Coin Debasement, Currency Inflation and the Loss of Purchasing Power

Posted by PITHOCRATES - April 16th, 2013

History 101

The Roman Citizens welcomed the Barbarian Invaders as Liberators from the Oppressive Roman Regime

The Roman Empire pushed its borders out for centuries.  And when they did their legions conquered new territories.  And other civilizations.  Allowing them to send a lot of spoils back to Rome.  Providing the necessary funds for the empire.  With this lucrative stream of wealth flowing back to Rome they could leave the economy alone.  And did.  Economic activity was pretty much laissez-faire.  Then something happened.  The Romans had conquered pretty much all of the known civilized world.  And they stopped pushing their borders out.  Putting an end to that lucrative stream of wealth flowing back to Rome.

This created a problem.  For the empire was never larger.  With a greater border to protect than ever before.  And more territory to administer.  Which meant more soldiers.  And more civil servants.  Neither of which worked for free.  Which changed how the Romans handled the private sector economy.  They began to tax and regulate the hell out of it.  To raise the funds to pay the costs of empire.

Things got so bad that some people just started disappearing.  So the Romans introduced something that would evolve into European feudalism.  They forbade people from leaving their jobs.  Ever.  They even forbade the children from leaving their father’s profession.  While they were doing this they were debasing their coins.  The gold a little.  As it paid the soldiers and the civil servants.  And the silver a lot.  The money of the common people.  Who weren’t as important as the soldiers and the civil servants.  Until their silver was nothing but worthless slugs.  Causing prices to soar.  And the economy to collapse back into the barter system.  Hastening the fall of the Roman Empire.  As the Roman citizens welcomed the barbarian invaders as liberators from the oppressive Roman regime.

The Spanish brought back so much Gold and Silver from the New World that it actually Depreciated the Money Supply

Europe met Asia on the Bosporus.  The straits that connected the Black Sea and the Mediterranean Sea.  And it was where the Silk Road brought the exotic goods of the Far East into Europe.  Which the Europeans just couldn’t get enough of.  Making the Mediterranean powers the dominant powers.  For they controlled this lucrative trade.  Until, that is, the European nations made better ships.  Ships that could cross oceans.  And were bigger than the ships that plied the Mediterranean.  So they could bypass the Mediterranean powers.  And sail directly to the Far East.  Fill their large holds with those goods the Europeans couldn’t get enough of.  Getting rich and powerful.  And shifting the balance of power to these European nations.

But the Europeans just didn’t go east.  They also went west.  And bumped into the New World.  The Dutch, the French, the British, the Portuguese and the Spanish all had colonies in the New World.  It was the age of mercantilism.  Colonies sent raw materials to their mother country.  Who manufactured these raw materials into finished goods.  And shipped them from the mother country on the mother country’s ships through the mother country’s ports.  For the name of the game was balance of trade.  Which meant you imported lower-valued raw materials and you exported higher-valued finished goods.  And because the value of their exports was greater than the value of their imports there was also a net in-flow of gold and silver.  Which was what mercantilism was all about.  Trying to accumulate more gold and silver than your trading partners.

And the Spanish hit mercantile pay-dirt in the New World.  Gold and silver.  Lots of it.  So they loaded it up on their ships.  And sent it back to Spain.  Where it entered the European money supply.  And none too soon as the Europeans were cash-starved.  Because of all those exotic goods the Europeans couldn’t get enough of.  While those in the Far East had no interest whatsoever in European goods.  Which meant that European gold and silver went to the Far East to pay for those exotic goods.  Leaving the Europeans starving for gold and silver.  But thanks to the New World, they were able to reverse that net outflow of gold and silver.  In fact, so much gold and silver arrived from the New World that it actually inflated the money supply.  Which actually devalued the currency.  And because the currency lost purchasing power prices rose.  Making food more costly.  And life more difficult.

