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Death of the Dollar

China, Russia quit dollar

By Su Qiang and Li Xiaokun (China Daily)
Updated: 2010-11-24 08:02

Lucky them. They have a choice. Here the Federal Reserve notes are legal tender.

"United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

-Coinage Act of 1965, specifically Section 31 U.S.C. 5103

However, you can stipulate whatever payment you want in private transactions.

Maybe we could start a private money movement to create our own escape hatch from the increasingly devalued Federal Reserve notes.

Gold and silver coins, anyone?

(HT Boaz Arad, OActivist google group.)

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What to do about the Fed

One of the biggest, if not THE biggest, issues facing us today is getting the budget and deficit under control and th economy growing again.

The Fed is trying to jump start spending through quantitative easing---but that's going to have the same effect as an alcoholic dealing with his problem by having another drink.

So what would be a better solution?

The best solution would be to End the Fed--but a more realistic solution may be to end the Fed's "dual mandate" of price stability and full employment and make its job simply the preservation of the value of the dollar.

Read more here and here.

What do you think?

(HT TIADaily.com.)

The Real Danger of Deflation

The only genuine danger from deflation is that faced by over-indebted, would-be deadbeats. When money gains value over time (as under deflation), the over-indebted face a larger repayment burden. They must repay their debt with ever more valuable money, compared with the (lesser) value of money initially borrowed. In a deflation, the prices (and incomes) one receives necessarily decline, but the face amount of the debt owed does not decline. This is the “pinch” that deflation ultimately exposes and makes transparent.

And guess who is the most over-indebted? None other than the US Government who is rapidly making money out of thin air which will devalue your savings and allow politicians to pay off the national debt with cheaper dollars.

You lose. They win.

Read more: "The Deflation Myth" by Richard Salsman

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Change you can believe in

World Bank chief surprises with gold standard idea

He isn't talking about gold and silver coins, but that would be the best change for our change!

Significant inflation and deflation are caused by political manipulations of the money supply, which also lead to the booms-and-busts of the business cycle. Return to the gold standard would be a return to 'honest money" and would end the government's ability to erode our savings through its hidden "tax."

Bringing it up as something to seriously consider is the first step.

Making it happen will require a clear and thorough debunking of Keynesian economics and the belief in central planning.

It's an up hill battle, but one we can not ignore.

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The Fed and Quantitative Robbery

With all the hoopla over the election, Bernanke's quantitative easing announcement (a.k.a. theft of your savings) is getting insufficient attention.

Wrap it up in all the excuses you want (a weaker dollar will improve exports, we have to avoid deflation, it's really credit easing to boost business and spending....) it still comes down to the fact that whenever the government creates money out of thin air, the value of the money you have earned and saved goes down.

For every dollar you earned and saved in 1980, you only have 34 cents left. The other 66 cents has been inflated away by the Fed.

If you are old enough to have started working in 1973, when Nixon abandoned the gold standard, that dollar is now worth only 20 cents.

What happened to the value of our money 100 years ago, when we did not have the Fed and we were still on a commodity money standard?

From 1880 to 1910, a similar 30 year stretch, the value of the dollar fell 3 cents. That means you'd still have $0.97 in 1910 for every dollar you earned in 1880 instead of the $0.34 cents you have today from what you earned in 1980.

Here's a chart I have posted before which illustrates the destruction of the value of our money by the government. The dashed lines are periods in our history (including the present) when paper dollars are cut loose from a hard metal standard.

So are we better off with the Fed or with freedom? Does the government simply get to keep printing and borrowing money and then pay us back with less, all the while eroding away our ability to save and provide for our own future?

I think the answer is obvious.

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Disturbing discussions to nationalize private retirement accounts

Too busy with other things to write a in depth comment or analysis but want to be sure folks know this:

[L]ast Thursday, a Senate Health, Education, Labor and Pensions Committee held a hearing on retirement savings and security... The point of the meeting was to figure out ways in which private 401(k) plans could be more "fairly" distributed as taxpayer-funded pensions. Senator Tom Harkin, Chairman of the Committee, hand-picked the witnesses for the meeting. Who did he chose? People advocating "Guaranteed Retirement Accounts"...It is a plan created by Theresa Guilarducci and it would seize private retirement accounts, set up an additional 5% mandatory payroll tax, and then use the money from the tax and seizure to distribute it "fairly" to Americans."

