1. Introduction

 

In this paper, we analyze the value of money. We consider both paper money and gold. We attempt to relate the supply of money (MS) and gold to their purchasing power (PP). We demonstrate the extent to which printing of money dilutes its value. As a store of value, the value of money is represented by its purchasing power. We compare the ability of paper money and gold to function as a long-term store of value. We conclude that gold is an excellent store of value, while paper money is not. We observe that excessive printing of paper money is the ultimate cause for the inability of paper money to function appropriately as a store of value.

 

2. Data Sources

 

Historical monetary data is readily available on the internet. The official source is the Federal Reserve Board. Its monetary aggregate data can be found on its web site and is available free of charge.

 

The Bureau of Labor Statistics (BLS) publishes the historical Consumer Price Index (CPI) data. Like the Fed, it also publishes the data on its web site and makes it freely available. For a proxy of the purchasing power of money, we use the inverse of the consumer price index. To illustrate, if the price index doubles, the purchasing power is halved; if the price index increases 10 times, then purchasing power of money falls 90%.

 

 

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Published originally on DollarDaze.org - Feb 23, 2009

 

 

About The Authors

 

Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices.

 

Dr. Krassimir Petrov received his Ph. D. in economics from the Ohio State University and currently teaches Macroeconomics, International Finance, and Econometrics at the Prince Sultan University located in Riyadh, Saudi Arabia. He is a frequent contributor to www.FinancialSense.com

 

 

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.