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Gold or Consumer Price Index (CPI-U) — What Basis for Stable Money?

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Good money has always meant stable money. Stable money buys the same goods in 5, 10, or 30 years’ time as it does today. Stable money means that if the price of a good goes up it is because the cost of the good is rising, not that the value of one’s money is depreciating.

Nations thrive with stable money and decline when their currencies float and are debased. The Roman Empire is a good example. In 312 A.D. the Emperor Constantine minted the solidus coin containing 4.5 grams of pure gold. The eastern Empire, based in Constantinople (Byzantium) maintained the gold content of the solidus and the empire flourished for another thousand years until 1453. In contrast the western empire with Rome as its capital continued to debase its currency. In 400 A.D. Rome was sacked by Visigoths and the last western roman emperor, Romulus was deposed in 476.[1]

The solidus, meaning solid gold.

The example shows stable money is about more than just a means of exchange — it reflects something about the confidence and discipline of a nation.

Until 1971 when the US left the gold standard, the stability of money was provided by gold. Currencies pegged to the value of gold (the gold standard) themselves became stable. Since 1971 the world has been without stable money. Many see today’s floating inflation ridden currencies as a major factor in the loss of real wages for workers, lower economic growth, staggering government debt and the chronic instability of the financial system.

In order to remedy this situation I launched Saver Token in May of this year as a return to stable money. But unlike the gold-based stability of the past, Saver Token is not pegged to gold. Instead it tracks the US Consumer Price Index for all urban consumers, seasonally adjusted (CPI-U). Why this change of method? Is gold no longer stable? What grounds are there to believe CPI-U can be used as a basis for stable value? These questions are important, not just for Saver Token, but for a financial system in perilous need to rediscover sound money. The answers to these questions may surprise you.

The stable value of Gold

Let us start with gold. The question that is never asked in the quest for stable money is “Why does gold have a stable value?” Gold, silver, and to some extent other metals such as copper and bronze where used as a medium of exchange for at least two thousand years before the minting of the first coins in Lydia in the 8th Century B.C.[2] The metals were used as a unit of exchange based on their weight. Because the weight of a metal, assuming its purity, always contained the same amount of metal, people had a means of valuing different items such as sheep, bricks or pottery they wished to exchange with each other. Each would be worth so much weight. This enabled, for example, six sheep, with a value of 2 ounces of gold, to be traded for 100 bricks because they also were valued at 2 ounces of gold. The stability of the relationship between weight and the amount of the metal produced the idea that these metals had a constant monetary value.[3]

The point is that people, probably unconsciously, gave gold and the other metals their stable value. There is nothing inherent in these metals that mean they have to have a constant value. Like language, monetary value and stable value are human artefacts. The reason people gave gold this stability was in order to have a stable means of exchange. In the words of Nathan Lewis: “It is the ‘need’ that makes it so. Stability of value is inherent in the concept of ‘money.’ Thus, I think that gold is pressed into the role to some degree — that humans, somehow, manage to maintain gold’s value stable.”[4]

The stability of gold then is a product of people’s need and expectation of such stability.

Understanding where gold’s stable value comes from does two things. First it begs the question whether we still need gold to have a stable value. If we do not then the motivation for conferring stability, conscious or unconscious, disappears. Second, it highlights people as the source of both monetary value and monetary stability. In a world where the majority of the population still believe government and their central banks are the creators of money and its value, this realisation is empowering and can have far reaching consequences.

We can see what happens when the need for stability disappears with the demise of silver’s peg to gold in the early 1870’s. Before that time most of the world actually ran a bimetallic money system with the value of silver pegged to gold at a standard rate. This rate varied from time to time and from region to region but always within a given range. In the 4th century B.C. Alexander the Great used a 1:10 ratio established by his father Philip. Eighteen centuries later the gold silver ratio in Europe around 1500 had only changed to 1:10.7. With the nine fold increase in world silver production between 1493 and 1615 from the mines of Mexico and Bolivia the gold silver ration declined to 1:12 in 1600 and 1:15.5, depending on location by 1700. However these are small changes over long periods of time. For practical purposes at the time they would have been unnoticeable and are testimony to the ability of people’s need and expectation to maintain a constant value.

[1] Nathan Lewis, Gold the Final Standard p.30.

[2] Nathan Lewis, Gold the Final Standard p.22.

[3] Nathan Lewis has provided an excellent history of money in Gold the Final Standard.

[4] Private correspondence with Nathan Lewis.

The loss of silver’s peg to gold. Source:

Then in the early 1870’s silver lost its peg to gold. The cause was not an increase in the supply of silver. This had already happened in the 16th century and had not been sufficient to do more than adjust the gold silver peg. What happened in the 1870’s was total collapse of the peg. It has never been restored.