Read more here.

One quick note---consider the fact that if the government could not devalue our money, saving for retirement would be much easier. Fiat money and legal tender laws give government the power to erode the value of the dollars we earn so that simply putting them in a bank is an inadequate strategy to save for the future. In order to just stay even, one has to invest.

Here's a chart of the increase in the monatary base (i.e. creating money out of thin air) since 1910:

Now look at the purchasing power of those dollars:

Key dates to remember:

1913: The Federal Reserve was created .

1944 Bretton Woods and the creation of the International Monetary Fund.

1971: Nixon defaulted on the gold standard, ending convertibility of the dollar to gold.

Looking at the purchasing power chart, it is glaringly obvious that each of these government manipulations of our money was followed by a severe plummet in the value of our dollars.

A dollar earned in 1910 would only be worth $.04 in 2009.

A dollar earned in 1950 would only be worth $0.11 in 2009.

This is out right theft by the government---which then uses the fact that people have a hard time saving for their retirement to justify the "need" for programs like Medicare and Social Security.

These acts should be considered crimes!!

And now, the covert theft of our savings is inadequate to fund the bloated beast of government spending, and they want to confiscate our retirement funds outright.

Where is the outrage?

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"No legal tender law is ever needed to make men take good money;

its only use is to make them take bad money."

-- Stephen T. Byington, Source: September 1895, American Federationist

HT Liberty Quotes

U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion

This headline deserves to be in the New York Times, not The Onion.

For a better understanding of why The Onion has it right when referring to today's Federal Reserve Notes, and Bernanke, Geitner and the majority of of economists and politicians have it wrong, read the posts and the vigorous, enlightening discussion which follows in the comments of a recent series from The Rational Capitalist:

"Economy Update and the Causes of Boom-Bust" , Part 1, Part 2, and Part 3, with Part 4 pending.

Here's Doug's own summary:

Part 1 - Today's crisis as an instance of the classic inflation-depression or boom-bust cycle

Part 2 - Positivism, empiricism and the self-induced myopia of the economics profession

Part 3 - Brief review and analysis of 19th century monetary history; gold the hero, government the villain

The most extensive debate is in the comments following part three on whether or not fractional banking is a legitimate practice, even when practiced privately and on a gold standard.

Thought provoking. Check it out.

50% tax on Savings

Are you aware that there is a "tax" on all of your savings?

The value of the dollars you saved in 1985 are now worth half of what they were worth back then--meaning, when adjusted for purchasing power parity, today's dollar will only buy half of what you could buy with a dollar 25 years ago.

This "hidden tax" is embezzlement by the US Government in collusion with the Federal Reserve Board. By creating money out of thin air, the money supply of fiat paper dollars has been steadily increasing, eroding the value of each individual dollar. This degree of erosion could not occur on a gold standard. Conversely, it has always occurred with irredeemable fiat money.

(The hyperinflations of the assignat of the French Revolution, and the pre-WWII German mark are only two famous examples of this phenomenon--of which there are many more.)

Just thought you ought to know.


Key dates:
Federal Reserve System went into effect 1913
Gold Standard officially abandoned 1971.


Chart from Economic Bulletin of AIER Feb. 2010

California finds a backdoor to the Fed's magic printing press. Will it be unlocked?

Doug Reich, The Rational Capitalist, has made a crucial observation that needs to be understood far and wide. Be sure to read his entire post, also up at simply Capitalism.

Now Your State Can Print Money Too!

One reason why spending at the state level can rarely get out of control is because states lack the power to print money. In other words, they must rely on taxation or municipal bond offerings to raise money to fund their budgets. Since taxation is unpopular, there is an obvious political limit to increased tax rates. Since private municipal bond investors can only buy so much debt before asking for higher interest rates, there is also a limit to the amount states can raise through borrowing. The federal government figured out how to get around this limit by creating the Federal Reserve System which is a pseudo private bank with the power to create money. The Fed can buy federal government debt from the public with fake money. Therefore, the federal government always has a buyer for its paper.

Now, the states want to get in on the action.

Of course, the states will not ask for the direct power to print money. They have a more clever way...


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The cause of our suffering: too much saving?

Today's post is published over at Simply Capitalism.

I hope you'll check it out.

