Cold Cups and Gold
In the summer of 1981, I was a junior controller at the Dixie Cup factory in Fort Smith, Arkansas. In my first meeting, the 12-ounce cold cup line manager was presenting his budget for the coming year.
His job was simple. He had to profitably turn paper, wax, glue, ink, labor, and machine time into as many 12-ounce cups as possible while meeting Dixieโs quality standards. With inflation running at 11%, the factory’s job was harder. It had to determine if he succeeded. His P&L could not fairly measure how well he was running the line because input costs fluctuated independently of the cup’s selling price.
Dixie needed a reliable measure of the value he added through his decisions, like whether to take a line down for maintenance and reduce output or let it run and risk quality.
Dixieโs answer was to standardize costs and prices, so his P&L just measured his value-add.
George Gilder published ๐๐๐ ๐ฎ๐ญ๐จ๐ฉ ๐พ๐๐ฃ๐ฉ๐ช๐ง๐ฎ ๐พ๐๐จ๐ ๐๐ค๐ง ๐๐ค๐ก๐: ๐ผ ๐๐๐ฌ ๐๐ฃ๐๐ค๐ง๐ข๐๐ฉ๐๐ค๐ฃ ๐๐๐๐ค๐ง๐ฎ ๐ค๐ ๐๐ค๐ฃ๐๐ฎ in 2015, where he argues that money is the measure that tells economic actors whether their efforts succeeded or failed. For that measure to mean anything, it has to be stable and outside what it measures. I saw Dixieโs standardized costs and prices work, so his argument made sense to me.
According to Boeing, a 747-8 has about six million parts made by more than 550 suppliers in nearly 30 countries. That can only work if everyone uses standard weights and measures. We would not have a 747-8 if a meter fluctuated or was subject to government policy.
It would be as if the Dixie line manager learned that the best way to beat his number was to devote more time trying to predict next month’s price of paper than to improving the line’s productivity.
Gilderโs answer is gold.
Not the reason we often hear, which is that our credit-based fiat monetary system is unstable. It’s for the same reason I saw on the 12-ounce cold cup line.
An economy cannot be efficient when its performance changes the measuring stick used to measure that performance.
Technology has not made gold steadily easier to produce. As mining technology improves, easier deposits are depleted, forcing miners to go deeper, process lower grades, and search in more difficult places.
Today, central banks conjure up our money. No one can conjure up gold. New gold has to be found, financed, developed, mined, and processed. That takes time. Time cannot be printed. Despite centuries of technological progress, the world’s stock of gold has grown at an average rate of about 2.5% a year.
As I head to Colorado Springs for Mining Forum Americas, I like to think I might bring a small measure of value-add to how an important industry finances, one that could bring to the global economy something I first saw work on a 12-ounce cold cup line in Fort Smith.
A stable measure of value, and maybe just a little more of it to go around.
