Follow the Yellow Brick Road, follow the
Yellow Brick Road...and follow the price of gold rising, indicating
concerns about inflation
With heightened concerns about inflation – due in part to rising
oil prices – many investors are choosing to put their money in gold.
Looking back over time, history has proven that gold stands up to
inflation. Back in the 1970’s when serious inflation took hold of
the United States economy; gold prices shot higher and rewarded
those who invested in gold.
Let’s go back about 100 years ago when the US was on the “Gold
Standard”, meaning our paper currency was backed by actual gold
reserves. It was believed that gold was scarce, which continually
drove the price higher. This created great hardships for farmers of
that era. Farmers would borrow money for seed, but by the time they
were able to harvest, the rising price of gold made it much more
costly to pay back the bankers. Farmers were struggling.
The hardship many farmers experienced sparked the formation of
the Populist Party, who wanted the US to go off the Gold Standard
and onto a “bimetallic” standard of gold and silver. Since silver
was more plentiful, the idea was that prices would not rise as fast.
This would allow farmers to repay Banks for their seed money without
the huge additional cost for the increase in currency.
The most memorable work of
literature to come from the debate over gold and silver in the
United States is "The Wonderful Wizard of Oz," published in 1900 by
L. Frank Baum. That’s right, many think that the “Wizard of Oz” is a
children’s story. But the reality is that the story is about gold
and the struggle to get off the Gold Standard and onto a bimetallic
standard. In fact, OZ or the letters O and Z are the abbreviation
for ounce, as in ounce of gold.
The characters and items in the tale have a very symbolic meaning
associated with the Populist period. Baum summarized the monetary
debate through a charming story about a naive girl from Kansas –
Dorothy, who represented the average American citizen. Baum based
Dorothy's character on the outspoken Populist Leslie Kelsey, known
as the “Kansas Tornado."
On Dorothy's journey down the yellow brick road, which
represented the gold standard, Dorothy meets the Scarecrow, the Tin
Man, and the Cowardly Lion. The Scarecrow represented Midwestern
farmers that did not possess the intelligence needed to look out for
their own best interests; the Tin Man represented the American
factory worker that had become heartless through industrial labor;
and the Cowardly Lion represented William Jennings Bryan, the failed
Populist Leader. Bryan lost three presidential elections as key
supporter of the Populist movement for the bimetallic monetary
standard.
When they reached the Emerald City, the Wizard represented the
McKinley administration, which appeared “all knowing” as they pulled
strings behind a curtain, but were truly powerless to help the
people. The Wicked Witch of the East represented the eastern banks
that farmers borrowed from.
Once the Wizard was exposed and the Wicked Witch defeated, the
Scarecrow or farmers were enlightened, the Tin Man or factory
workers more empathetic, and the Lion or Populist Leadership were
empowered. Even the Tin Man’s axe was made of both gold and
silver...the harmonious blending of the two metals.
But Dorothy still needed to get home. She was able to do this by
using her silver slippers, which
she had acquired near the beginning of her long journey. Yes, the
1939 MGM movie used Ruby Red slippers for dramatic and colorful
effect, but the original slippers in the book were silver. So the
answer was in her hands all along...silver! Mr. Baum wanted to
creatively make his point that using silver was the answer.
Although Frank Baum, William Jennings Bryan and the Populist
Party tried, the US remained on the Gold Standard. However, a few
years later, large gold deposits were discovered, which alleviated
the pressure on prices.
Today, increasing gold prices can signal that investors are
concerned about inflation. But don’t look for a wizard or magic
slippers to fix it. The Fed has now hiked the Fed Funds Rate
thirteen times in their efforts to alleviate inflation. |