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You've got to see this

What does one TRILLION dollars look like?

Let's start with a stack of one million dollars.




(I'm told I need several stacks like this one in order to retire.)

Now think about some of the figures we've heard lately.

Annual Government spending for 2007 was just under $3 trillion. Revenue was $2.5 trillion. Budget deficit therefore was 1/2 a trillion dollars.

The U.S. GDP in 2007 was $14 trillion. In 2008, it was just over $14.5 trillion.

At the end of 2007, the national debt was $9.3 trillion. On Sept. 30, 2008 (the end of the fiscal year) it was just over $10 trillion.

In the last half of 2008, government spending for bailouts and other guarantees related to the financial crisis resulted in new debt and obligations of an additional $8.7 trillion.

Keep in mind what that million dollar bundle looks like.

And now take a peek at one trillion dollars.





Do you see the guy standing in the left-hand corner?
Now imagine 9 more of these.

What the heck do we think we are doing?!

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Keynes knew what he was doing (at least here)

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

-- John Maynard Keynes
(1883-1946) British economist
Source: "The Economic Consequences Of The Peace"

HT Liberty Quotes

How can we afford to spend even more?

I.O.U.S.A. --- A 30 minute clip on the US Debt by pgpf.org


I wasn't sure at first if I wanted to embed this clip, but I finally decided that the good parts outweigh the bad. I will give you a summary, and a bit of a critique, and then you can decide if you want to invest the time to watch it. Given the push for more and more spending, I think it is critical to be aware of the facts about the size of our debt

The first few minutes are introductory and meant to be an attention getter, so you won't miss anything of substance if you skip that part. (Just click on and drag the button to the right of the the play/pause button and scroll to the time you want. I've given you the times for the various sections below.) The subject of our debt is introduced with the fact that, as of Feb. 2007, the federal government was in the hole for $8.7 trillion. (That's $8,700, 000, 000, 000--and it doesn't include state or local government debts.) With a GDP at that time of $13.5 trillion, it leaves us with a debt/GDP ratio of 64.4%.

I have found different figures on different sites. The CIA World Fact Book estimates the 2007 GDP to be $13.78 trillion, and lists a 60% debt ratio. The OMB Historical Tables for the Federal Deficit doesn't give a figure for the GDP, but estimates the debt ratio for 2007 as 65.5%, and for 2008 as 66%. However, as you can see from the table, significant pieces of the data are still not available.

Below is a graph of debt as a percent of GDP from 1950 to Sept. 30 2008. The website where this graph is posted uses the OMB figures and makes the claim that Bush's tax cuts and the Iraq war are major contributors to the deficit, a fact which is contradicted at the end of the video clip.



The above figures don't include the "unfunded promises" of Medicare and Social Security which if added in bring the total as of Sept. 2007 up to $53 trillion. (That's $53, 000,000,000,000.)

3:00 minutes: The Debt and the Four Deficits

Here starts the "business" part of the clip. By their analysis, we have four major deficits to be concerned about: budget deficit, savings deficit, trade deficit and leadership deficit. (I disagree that a trade deficit per se is a problem and will explain my objections later.) Next comes my favorite part of the clip: a moving graph of the US Debt throughout the history of this country. A ball rolls up and down a series of peaks and troughs as it travels in time from the American Revolution to today. I find the visual image provides a helpful perspective.

~8:00 minutes: The Budget Deficit

A pie chart shows where the money goes. The largest single slice is Social Security, with the military a close second. Next comes Medicare and then Medicaid. It's important to realize what a huge chunk of the budget these programs take and just how insignificant "earmarks" are in comparison. The second pie chart shows where the money comes from: tax, tax, and more tax...but still short by $410 billion. (That's $410, 000, 000, 000.)

9:45 to 11:00: Graphics of the federal budget deficits for the past 40 years.

12:30 to 13:25: Animated graph showing how expenditures blossom as baby boomers retire.

13:35: The Savings Deficit.

The clip claims that for the last two years, the savings rate has been negative, but the charts I found don't show it to be bad, but not quite that bad. Click to enlarge the charts to see the personal savings rates from 1959-2008 and for a close-up look at 1998-2008.



16:00: A graph of personal savings rate as a percent of disposable income, showing the plummet from 12.5% in 1950 to -2.9% in 2000.

17:00: The Trade Deficit.

