I was doing some evening reading and came across this interesting letter from Howard Buffett, Warren Buffett’s dad. Howard had a huge impact on Warren’s life so it was surprising to read his stance on gold. In essence, Howard was a raging gold bug who stated that “paper systems end in collapse” and believed that the government’s debt from WW2 was spiralling out of control and posed a massive problem. He also believed that the fiat system was the equivalent of surrendering “your children and your country to galloping inflation.”
The reason I find all of this so interesting is that no person on earth has single handedly benefited from fiat money more than Howard’s son Warren. Yes, inflation has risen substantially since 1948 when he wrote that letter, but American living standards have exploded far higher than the rate of inflation. In the meantime, few families have benefited from fiat money more than the children and grandchildren of Howard Buffett.
Even more interesting to me, is Warren’s rejection of his father’s beliefs on the way to becoming the world’s biggest beneficiary of fiat money. Warren not only understands the silliness of building a portfolio around commodities, but he also clearly understands that the national debt does not pose some form of solvency problem in the same sense that a business or household is constrained by.
Buffett on gold:
“The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”
“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils (XOM) and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”
“What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while.”
Buffett on the national debt:
“(US government debt) is denominated in our own currency, and that’s a tremendous advantage.”
“Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”
How about that? On the way to becoming the largest beneficiary of the capitalist system he rejected the views of the gold bugs and embraced the fiat system. Is it a coincidence that Warren Buffett rejected a platform based on fear and misunderstanding on his way to tremendous success? I don’t think so.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.