Money

The other day a friend and I were talking about money. There's nothing unusual about that, except that we weren't talking about how to make it or about how to spend it, instead we were trying to figure out what it actually is. My contention was that money represents, or should represent, something real and tangible. My friend maintained that money is only a means of exchange and does not represent anything at all in and of itself; that it is only a mutually agreed upon medium of exchange. I tried to convince him that since money has no value then he should give me all of his.

I finally had to agree that my friend was right. If you were to give a dollar bill, or even a one hundred dollar bill, to someone who has never seen or heard of it, they might use it as kindling for fire, or for toilet paper, but they would be unlikely to exchange it for food or shelter. What disturbs me about the idea that money has value only because we all mutually agree that it does, is the fear that society in general might revise its opinion downward of the value of the money I've worked all my life to acquire. What's to prevent that from happening? I suppose it's just as possible that the money I've saved might become more valuable, but that never seems to happen. I wonder why?

Some say that the reason for inflation is because businesses charge more money for things. I realize that merchants can't raise their prices arbitrarily high or people couldn't afford to buy their goods, but why is it they're able to charge a little more every year? Well sure, most everyone gets a raise each year so I guess people are able to pay more money for things, and that's why business raises its prices each year, right? But then again, what determines how much of a raise we get each year? I mean, wouldn't we be just as well off if we didn't get any raises at all? That way, prices wouldn't go up because merchants wouldn't be able to charge more money each year. Still though, there's something bothersome about the whole thing.

According to the government, inflation is currently only two or three percent per year. Of course the government gets to pick which items to monitor for price increases. Government officials must not live like other people because the prices I pay for things certainly seem to be rising more than that. One price that is certainly increasing more than two or three percent per year is stock equities. Most estimates I've heard say that about half of the people in the U.S. buy stocks. Stock prices have been rising in recent years by 20 or 30 percent per year, particularly large capitalization stocks. The stocks you own go up in price, but so does the price you pay to acquire new stock. I suspect that if the cost of say, stocks and health care costs were included in the inflation index, the rate of inflation would be at least ten times what the government estimates.

The government also claims that it only "monitor's" inflation and reports on it periodically as though inflation were an unpredictable wild beast to be fearfully watched. It claims that inflation can only be subdued by raising interest rates and slowing down the economy, and in the process causing businesses to fail and people to lose their jobs. Surely there must be some better way to at least predict inflation, and perhaps even control it. As it turns out, there is.

The other day I picked up a marvelous paperback book titled Money Mischief by one of my favorite writers, Milton Friedman. The book is very entertaining. It starts off by describing the currency of the Uap islanders in Micronesia in the early 1900's. Although you wouldn't guess in a million years what it was that they used for currency, it has many of the same properties, as does our own money. He then goes on to explain the effects of increases and decreases in our money supply. Our money base by the way, mostly consists of ledger entries (like your checkbook, bank statements, etc.) rather than actual "Greenbacks" or coin tokens. I admit to having skimmed over some of the middle chapters on Bimetallism on the first reading, but after having finished the book I went back and read those chapters with enthusiasm. The bombshell for me was Chapter 8, titled "The Cause and Cure of Inflation," specifically page 206 which says:

So what do you think of that!? Talk about money from nothing! That's even better than wine from water. One branch of the government goes into a closed room with another branch, they stroke each other for awhile, and then they walk out with all this new money created out of nothing. This increased supply of money is what's known as inflation. They don't even need to actually print greenbacks, they just enter it on their books. Try that with your bank sometime.

The really disturbing part about the Fed and the Treasury creating money from nothing, is that as far as I know there are no checks or balances on it. Who decides when or how much? If anyone knows the answers, please email me.

If anyone except Professor Friedman had made that claim I would have called him a bald faced liar to expect me to believe such an incredible story. Professor Friedman by the way, is a Nobel Prize winner in Economics, and has written other books besides this one. Yes, I know that the U.S. Constitution grants Congress the power: "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures" and prohibits the states from making "...any Thing but gold and silver Coin a Tender in Payment of Debts." However, coinage of Money is an entirely different matter than simply wishing money into existence. As a matter of fact, coinage is the subject of the Bimetallism chapters in Professor Friedman's book. Paper money wasn't even generally used until the eighteenth century, and back then it was used only as a proxy for gold or silver — not that there's anything particularly special about gold or silver, but you probably wouldn't want a loaf of bread or pound of beans that had sat in a bank vault for several years. In fact Friedman says, "Before 1971, every major currency from time immemorial had been linked directly or indirectly to a commodity." In early 1971 a U.S. dollar was at least theoretically redeemable from the U.S. Treasury for 1/35th of an ounce of fine gold or about 3/4th of an ounce of fine silver. Sure, you can still buy gold with your dollar bill. As of mid 1999 you can buy about 1/285th of an ounce of gold with your paper dollar, but that depends on the gold merchants perception of the value of your paper money. That is far different than having a fixed amount of gold bullion in a bank and being able to visit that bank whenever you wish to exchange your paper IOU for the metal itself, or for whatever commodity is being held in reserve for you.

Today the U.S. Dollar is redeemable for absolutely nothing whatsoever and is only an IOU that says, "I owe you an IOU." Friedman calls this kind of imaginary money "Fiat" money because it is arbitrarily decreed to have value by the government. I've heard it referred to as "Flat" money on CNBC, the popular financial television broadcast. Once in awhile CNBC will mention that the Fed did a "Bond Pass." A "Bond Pass" is what I described above. Whenever I'm tempted to trust the government (not very often) I pull out one of my old Silver Certificates that says, "This certifies that there is on deposit in the Treasury of The United States of America One Dollar in silver payable to the bearer on demand."

Speaking of coins, do you know why they have those serrated edges? That used to be to prevent people from shaving the edges, passing the coins on at full value, and then melting down the shavings and selling it. Ha ! That's one thing the government doesn't have to worry about anymore now that most of the coins are "Cupro-Nickel" coated copper (except for pennies, which are copper-coated zinc). Here's an excerpt from "http://www.usmint.gov/" that shows the value of our coins (i.e.  tokens). The total manufacturing cost, per unit, for circulating coins is:

So the basis of the U.S. monetary system is nothing more than government sanctioned "monopoly money" that has value only because of our faith that the government will restrain itself from issuing an oversupply of money to itself thereby making the money worthless.

It's actually even worse than that. When the U.S. went off the gold commodity standard in 1971, so did the rest of the world.  Friedman says, "...a world monetary system has emerged that has no historical precedent; a system in which every major currency in the world is directly or indirectly, on an irredeemable paper money standard... The ultimate consequences of this development are shrouded in uncertainty."