Most analysts bemoan the existence of the "trade deficit." Even the name sounds dreadful! In the Mercantilistic days before the existence of capital markets, if a country's imports were greater than its exports, gold drained out of the country. Monarchs viewed this as "unfavorable." They wanted the gold to stay in their country, so they could tax it away from their subjects and wage wars. Today's situation is different. The "trade deficit" gives only one part of the equation. When all the relevant factors are taken into consideration, there is a balance of payments, not a deficit or surplus. And instead of a sign of weakness or vulnerability, imports greater than exports signal a growing, healthy economy. (I will expand this explanation of trade deficits sometime in the next day or two--I hope.)

The part of this section on trade that I am less sure about is the risk of having foreign ownership of the U.S. government debt. I'd love it if someone more knowledgeable could comment on this.

22:00: The Leadership Deficit

This section talks about the importance of balancing the budget but, in my opinion, fails to emphasize adequately the need to cut spending (as opposed to--gag--raising taxes.)

The last 5 minutes make offers some projections that seem questionable, but not enough data is offered to evaluate them. Here the important point is made that pork barrel and special interest spending is less than 1% of the annual federal budget, and that the cost of the Iraq war is less than 3 % than of the what we owe.

Sobering statistics. I wonder what the spending and promises of the past few months will do to these figures. And then there is the spending planned by the new administration... 000, 000, 000, 000, 000, 000, 000, ... ... ...

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Money as Debt

(Please read post before viewing)



A few months ago, Glenn McIntosh sent me the link to the above video clip. I hesitated to embed it until I had a chance to review it more carefully--and I finally have. Some parts are excellent; some are equally disastrous. The first 20 minutes provide a clear and well illustrated explanation of how, currently, our money is based not on value but on debt. Accepting the legitimacy of a system where money is debt creates the foundation upon which are built many of the errors in mainstream economic thought. To understand how and why a free market works, to properly interpret Say's Law of Markets, to understand the fatal flaws of Keynesian economics, it is essential first to understand money- what we currently call "money" and what money more properly should be.

I received the link at the same time I was reading The Mystery of Banking by Murray Rothbard. The whole book is worth reading, but the first 100 pages in particular provide a helpful introduction to money, its history, its role in an economy, and the importance of understanding how the law of supply and demand function in regards to money itself. What I found particularly informative is the role of credit expansion (via fractional reserve banking) on the supply of money. I don't agree with Rothbard's assessment that the creation and use of fiduciary media is by nature fraudulent, but he explains quite well how money is created from "thin air" through the pyramiding of debt. This aspect of the "money supply" is essential to understand in order to comprehend today's events. (Even with rock-bottom interest rates and a skyrocketing monetary base, we are experiencing a deflation through the collapse of that credit pyramid.) The table of contents can direct your reading to specific subjects of interest, but I would strongly recommend reading at least the section on fractional reserve banking (pg. 94-103) to complement the first 2o minutes of the video clip.

The clip provides a quick introduction to some of the same ideas. The explanation and visual presentation of the structure of the system is accurate. The analysis of the cause (evil bankers and unsustainable growth) and the offered solutions (total government control of money and/or reversion to a barter economy based on the labor theory of value) are ridiculous. Also, the author fails to see the essential supporting role government has in the expansion of credit via legal tender laws and the Federal Reserve.

Some of the good points the clip makes:

1. "Money used to represent value. Now money represents debt."
2. A major problem with fiat paper money is that it allows government and banks to loan what doesn't exist. What does exist is real savings --the excess of production which is not immediately consumed and therefore available for investment in the production of goods in the future. Paper money allows the pretense that wealth is being transferred and invested, when in fact nothing is. Eventually reality has to catch up because you can't get something from nothing.
3. How the threat of bank runs provides an important check on credit expansion (and the unstated implication of the moral hazard provided by reserve requirements and federal deposit insurance.)
4. The government directly creates less than 5% of the money in circulation. The rest is created indirectly through bank credit.
5. Also implied is the mechanism for monetary contraction through a collapse of the credit pyramid when there is a decline in the value of the assets at the base of that pyramid.
6. "Inflation is a flat tax on money." Because it is not directly voted on, it is "taxation without representation." Inflation is a huge wealth redistribution program that takes wealth form savers and gives it to spenders. This is not an unintended consequence of Keynesian economics, but the intended consequence.

