The reason, I found out, is that at the time it was. When I was six years old, it was 1974. Back then, a million dollars was A LOT of money. Now, it isn’t.
My research took me further back. In fact, all the way back to Isaac Newton, who – along with revolutionising modern physics – was the master of the Mint in London. He was the first to link currency to gold. Things pretty much stayed the same for two hundred years. A pound could be swapped for pretty much the same amount of gold in the early 1900’s as it could in the 1700’s.
The problems with the value of money really became apparent when I was four years old. Nixon brought the US dollar off the gold standard in 1972 after which all hell broke loose. At that age, there isn’t much you can do to protest (although I tried). It’s difficult to really appreciate the magnitude with which our wealth has been eroded since then – but I’ll do my best with this fact:
In the last 40 years, world currencies have lost 97% of their value
From the 1800’s to around 1918, an ounce of gold could be bought for less than US$20. That crept up to around US$40 when I was born, in 1968. By 1972, due to the US need to print more money to fund the Vietnam war, the cost of an ounce of gold jumped up to $60. So it took over 100 years to hit $20, another 50 years to hit $40, and another 4 years to hit $60.
That was the time when the Europeans began trading in their US dollars for Gold, and Nixon decided to take the US dollar off the gold standard and turn it into a ‘fiat currency’ – which really means it’s not backed by anything other than future tax dollars. The results? An ounce of gold cost over $300 by 1979, over $600 by 2006 and over $1,300 by 2010.
That means in gold terms, what was $40 when I was born, is now $1,300. That's a depreciation of 97%... Money today is worth 3% of what it was in 1968. Being a millionaire today is the equivalent of being a $30,000-aire in 1968…
Another way to look at it? Someone who was a millionaire back then, if their money was in gold, would be worth $300 million today. Someone who was a millionaire back then, if their money was in dollars, would be worth $1 million today.
Addendum…
Predictions are that currencies have a lot further to fall. That means that $1 million will be worth a 1968 wheelbarrow. My advice? Maximise your investment in assets such as commodities and property (particularly in Asia), while keeping a level of debt you can service, and as currencies devalue, so will your liabilities.Holding on to your money - at the speed with which it is devaluing - is the worse thing you can do. Governments are printing money faster than you can spend it.
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5 comments:
I found it kind of strange the Mark Cuban was recently advising people to put their money in the bank, isn't it better to invest in assets? http://blogmaverick.com/2010/08/20/the-stock-market-is-still-for-suckers-and-why-you-should-put-your-money-in-the-bank/
Thanks Rodger. This is a great summary of what I have read about a few times and I'd love to know more. I would love to know how the different currencies have aligned themselves to gold over the years? As you said the USD aborted the alignment - therefore making itself 'only worth what someone will trade you for it'. What about the other currencies? I heard for every dollar they printed in the mint they would purchase the same proportion in physical gold. Over the years this has changed from 1:1. Am I understanding it? Thanks Rodger and thanks for all your great information.
Michael Maidens
Hi Peter - I think he's right to say don't leave it in stocks. There is so much new money that banks and institutions now have available - it moves daily between currencies, stocks and other instruments that offer high velocity. That means you could easily lose your capital even though the underlying value is there.
But putting it in the bank simply means you've put your wealth is tied to currency movements instead of stock movements - which is even higher velocity and now higher volatity (as we've seen this year).
For example, if you had put your money in a US$ account at the beginning of this year, you've already lost over 20% of it compared to having it in gold, and over 10% of it if you had it in Australian dollars instead.
So if you've got spare cash, I'd say put it in:
1. Currencies with upward pressure (Asia / Australia)
2. Property with upward pressure (Singapore / Some parts of China & Australia)
3. Commodities like gold and silver
All three of these are assets that have a controlled growth in supply, but a faster growth in demand. VS shares and currencies that companies and governments can (and are) freely printing.
The Australian $50 note was first circulated in 1973 and the $100 note in 1984. Both purchased the same amount of products or services on the day they were introduced. In other words: between 1973 and 1984 that currency devalued by half.
In 1969 AUD$0.88 bought US$1.00 and today the two currencies are almost on parity.
Money may be a great way to keep score, but you'd better count it really quickly because it is reducing in value every second!
Thank you for expanding on that Roger! I hope the dollar picks up regardless, from the looks of it (after watching Ron Paul youtube vid &other sources) there is continued upheaval on the horizon.
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