President Andrew Jackson joined the Hard-Money People and refused to renew the Charter of the BUS

Responsible nations have chosen gold and silver as their currency as it is difficult to increase the money supply and cause inflation.  Because mining these precious metals, refining them and minting coins is very costly.  Unless you discovered a New World with gold and silver paving the streets.  But that didn’t happen every day.  The irresponsible government, though, figured out a way to make that happen every day.  By just getting rid of the responsible gold and silver.  And replacing it with paper notes.  Fiat money.

Fiat money dates back to 11th century China.  To the Song Dynasty.  Which allowed the government to spend more money than their taxes raised.  Especially during war time.  But printing money devalued the currency.  And when you make the currency worth less it takes more of it to buy the things it once did.  Reducing purchasing power.  And unleashing price inflation.  Making food more costly.  And life more difficult.  During the American Revolutionary War there was so little gold and silver available that the Continental Congress turned to printing money.  And they printed so much that they unleashed a punishing inflation.  Causing prices to soar because the money became so worthless.  People wouldn’t accept it for payment.  So the Continental Army had to take the provisions they needed.  Leaving behind IOUs for the Continental Congress to make good on.  Later.

Of course, not everyone suffered during times of inflation.  Speculators did very well.  For their friends in the government’s central bank could print money and loan it to them on very favorable terms.  The speculators then used this cheap money and bought and sold assets.  Pocketing handsome profits in large part because of that inflation.  As the currency depreciation raised prices.  Including the prices of the assets they were selling.  So the rich got richer during periods of inflation.  While the working class just lost purchasing power.  Which is why President Andrew Jackson joined the hard-money people.  Those who favored gold and silver over paper currency.  And refused to renew the charter of the Second Bank of the United States (BUS).  Being one of the first world leaders not to choose destructive inflationary policies.  Instead choosing policies that favored the people.  Not the state.

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Goldsmiths, Specie, Bank Notes, Bank Reserves, Spanish Dollar, Continentals, Bank of the United States and the Panic of 1819

Posted by PITHOCRATES - June 26th, 2012

History 101

When Spain came to the New World they Brought Home a lot of Gold and Silver and Turned it into Coin

Our first banks were goldsmiths’ vaults.  They locked up people’s gold or other valuable metals (i.e., specie) in their vaults and issued these ‘depositors’ receipts for their specie.  When a depositor presented their receipt to the goldsmith he redeemed it for the amount of specie noted on the receipt.  These notes were as good as specie.  And a lot easier to carry around.  So these depositors used these notes as currency.  People accepted them in payment.  Because they could take them to the goldsmith and redeem them for the amount of specie noted on the receipt.

The amount of specie these first bankers kept in their vaults equaled the value of these outstanding notes.  Meaning their bank reserves were 100%.   If every depositor redeemed their notes at the same time there was no problem.  Because all specie that was ever deposited was still in the vault.  So there was no danger of any ‘bank runs’ or liquidity crises.

When Spain came to the New World they brought home a lot of gold and silver.  And turned it into coin.  Or specie.  The Spanish dollar entered the American colonies from trade with the West Indies.  As the British didn’t allow their colonies to coin any money of their own the Spanish dollar became the dominate money in circulation in commerce and trade in the cities.  (Which is why the American currency unit is the dollar).  While being largely commodity money in the rural parts of the country.  Tobacco in Virginia, rice in the south, etc.  Paper money didn’t enter into the picture until Massachusetts funded some military expeditions to Quebec.  Normally the soldiers in this expedition took a portion of the spoils they brought back for payment.  But when the French repulsed them and they came back empty handed the government printed paper money backed by no specie.  For there was nothing more dangerous than disgruntled and unpaid soldiers.  The idea was to redeem them with future taxation.  But they never did. 