Some of the key errors in the latter half:

1. Charging interest is unethical in all cases.
2. Money is "just an idea" and can be "whatever we choose it to be." (See An Argument for Commodity Money)
3. Economic growth is unsustainable because it will deplete "finite resources." (See Finite Resources vs. Infinite Resourcefulness)
4. Equating inflation/deflation with rising/falling prices irrespective of cause. (see Inflation and Deflation)

Some of the ideas I need to consider further:

1. If money is debt, then "No debt, no money."
2. The driving force of the endless need to expand the money supply is the need to create enough new money to pay the interest on the debt.

Thanks to Glenn for the tip. I hope you find the clip informative as well.


Up date 1/16/09: Related to this topic is an excellent post at The Rational Capitalist on The History of Money and Banking. The post discusses the origins of fractional reserve banking, and the concepts of bailment, loan and deposit contracts. Some of the problems of fractional reserve banking are nicely illustrated through his example of bike stoarage and bike-claim tickets. I had intended to write a post along these lines sometime in the future, but now I don't have to. I love the dividsion of labor!!
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Something for Nothing

I came across this article yesterday. Saville doesn't really say anything which I haven't read in multiple places, but he says it very well and quite succinctly.

Trying to get Something for Nothing
by Steve Saville 10-21-2008

The current predicament was not caused by insufficient government regulation and the risk of future disruptions will not be mitigated by increased government regulation. The mortgage market was already heavily regulated prior to the crisis, but had it been even more regulated and had the regulations severely crimped, rather than boosted, the abilities and desires of financial corporations to expand the supply of mortgage-related instruments, then the focal point of the boom would have shifted; however, bubbles would still have formed somewhere and these bubbles would subsequently have burst, leaving financial wreckage and major economic dislocations in their wake (the bust is always and everywhere a consequence of the preceding boom)...

Now that the investment boom has gone bust and the necessary adjustment process has begun, we are being told incessantly that the solution to the problems caused by massive increases in the supplies of money and credit is additional massive increases in the supplies of money and credit. And given that the private banking industry is no longer capable of driving the monetary expansion, we are being told that the central bank and the government must become even more involved...

Whether the advocates of increased government spending and the various other re-inflation policies realise it or not, at the root of their proposed 'solutions' to the crisis is the idea that it is possible to get something for nothing. It is axiomatic that an increase in production must precede a sustained increase in consumption; that saving is the basis of long-term economic growth; that no individual can become rich by spending more than he earns; and that no country can become wealthy, or recover from a recession, by consuming more than it produces. And yet, most commentators have deluded themselves into believing that you can get around the problem of inadequate real savings by simply increasing the supply of the medium of exchange, and that you can bypass the need for increased consumption to be funded by increased production by simply getting the government to spend like a drunken sailor.


Sweet summary, isn't it? Truly, the whole article is worth a read.

Inflation and Deflation

Inflation is frequently defined as “a rise in the general price level.” Deflation is defined as “a fall in the general price level.” These definitions are both erroneous and harmful. When an effect (a change in the level of prices) is mistaken for a cause (in this case, a cause of deflation or inflation) efforts to address the problem will be misdirected. Sometimes it leads to trying to fix what isn’t broken, and other times to taking actions which aggravate rather than relieve a real problem.

Inflation and deflation are "everywhere and always"¹ monetary phenomena--by which I mean, they occur as a result of a change in the quantity of money. Inflation is the decline in the purchasing power of money due to an increase in the supply of money more rapid than the increase in real wealth.² When the supply of money is kept constant, prices will reflect the existing relationship between supply and demand.³ The greater the supply, the less valuable something is. As economic value is expressed in terms of demand, this means the greater the supply the less the demand. The “equilibrium price” is that price at which all of the existing supply will be purchased (i.e. demanded.) Prices will fall if supply goes up relative to demand and will rise if demand goes up relative to supply. In a system of constant money, changes in prices reflect changes in the supply and demand of the various goods and services⁴ available for exchange.

Money itself is effected by the law of supply and demand. The greater the supply (the larger the quantity of money) the less valuable money is in terms of goods. In other words, it takes more money to purchase the same supply. Prices rise. The opposite is also true: a contraction in the money supply will lead to falling prices as the existence of less money makes each unit of money more valuable.

