Gold is only $4 short of $500 and the Dow is not far below 11,000.

No one seems either jubilant or alarmed. Instead, a sort of stupid numbness has settled over investors. All the news, no matter what it is, reassures them. 

This attitude of reckless complacency must be a product of the Great Moderation. The Fed has proven that it can control the business cycle, says Fortune. Over the past 20 years, crises have come and crises have gone. Each crisis deftly managed by the Fed and none disturbed the underlying tranquility of the world's financial system...or shook investors' faith in the people who run it.

Of course, the confidence is not limited to investors. Ordinary householders are now leveraging themselves as if they were Jesse Livermores; they are sure that nothing bad will happen. 

“Holiday shopping +22% over weekend,” reports the FT. So far this holiday season, people are spending nearly a quarter more than they did last. What is remarkable about this is that it seems so out of place next to the other news items in the paper. Elsewhere, we discover that household earnings are falling for the second year in a row (not news to us) and that average hourly wages are no higher in 2005 than they were in 1973 (again, not news to us). 

How can people who earn less spend more? Of course, that is merely a rhetorical question; we already know the answer. They do it by going further into debt. They are confident to a fault - unflappable, immoveable, almost as if they were dead. While obvious, the fact of it bothers almost no one - your editors excepted. The rest of the world believes, as Fortune put it: “It is the sheer free-market vibrancy of the U.S. economy that will probably be its greatest strength in the decades to come.” 

But it is our sad lot in life to remind readers that things do go wrong from time to time, free market vibrancy or not. 

If the last 10 years have been a period of “Great Moderation,” the 10 years of the late ‘60s and early ‘70s must have been a time of “Great Extremism.” 

There was a, “Stampede out of paper money,” reported Roger Eglin in The Observer, on the March 17, 1968. “Spurred on by greed, fear, hysteria and ignorance, European civilization's seams were creaking…The French threw their urbanity out of the window and punched and fought like animals to get gold. Men in Throgmorton Street and around the City (London's equivalent to Wall Street) were desperately worried…”

They had good reason to be worried; the world's financial system seemed to be breaking down. Merchants were reluctant to take dollars; international exchanges were blocked.  Travelers were stranded without cash.

“Even having the money with you can still bring problems,” Eglin explained. “People are getting frightened by the sight of foreign currency. The Hilton hotels in Rotterdam and Amsterdam are not changing foreign currency for guests, although they will take it for bills...‘People are no longer prepared to hold money,'” Eglin quoted a broker, “It's an expensive process holding gold, but it's a better short-term holding.”

“No one wants to tough paper - especially anyone else's - unless he is forced to do so.  The confidence that props up the international money system is being eroded. Once this starts it could spread like wildfire.”

He was referring to non-Americans. Holding gold in the United States was still against the law. 

“The mighty dollar,” Eglin continued, “once the lingua franca of world money, has caught the plague. Dutch bank managers for 10 days have been telling their clients to get out of dollars and into guilders or marks. One London merchant bank ditched its dollars for marks earlier last week…Panic is even creeping in. Last week a London hotel would not take payment from a party of Americans in dollars or Swiss francs…”

The years of the Eisenhower administration were calm. Readers will wonder what happened to cause such a landslide in confidence. Was not America on top of the world in the Johnson Administration, just as it is in the time of Bush? Had we no central bank with a genius at its head? Did not the U.S. economy vibrate then...as now?

Again, we only ask the questions because we like the sound of them.

Then, as now, the United States was increasing spending at a breathtaking rate. The war du jour back then was in the jungle, not the desert, but the landscape of domestic spending was almost exactly the same as it is today. If anything, the dollar should have been stronger then, than it is now. At least in the 1960s, voters, householders, and legislators still felt they should pay their bills. Lyndon Johnson proposed a 10% tax increase to try to bridge the gap between outflow and income. It was rejected by Wilbur Mills, head of the House Ways and Means Committee. He wanted guns and butter, too, but he knew the taxpayers wouldn't want to pay for them.

And so, the matter was thrown onto the international financial markets. Especially in Europe, people still recalled how quickly things could get out of control. In Germany, in the 1920s, the price for a beer rose before it had been drunk. Inflation set off a “flucht in die sachwerte” - a rush into material things - that was remembered even in the ‘60s. 

The favorite material thing in such times is gold. Pressure on the gold price forced the Nixon Administration to drop the last vestige of gold backing for the dollar in 1971.  Over the next nine years, the price of the yellow metal rose 2,000 percent, and mortgage rates hit 18 percent.

Eventually, markets settled down. And now, after such a long stretch of “moderation,” extremism is underestimated, under-appreciated, and under-priced. But does this mean that modern Americans will never flap again? Again, another rhetorical question.

*** We have been wondering whether to jump on gold now, before it goes over $500, or to stick with the discipline of buying on weakness. Our current target price is $450, which is far below the current market price of $496. Still, gold will most likely correct soon. It is far above its 200-day moving average: $440. 

*** What is it about gold? Does it have some mystical quality? Is gold the
key to prosperity?   

Well, ‘no' to both questions. It is just another element. But over many thousands of years, by trial and error, gold has been discovered to be very useful as a means of exchange, and a store of value. No law makes it so. No opinion on the issue matters. You might as well wonder why people wear wool clothes, why men and women pair up, or why people eat turkeys for Thanksgiving. There is no law that says you have to do so. But whatever your purpose, some things work better than others.

People are always experimenting with other forms of money. Governments prefer money they can control, naturally. They particularly like the paper money, because it is so accommodating. Since the invention of the printing press, they can produce as much of it as they want.

But just because a politician says a piece of paper is valuable, doesn't make it so. Here at The Daily Reckoning, when we hear a politician say something, we're inclined to believe that the opposite is true. We have seen no successful government program in America since World War II. Why would the government's new money be any better?

Does gold make you prosperous? Of course not. It only measures past prosperity. If you have gold, but do not produce a positive cash flow, you grow poorer all the time. Gold is just a handy way of making sure that what you've earned does not disappear suddenly and completely. 

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.