Why did silver’s stable value fail? The 1870’s where a period of unrivalled economic expansion driven by the industrial revolution. One result was the removal of local monetary differences and the evolution of an international finance based on gold alone. The Bank of England was formed in 1694 with its notes convertible into gold. As other countries followed the British model bank notes and other paper instruments increased for trade purposes, all convertible into gold. The effect was that the need for silver to maintain a stable value disappeared. Without the need the stability was gone.

The question for people who advocate a return to the gold standard is, “If it can happen to silver, can it happen to gold?”

Gold since 1971

The answer is yes, it can happen if there is no longer either the need or expectation for gold to have stable value. The evidence since 1971 is mixed but on balance I would say it suggests gold continues to maintain at least the semblance of stable value. Let us take a look.

First though finding evidence of price stability is not as easy as it sounds. If one is looking to see if gold has been stable since 1971 what does one use as a benchmark of stability?

In two blog posts Nathan Lewis investigates the stability of gold’s value since 1971 by focusing on commodities. During the gold standard era in Britain, 1694–1914 commodity prices measured in gold where in general stable. This is what you would expect with stable money — prices do no change because the value of the money does not change.

The relative stability of commodity prices during the gold standard era in Britain. Source:

Then commodity prices do change during the first and second world wars when Britain let its currency float. Since 1971 commodity prices have fallen by a fifth against gold. Lewis suggests some of this fall could have been the result of the increases in farm yields as a result of the green revolution. The 1970’s also saw a large increase in investment in the mining sector which could have kept prices low relative to gold.

However not all commodities have changed their value relative to gold. For example crude oil priced in gold has remained relatively stable.

Spot crude oil prices measured in gold since 1970. Source:

There is other data that suggests gold’s continued stability. Advocates of the gold standard like Nathan Lewis are not in favour of instruments such as the Consumer Price Index (CPI-U). Yet the CPI itself gives support to the idea that the value of gold post-1971 has remained relatively stable. The below graph plots the spot price of gold and the CPI-U on different axis. As you can see since 1982 both have risen at approximately the same rate. As CPI-U is a measure of inflation, this suggests that over the 46 year period of the data the value of gold has kept a stable value.

Spot gold prices compared to CPI-U, separate axis.

This visual indication of gold’s stability is supported by comparing actual prices in stores. Ed Dolan, in an article we will touch on below, conducted a price check of grocery items advertised in a newspaper in 1982 with his own local supermarket in Northport Michigan on 9th February 2015.

Newspaper ad for grocery prices 1982. Source:

During that period the CPI rose almost 3 times. In comparison the spot price of gold rose 2.4 times. When these multipliers are applied to the cost of a range of grocery items gold on average overstates inflation by 11% while the CPI understates inflation by 11%.

Comparing gold and the CPI as a measure of prices increases in groceries 1982 to 2015. Store data source:

For example, the price of chicken breasts in 1982 was $1.19 cents. Its actual store price in 2015 was $3.59. The gold forecast was within 1% of this price at $3.55, while the CPI under-forecast by 20% with a price estimate of $2.86.

The Challenge of Gold’s Stability

The relative stability in some commodity prices measured in gold and the long term parity between CPI-U and gold suggest that gold continues to have a relatively stable value. There is certainly little evidence that it has completely lost its stability in the same way silver’s price stability collapsed in the 1870’s. This should be good news for those seeking a return to stable money through a restoration of the gold standard.

Yet while gold still seems to hold a stable value over the long term, in the short and medium term, as well as for everyday transactions I do not believe it would be credible in the eyes of those using a currency based on it.

For example gold did well in forecasting the rise in chicken breast prices between 1982 and 2015. However it is unlikely this means that the price of chicken breasts prices followed gold’s long decline to cost just $1 in 2000, to peaked at $4.53 in November 2009 and then fell back to $3.59 in 2015. Far more credible is that prices generally rose in line with the CPI-U than followed the erratic trajectory of gold.

This lack of credible price stability in the short to medium term can also be seen in the lending market. For example, the below graph shows the annual interest rate for a 30 year fixed rate mortgage in the United States. A second line shows the rate with the inflation rate calculated by the CPI-U removed. For banks to make money on their loans they need to offer a rate above the rate of inflation. If the real (inflation-adjusted) rate of interest was negative they would be losing money on every loan. The graph shows that banks still earn from their loans when the interest rate is adjusted by CPI-U. The CPI-U adjusted rate is still above zero. This is credible in real world terms. Banks do not make loans to lose money.

However, if we adjust the 30 year fixed mortgage interest rate by the 12 month average price of gold the result illustrates the volatility of gold’s value.