So, the quantity (supply) of money has definite effects on prices by its ability to change demand (the willingness and ability to spend money.) When more money is available, a larger amount of money can be offered to purchase the same goods as before. Prices are also affected by the availability of goods. An increased supply of goods will also result in lowering the equilibrium price. To the extent that the increase in supply is due to an increased productivity (increased efficiency in labor and/or materials) the fall in prices will not have an adverse effect on profitability, total sales revenues or ability to repay debts. Quite the opposite. An increase in the supply of goods due to increased productivity is the engine of economic progress and the cause of a rise in the standard of living. Less of one’s labor is needed to obtain the same or greater amount of goods. To equate falling prices due to an increased productivity with a fall in prices due to a contraction in the quantity of money is to equate a beneficial situation with a harmful one. For this reason, defining inflation and deflation simply in terms of a change in prices fails to distinguish between these fundamentally opposite economic situations.

Fear of falling prices, irrespective of the cause of the fall, has misled many economists. The siren of “price stability” has lured both Keynesians and Monetarists onto the rocks of inflationary destruction. In contrast to falling prices due to an increase in the supply of goods, falling prices due to a contraction in the money supply will lead to a fall in total sales revenue, profits and thus a fall in employment and the ability to repay debts-the meaningful definition of deflation. But a large contraction in the money supply can only occur in a system that first allows a large growth in the money supply. This increase or decrease of the money supply out of sync with the production of real wealth is the ultimate cause of the boom and bust of the business cycle. Inflation, an increase in the money supply, stimulates a boom. Deflation, a contraction in the money supply, results in the bust.

What kind of money is vulnerable to significant and recurrent inflation and deflation? Money that is disconnected from the production of actual wealth, ie. fiat money and fiduciary money created through credit expansion. A commodity money, such as gold, can increase in supply, but its increase is limited. This is illustrated by the chart below showing the historical growth of gold as a percent of the world gold stock.

World Gold Production as a Percentage of World Gold Stock 1800-2000

(Source: Salsman, 1995⁵ Click on images to enlarge.)

Once gold is brought into existence, only a negligible amount is used up⁶. The rest remains in existence as a store of value. The stability in the stock of gold is in marked contrast to money created out of thin air, either by the Federal Reserve or through the pyramiding of debt made possible by a fractional reserve banking system undisciplined by commodity money. Fiat and debt money can go out of existence as easily as it was created. The chart below illustrates the historical instability of the fiat money supply compared to the supply of gold. (Money supply is in red; gold stock is in black.)

Total Gold Supply vs. Money Growth Supply Annual Rate of Change 1933-2008

(Source: Gold Fields Mineral Resources, Ltd; KITCO)

This can also be demonstrated by comparing the purchasing power of gold to that of the U.S. dollar.

Purchasing Power of Gold and of the Dollar 1792-1994 (1792= 1.00)

(Source: “Gold and Liberty” by Richard M. Salsman⁷)

Or perhaps more dramatically when superimposed as below:

Purchasing Power of Gold and the U.S.Dollar 1792-1994

(Source: “Gold and Liberty” Richard M Salsman.⁸)

Prices rise and fall.

Prices can change as a result of shifting supply relative to demand, thus redirecting resources to where the demand is greatest. Or, prices can change because of a change in the quantity of money, leading to the inefficiencies of inflation and deflation. When prices simultaneously reflect both a change in supply/demand and a change in the quantity of money, there is no way to distinguish how much of the change is due to which cause. In this way, a changing quantity of money masks and distorts the signals which are essential for the efficient allocation of resources. Without accurate price signals, savings are malinvested, excessive risk is assumed, consumption exceeds production. Eventually, reality catches up with the falsely inflated values. The deflationary realignment is painful and destructive. To preserve accurate price signals and prevent the inflation/deflation boom-bust cycle, we must have a money which is sound and constant. These are the benefits of a commodity money, like gold.

An essential function of definitions is to enable us to isolate and distinguish different phenomena one from the other in order to think about them more clearly and accurately. Definitions of inflation and deflation that fail to distinguish between the differing causes for a rise or fall in prices can not serve this function. In fact, they do the opposite. Inflation and deflation disrupt economic calculations and are therefore destructive to the creation of wealth. A fall in prices due to increased productivity is accompanied by a rise in the standard of living. Only when this distinction is understood can we hope to respond appropriately to changing economic circumstances.




