A picture's worth a thousand words: I like graphs. Anyway, here's a long-term view from deCarbonel's Market Skeptics blog:
This picture, this visual history of America, is on deCarbonnel's under the heading Monetary Policy, theme of Gold Policy. And sure enough, it shows a long-term close relation between the value of gold and the value of the dollar. Except during the Civil War, and except since 1934.
But I'm showing you that picture for a different reason. Look at the low points on the graph. There's one just before 1820. One during the Civil War. One around 1920. And one... Let's say 1980 (when gold reaches a really high peak) after which the dollar stops losing value really really fast.
Arbitrary? Not entirely.
Now, compare those four key points to the Kondratieff graph here.
The end of Kondratieff "Summer" occurs in 1816, 1864, 1920, and 1980. It's a good match to the low points on deCarbonnel's graph.
After the fact? Maybe. Interesting? I think so. But it's not coincidence. Both graphs show price trends. We should expect them to match up. What's interesting is the repeating wave pattern, the regular ups and downs clearly visible until Depression-era policies disturbed the waters.
The old rhythm no longer shows up on the graph. But that doesn't mean there is no rhythm. It only means we don't know how to read the evidence.
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I'll say this in the simplest form, in order to honor the late great John Wooden, who preached the value of fundamentals:
I've read that one dollar bought in 1800 exactly what one dollar bought in 1900. In other words, while it was tied to gold, the dollar retained purchasing power over the long term.
However since 1913, the year in which the Federal Reserve came into existence, the dollar has lost more than 96% of its purchasing power! In other words, if you'd held dollars in paper form, you'd seen the quantity of goods you could buy per dollar collapse.
Why the loss of purchasing power? Well, paper is created out of thin air, and is thus limitless, unlike gold, which is finite. Something which can be created in infinite quantity has a much greater chance to decrease in value than something extracted in small quantities from the ground.
The best example of a falling dollar is found in comparing it to commodities exchanged in a barter system. An ounce of silver, for instance, bought about four gallons of gasoline in 1900, and it bought four gallons in 2000 as well. Silver depreciated zero percent. The price of a gallon in dollars, however, went way up over that period. It could be said that gas "went up" when in fact it was the dollar that went down.
We could use semi-precious stones, and any manner of finite commodities to establish sound money--a dollar whose intrinsic worth is tied to something of lasting value.
The government could seize all of the commodity, or restrict its ownership, in order to prevent a black market, illicit exchange like we might see with pennies today. A penny, you see, is now worth two! So a few years back, fedgov determined that melting down pennies would be illegal.
Now the reason for that would seem on the surface simple: prevent people from hoarding and melting down copper in the pennies, then selling it for profit. Yet the ulterior motive for restricting the use of pennies is actually psychological: if Americans really understood how their money was being constantly devalued, they'd realize there's no reason to hold their savings in dollars at all. They might seek to use alternative forms of money which would retain value...something like copper.
So copper and gold aren't going up in value: it's the paper dollar that's declining in what it can buy. This diminished purchasing power is most evident in items like copper, silver, and gold, which have been long recognized as standard bearers of value. Yet as the chart shows, this isn't a steady progression but rather a sequence of ups and downs as the dollar gains and loses purchasing power.
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