If gold was providing a stable value then the graph also suggests that banks were losing money on their loans between 2001 and 2012. The trend line also goes negative in 2010. Neither of these suggest gold is currently representing real-world stability in the short to medium term. It is this lack of credibility over time frames important to people in their daily lives which is why I did not choose gold as the basis for Saver Token.

Yet does the CPI-U do any better? That is where we turn our attention to now.

CPI-U as the basis for stable money

Unlike the stability provided by gold for thousands of years, the Consumer Price Index (CPI-U) is a statistical construct based on changes in actual prices. If the stability provided by gold was a largely unconscious act by people in the past, use of CPI-U as a measure of stable money has the distinct advantage of being a conscious act of creation. Because it is a statistical measure, deliberately created to measure inflation, CPI-U does not carry the same risk as does gold that one day its loses its ability to measure inflation because it is no longer needed.

The conscious act of creation does however also have drawbacks. The most obvious is that people argue about how it is created. Many believe CPI-U understates the rate of inflation. They point out the index is generated by the Department of Labor Statistics (DLS). As a government department its opponents claim that there is every incentive for DLS to understate inflation as it makes the economy look better than it is and reduces the cost of social security payments and other indexed government expenses.

One of the most longstanding critics is John Williams and his Shadowstats website. Williams claims that changes to the way CPI was calculated in the early 1980’s means that inflation is actually 7% higher per year than officially reported. His Shadowstats index records this higher rate.

Ed Dolan has shown that Williams is unlikely to be correct. At least 5% of William’s CPI-U understatement is due to a simple double counting error in his calculations.[1]

In the same article Dolan goes on to show, using the 30 year mortgage interest rate test and others that William’s Shadowstats CPI is not credible for the same reason as gold — if inflation was running at the rate claimed by Williams banks would have been losing money for years.

Other data sources including MIT ‘s Billion Prices Project suggest that CPI-U is understated, occasionally showing divergences greater than 1.5% in measuring annual inflation compared to prices tracked on the internet in real time.[2]

On the other hand data from Adobe Analytics, also gathered from the internet, suggests that CPI-U overstates inflation by as much as 3% per annum.[3]

This debate as to whether CPI-U is overstated or understated is a natural consequence of the Index being a conscious act of creation. In the same way that a democracy is supposed to promote better decisions through debate from different points of view, a measure of inflation, and hence monetary stability consciously generated is always going to have advocates for change. This is healthy and not a sign of its inappropriateness as a basis for monetary stability.

This would of course be different if the CPI-U was intentionally manipulated to serve the interests of government. However even one of their harshest critics, John Williams admits the BLS is honest in the way it implements its methodology. Where there are allegations of government mishandling of statistics, as in Brazil, the production of the index can be privatised.[4]

CPI is credible on an everyday level. Ed Dolan’s article shows this in terms of interest rates and GDP as well as in the changes in prices of grocery items between 1982 and 2015. The discrepancies with MIT’s Billion Prices Project and Adobe Analytics are discrepancies in degree (understated and overstated). However each supports the general overall trend.

This credibility is also apparent at the macro level. A graph of the CPI-U shows how inflation took off once the US left the discipline of the gold standard in 1971.





CPI-U is known and understood by people as a measure of inflation. It is widely quoted in the media and used as an important economic indicator. It informs the decisions of central and commercial banks about interest rates and monetary policy in general. Money based upon it would be easily assimilated into the system. For example, loans in the money would be understood as equivalent to the nominal interest rate less expectations of inflation.

The appeal of gold as the basis of stable money is its impressive track record over more than 4 thousand years. When money was gold, or was linked to gold, it was stable. Nations prospered. In comparison does the use of CPI-U as a basis for stable money seem too theoretical? Is it just another thought experiment dreamt up by economists?

Actually, like gold, the consumer price index has a track record. A unit of account based on the CPI called the Unidad de Formento was introduced into Chile in 1967 to help combat inflation. By 1982 it was being widely used to price mortgages and long date loans as well as large ticket items such as houses and even cars. It continues to this day and is used in other countries including Uruguay, Ecuador, Mexico, Columbia and Iceland.[1]

A unit of account is one of the functions of money, the others being a medium of exchange and a store of value. The fact that CPI has been used for decades in this way demonstrates its ability to help establish price stability and counter inflation.

Like the gold standard itself, indexed units of account using CPI have not required international co-ordination. Countries have simply adopted them to meet their financial needs and they have worked.

I hope this give some insight into why I chose CPI-U as the basis of stability for Saver Token. CPI-U is:

· an act of conscious creation

· simple to implement

· already understood and part of the financial system

· proven to work.

We should perhaps also realise that gold’s stability was not perfect. It did not have to be for the metal to provide the basis for stable money. In the same way, CPI-U will never be a perfect measure of inflation. It does not have to be to enable us to return to stable money.


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