1. This phrase is from a frequently quoted description of inflation in Monetary History of the United States 1867-1960 by Milton Friedman and Anna Schwartz.
2. An alternate definition is “an increase in the quantity of money at a rate more rapid than the increase in the supply of gold and silver.” Gold and silver simply stand in place as a direct unit of measure of the value of all other wealth—wealth being the material goods made by man; also land and natural resources in so far as man has made them usable and accessible. All definitions are derived from Capitalism: A Treatise on Economics by George Reisman.
3. Demand is defined as the willingness and ability to purchase and is quantified by dollars actually spent.
4. To simply the language, for the rest of the post I will use “goods” to signify both “goods and services.”
5. Salsman, Richard, “Gold and Liberty” Econ Ed Bull v.XXXV no. 4 1995, p. 27
6. An insignificantly small amount (relative to total existing stock) of gold is actually consumed in medical other commercial uses. The rest remains easily retrievable.
7. Salsman, 1995 p. 128-9
8. Salsman, 1995 p. 31

Egalitarianism and Inflation

This article was recommended by a commenter. It's lengthy and not all of it is directly relevant to the topic of inflation. Also, although Rand has great ideas, her style of delivery can be distracting to those not already convinced of her point of view. For those reasons, I have chosen to post the excepts I found most pertinent to our current discussion on the nature of money.

excerpts from

Egalitarianism and Inflation

by Ayn Rand

Agriculture is the first step toward civilization, because it requires a significant advance in men’s conceptual development: it requires that they grasp two cardinal concepts which the perceptual, concrete-bound mentality of the hunters could not grasp fully: time and savings. Once you grasp these, you have grasped the three essentials of human survival: time-savings-production. You have grasped the fat that production is not a matter confined to the immediate moment, but a continuous process, and that production is fueled by previous production. The concept of “stock seed” unites the three essentials and applies not merely to agriculture, but much, much more widely: to all forms of productive work. Anything above the level of a savage’s precarious, hand-to mouth existence requires savings. Savings buy time...

On a self-sustaining farm, your savings consisted mainly of stored grain and foodstuffs; but grain and foodstuffs are perishable and cannot be kept for long, so you ate what you could not save; your time-range was limited. Now, your horizon has been pushed immeasurably farther. You don’t have to expand the storage of your food: you can trade your grains for some commodity which will keep longer, and which you can trade for food when you need it. But which commodity? It is thus that you arrive at the next gigantic discovery: you devise a tool of exchange—money.

Money is the tool of men who have reached a high level of productivity and a long-range control over their lives. Money is not merely a tool of exchange: much more importantly, it is a tool of saving, which permits delayed consumption and buys time for future production. To fulfill this requirement, money has to be some material commodity which is imperishable, rare, homogeneous, easily stored, not subject to wide fluctuations of value, and always in demand among those you trade with. This leads you to the decision to use gold as money. Gold money is a tangible value in itself and a token of wealth actually produced. When you accept a gold coin in payment for your goods, you actually deliver the goods to the buyer; the transaction is as safe as simple barter. When you store your savings in the form of gold coins, they represent the goods which you have actually produced and which have gone to buy time for other producers, who will keep the productive process going, so that you’ll be able to trade your coins for goods any time you wish.

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[Several paragraphs following describing what happens when people trade not with money representing saved production but money representing a promise of future production. Treated as equivalent, the increased amount of "money" gives the appearance of greater savings than actually exists and leads to unjustified increased risk taking, higher prices, and inappropriate consumption of real savings. The disconnection between money and production also allowed the development of the theory of a consumer-driven (as opposed to producer-driven) economy.]

Therefore, they conclude, the consumer—not the producer—is the motor of an economy. Let us extend credit, i.e., our savings, to the consumers—they advise—in order to expand the market for our goods.

But, in fact, consumers qua consumers are not part of anyone’s market; qua; consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of “consumer”; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s “supply”; in the role of consumers, they represent a market’s “demand.” The law of supply and demand has an implicit subclause: that it involves the same people in both capacities...

How many non-productive people could you support by your own effort? If the number were unlimited, if demand became greater than supply—if demand were turned into a command, as it is today—you would have to use and exhaust your stock seed... If you understand the function of stock seed--of savings--in a primitive farm community, apply the same principle to a complex industrial economy.

