The Minimum Wage isn’t a Living Wage because the Federal Reserve devalued the Dollar

Posted by PITHOCRATES - February 1st, 2014

Week in Review

The Democrats like to talk about income inequality.  Which they say isn’t good.  So they want to raise the minimum wage.  To reduce income inequality.  Even President Obama said during the State of the Union address that he wanted to raise the minimum wage.  To $10.10.  To give them a living wage.  Because they can’t make it on the current minimum wage.  Of course, there’s a reason for this.   And it’s not because of the wage rate.  It’s about the depreciation of the dollar (see Hiking wages with worthless dollars by Seth Lipsky posted 1/29/2014 on the New York Post).

The most startling thing about President Obama’s State of the Union message is what he failed to say about the minimum wage. “Today the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” he declared Tuesday night.

But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20 percent? The president glided right past that point. Maybe he thought nobody would notice.

It strikes me that the president owed the country more of an explanation. After all, he spoke exactly on the 100th anniversary of the start of the Federal Reserve System. The central bank is about to begin its second century. Obama made no reference to any of that history.

Yet a century ago Congress refused to agree to a Federal Reserve until there was a promise about the value of the dollar: It insisted on having the Federal Reserve Act state that it would not lead to an end of the convertibility of the dollar into gold.

That legislative promise came to an end in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value. Only what one critic calls “irredeemable electronic paper ticket money.”

The minimum-wage crisis is a sign that fiat money is not working. It’s not, after all, that the nominal minimum wage has failed to go up (it’s been raised seven times since Reagan). It’s that the value of the dollar has collapsed. Today it has a value of only a 1,250th of an ounce of gold, a staggering plunge from an 853rd of an ounce on the day Obama took office.

Back in 1907 some people tried to manipulate the stock price of a copper company and long story short the Knickerbocker Trust Company collapsed and caused a panic in the banking system.  Enter the Federal Reserve System (the Fed).  A central bank that can inject liquidity during a banking crisis.  And forever eliminate these banking crises.  Or so went the theory.  But central banks have a nasty habit of devaluing their currency.  Because they can print money.  Fiat currency.  Well, the deal with the Fed was that they would not succumb to the central bank disease.  But, alas, they did.  Which is why minimum wage workers have less purchasing power today than they did during the Reagan administration.  Even though they are paid more dollars.

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