reasonably priced Disney tickets, and responsible central banks, it appears he will be disappointed. However, as they say, “in every failure their is an opportunity.”
While greedy men risk their future by amassing colossal debt, the kitteh simply watches and waits for his opportunity, and the dawn of the glorious Kitty Revolution…
Chairman Meow haz spoken.