Wealth represents goods that have been produced, but not consumed. What would a man do with his wealth in terms of direct barter? Let us say a successful shoe manufacturer wants to enlarge his production. His wealth consists of shoes; he trades some shoes for the things he needs as a consumer, but he saves a large number of shoes and trades them for building materials, machinery and labor to build a new factory—and another larger number of shoes, for raw materials and for the labor he will employ to manufacture more shoes. Money facilitates this trading, but does not change its nature. All the physical goods and services he needs for his project must actually exist and be available for trade—just as his payment for them must actually exist in the form of physical goods (in this case, shoes). An exchange of paper money (or even of gold coins) would not do any good to any of the parties involved, if the physical things they needed were not there and could not be obtained in exchange for the money...

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When a rich man lends money to others, what he lends to them is the goods he has not consumed. This is the meaning of "investment"... [C]redit means money, i.e. unconsumed goods, loaned by one productive person (or group) to another, to be repaid out of future production...

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Consumption is the final, not the efficient, cause of production. The efficient cause is savings, which can be said to represent the opposite of consumption: they represent unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. The worker who produces so little that he consumes everything that he earns, carries his own weight economically, but contributes nothing to future production. The worker who has a modest savings account, and the millionaire who invests his fortune (and all the men in between), are those who finance the future. The man who consumes without producing is a parasite, whether he is a welfare recipient or a rich playboy.

An industrial economy is enormously complex: it involves calculations of time, of motion, of credit, and long sequences of interlocking contractual exchanges. This complexity is the system’s great virtue and the source of its vulnerability. The vulnerability is psycho-epistemological. No human mind and no computer—and no planner—can grasp the complexity in every detail. Even to grasp the principles that rule it, is a major feat of abstraction. This is where the conceptual links of men’s integrating capacity break down...The most disastrous loss—which broke their tie to reality—is the loss of the concept that money stands for existing, but unconsumed goods...

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An economy based on specialization, division of labor and money is more complex than one based solely on direct barter, but the fundamental issues of production, consumption, saving and trade remain unaltered. Savings provide the escape from moment-to-moment survival, freeing up the time necessary for investments to improve future productivity. This investment in the future is only makes sense if our present and near-future are safe and secure. It is savings (production not consumed) that provides that security. To correctly calculate the extent of our safety-net, to decide how much excess production is available with which to take risks, or to tie up in future rather than immediate consumption, our money must provide an accurate accounting of that saving. The accuracy of that accounting is destroyed when "money" is disconnected from production such as occurs with money created by fiat. Money can fulfill its proper function only so long as it stands for actual existing goods--and this it does by remaining a good itself, i.e. a commodity-money.

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It's all about money

I am taken aback that anyone could seriously think we can spend and consume our way to prosperity. I don’t get it. Seems so obvious to me that when you are over your head in debt, the solution is not more debt, but cutting back, letting go of sunk costs, reevaluating priorities, and saving up to recharge your safety net before taking on more risk. Yet... a plethora of seemingly intelligent, highly-educated individuals don’t share this point of view. (Imagine that - People don't agree with me!)

Where is the disconnect? How does something I see as so nonsensical make sense to anyone, let alone to well-intentioned, reasonable people?

One point of departure is how we think of money. What is money? What is its role in the economy? What is the proper relationship of government to money?

Before tackling which monetary policy will best address the problems we face today, we first need to explore the matter of money itself.

In the spirit of trying to understand the issues and differences in opinion as best as I possibly can, I have invited a guest to write a post for my blog. Glenn and I have been sporadically exchanging emails on economic matters since mid-October. His analysis and conclusions are Keynesian in origin, while mine start from an Austrian point of view. I have learned a lot from this exchange and greatly appreciate his willingness to trade explanations and ideas.

The better grasp I have of opposing arguments, the more refined is my thinking. I asked Glenn to write a post defending fiat money while I wrote one in support of a commodity money (i.e. a gold standard.) We each wrote our posts independently and “in the dark” with respect to the other’s points. We ended up taking slightly different tacks in addressing the issues. If he's willing, we can post follow ups considering the points the other raised which were not addressed in our original essays.

Please join the discussion. Let's keep to the subject of "What is (should be) money" and see what we can learn!
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