Thomas Jefferson believed that the Combination of Money and Politics was the Source of all Evil in Government 

During the American Revolutionary War the Americans were starving for specie.  They were getting some from the French but it was never enough.  So they turned to printing paper money.  Backed by no specie.  They printed so much that it became worthless.  The more they printed the more they devalued it.  And the fewer people would take it in payment.  Anyone paying in these paper Continentals just saw higher and higher prices (while people paying in specie saw lower prices).  Until some just refused to accept them.  Giving rise to the expression “not worth a Continental.”  And when they did the army had to take what they needed from the people.  Basically giving them an IOU and telling the people good luck in redeeming them.

Skip ahead to the War of 1812 and the Americans had the same problem.  They needed money.  So they turned to the printing presses.  With the aid of the Second Bank of the United States (BUS).  America’s second central bank.  Just as politically contentious as the First Bank of the United States.  America’s first central bank.  The BUS was not quite like those early bankers.  The goldsmiths.  Whose deposits were backed by a 100% specie reserve.  The BUS specie reserve was closer to 10%.  Which proved to be a problem because their bank notes were redeemable for specie.  Which people did.  And because they did and the BUS was losing so much of its specie the government legislated the suspension of the redemption of bank notes for specie.  Which just ignited inflation.  With the BUS.  And the state banks.  Who were no longer bound by the requirement to redeem bank notes for specie either.  Enter America’s first economic boom created by monetary policy.  A huge credit expansion that created a frenzy of borrowing.  And speculation.

When more dollars are put into circulation without a corresponding amount of specie backing them this only depreciated the dollar.  Making them worth less, requiring more of them to buy the same stuff they did before the massive inflation.  This is why prices rise with inflation.  And they rose a lot from 1815 to 1818.  Real estate prices went up.  Fueling that speculation.  Allowing the rich to get richer by buying land that soared in value.  While ordinary people saw the value of their currency decline making their lives more difficult.  Thanks to those higher prices.  The government spent a lot of this new money on infrastructure.  And there was a lot of fraud.  The very reason that Thomas Jefferson opposed Alexander Hamilton’s first Bank of the United States.  The combination of money and politics was the source of all evil in government.  And fraud.  According to Jefferson, at least.  Everyone was borrowing.  Everyone was spending.  Which left the banks exposed to a lot of speculative loans.  While putting so much money into circulation that they could never redeem their notes for specie.  Not that they were doing that anyway.  Bank finances were growing so bad that the banks were in danger of failing.

Most Bad Recessions are caused by Easy Credit by a Central Bank trying to Stimulate Economic Activity 

By 1818 things were worrying the government.  And the BUS.  Inflation was out of control.  The credit expansion was creating asset bubbles.  And fraud.  It was a house of cards that was close to collapsing.  So the BUS took action.  And reversed their ruinous policies.  They contracted monetary policy.  Stopped the easy credit.  And pulled a lot of those paper dollars out of circulation.  It was the responsible thing to do to save the bank.  But because they did it after so much inflation that drove prices into the stratosphere the correction was painful.  As those prices had a long way to fall.

The Panic of 1819 was the first bust of America’s first boom-bust cycle.  The first depression brought on by the easy credit of a central bank.  When the money supply contracted interest rates rose.  A lot of those speculative loans became unserviceable.  With no easy credit available anymore the loan defaults began.  And the bank failures followed.  Money and credit of the BUS contracted by about 50%.  Businesses couldn’t borrow to meet their cash needs and went bankrupt.  A lot of them.  And those inflated real estate prices fell back to earth.  As prices fell everywhere from their artificial heights.

It was America’s first depression.  But it wouldn’t be the last.  Thanks to central banking.  And boom-bust cycles.  We stopped calling these central banking train wrecks depressions after the Great Depression.  After that we just called them recessions.  And real bad recessions.  Most of them caused by the same thing.  Easy credit by a central bank to stimulate economic activity.  Causing an asset bubble.  That eventually pops causing a painful correction.  The most recent being the Great Recession.  Caused by the popping of a great real estate bubble caused by the central bank’s artificially low interest rates.  That gave us the subprime mortgage crisis.  Which gave us the greatest recession since the Great Depression.  Just another in a long line of ‘real bad’ recessions since the advent of central banking.

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Steam Locomotive, Diesel Electric Locomotive, Interstate Highway System, Airplane, Air Travel, Refined Petroleum Products and Pipelines

Posted by PITHOCRATES - March 21st, 2012

Technology 101

The Diesel Electric Locomotive could pull a Train Cross Country and into the Heart of a City with Minimal Pollution

The 1920s were transformative years.  The Roaring Twenties.  It’s when we moved from animal power to mechanical power.  From the horse and plow to the tractor.  From steam power to electric power.  From the telegraph to the telephone.  From the gas lamp to the electric light.  From crowded mass transit to the freedom of the automobile.  From manual labor to the assembly line. 

You can see a glimpse of that world in 1920’s Steam Train Journey Across the United States – Westward Ho!  The beginning of the modern city.  With modern street lighting.  Electric power and telephone overhead wiring.  Streets crowded with automobiles.  Tractors and mechanical harvesters on the farm.  And, of course, the steam locomotive.  Connecting distant cities.  Transferring the freight to feed the modern industrial economy.  And shipping the finished goods.  As well as all that food from the farm to our grocer’s shelves.  Proving the 1920s were vibrant economic times.  With real economic growth.  And not a speculative bubble.  For there was nothing speculative about all of this technology becoming a part of our way of life.

Of course the technology wasn’t perfect.  The coal-burning locomotives belched black smoke and ash wherever they went.  Which wasn’t all that bad in the open country where a train or two passed.  But it was pretty dangerous in tunnels.  Which had to be short lest they suffocated their passengers.  (One of the reasons why all subways use electric trains).  Making for some long and winding railroads in mountainous terrain.  To go around mountains instead of under them.  Slowing trains and increasing travel time.  And they were pretty unpleasant in the cities.  Where the several rail lines converged.  Bringing a lot of coal-burning locomotives together.  Creating a smoky haze in these cities.  And leaving a layer of ash everywhere.  The cleaner diesel-burning locomotives changed that.  The diesel electric locomotive could pull a train cross country and into the heart of a city with a minimal amount of pollution.  As long as they kept their engines from burning rich.  Which they would if they operated them with dirty air filters.  Reducing fuel efficiency by having the air-fuel mixture contain too much fuel.  And causing these engines to belch black smoke.  Similar to diesel trucks running with dirty air filters.

Airplanes can travel between Two Points in a Direct Line at Faster Speeds than a Train or Bus with Minimal Infrastructure

Trains shrunk our country.  Brought distant cities together.  Allowing people to visit anywhere in the continental United States.  And the railroads profited well from all of this travel.  Until two later developments.  One was the interstate highway system.  That transferred a lot of freight from the trains to trucks.  As well as people from trains to buses and cars.  And then air travel.  That transferred even more people from trains to airplanes.  This competition really weakening railroads’ profits.  And pretty much put an end to passenger rail.  For people used the interstate highway system for short trips.  And flew on the long ones.  Which was quicker.  And less expensive.  Primarily because airplanes flew over terrain that was costly to avoid.

Highways and railroads have to negotiate terrain.  They have to wind around obstacles.  Go up and down mountainous regions.  Cross rivers and valleys on bridges.  Travel under hilly terrain through tunnels.  And everywhere they go they have to travel on something built by man.  All the way from point A to point B.  Now trucks, buses and cars have an advantage here.  We subsidize highway travel with fuel taxes.  Trucking companies, bus lines and car owners didn’t have to build the road and infrastructure connecting point A to point B.  Like the railroads do.  The railroads had to supply that very extensive and very expensive infrastructure themselves.  Paid for by their freight rates and their passenger ticket sales.  And when there were less expensive alternatives it was difficult to sell your rates and fares at prices high enough to support that infrastructure.  Especially when that lower-priced alternative got you where you were going faster.  Like the airplane did.

Man had always wanted to fly.  Like a bird.  But no amount of flapping of man-made wings got anyone off the ground.  We’re too heavy and lacked the necessary breast muscles to flap anything fast enough.  Not to mention that if we could we didn’t have any means to stabilize ourselves in flight.  We don’t have a streamline body or tail feathers.  But then we learned we could create lift.  Not by flapping but my pushing a curved wing through the air.  As the air passes over this curved surface it creates lift.  Generate enough speed and you could lift quite a load with those wings.  Including people.  Cargo.  Engines.  And fuel.  Add in some control elements and we could stabilize this in flight.  A tail fin to prevent yawing (twisting left and right) from the direction of flight.  Like a weathercock turns to point in the direction of the wind.  And an elevator (small ‘wing’ at the tail of the plane) to control pitch (nose up and nose down).  Ailerons correct for rolling.  Or turn the plane by rolling.  By tipping the wings up or down to bank the airplane (to turn left the left aileron goes up and the right aileron goes down).  And using the elevator on the take-off roll to pitch the nose up to allow the plane to gain altitude.  And in flight it allows the plane to ascend or descend to different altitudes.  Put all of this together and it allows an airplane to travel between points A and B while avoiding all terrain.  In a direct line between these two points.  At a much faster speed than a train, bus or car can travel.  And the only infrastructure required for this are the airports at points A and B.  And the few en route air traffic controllers between points A and B. Which consisted of radar installations and dark rooms with people staring at monitors.  Communicating to the aircraft.  Helping them to negotiate the air highways without colliding into other aircraft.  And air travel took off, of course, in the 1920s.  The Roaring Twenties.  Those glorious transformative years.

Refined Petroleum Products have Large Concentrations of Energy and are the Only Fuel that allows Air Travel

The most expensive cost of flying is the fuel cost.  The costlier it is the costlier it is to fly.  Not so for the railroads.  Because their fuel costs aren’t the most expensive cost they have.  Maintaining their infrastructure is.  They can carry incredible loads cross country for a small price per unit weight.  Without swings in fuel prices eating into their profits.  Making them ideal to transfer very large and/or heavy loads over great distances.  Despite dealing with all the headaches of terrain.  For neither a plane nor a truck can carry the same volume a train can.  And heavier loads on a plane take far greater amounts of fuel.  This additional fuel itself adding a great amount of weight to the aircraft.  Thus limiting its flight distance.  Requiring refueling stops along the way.  Making it a very expensive way to transport heavy loads.  Which is why we ship coal on trains.  Not on planes.

Trains are profitable again.  But they’re not making their money moving people around.  Their money is in heavy freight.  Iron ore.  Coke.  And, of course, coal.  To feed the modern industrial economy.  Stuff too heavy for our paved roads.  And needed in such bulk that it would take caravans of trucks to carry what one train can carry.  But even trains can’t transport something in enough bulk to make it cost efficient.  Refined petroleum.  Gasoline.  Diesel.  And jet fuel.  For these we use pipelines.  From pipelines we load gas and diesel onto trucks and deliver it to your local gas station.  We run pipelines directly to the fuel racks in rail yards.   And run pipelines to our airports.  Where we pump jet fuel into onsite storage tanks in large fuel farms.  Which we then pump out in another set of pipelines to fueling hydrants located right at aircraft gates.

These refined petroleum products carry large concentrations of energy.  Are easy to transport in pipelines.  Are portable.  And are very convenient.  Planes and trains (as well as ships, busses and cars) can carry them.  Allowing them to travel great distances.  Something currently no renewable energy can do.  And doing without them would put an end to air travel.  Greatly increase the cost of rail transport (by electrifying ALL our tracks).  Or simply abandoning track we don’t electrify.  Making those far distant cities ever more distant.  And our traveling options far more limited than they were in the 1920s.  Turning the hands of time back about a hundred years.  Only we’ll have less.  And life will be less enjoyable.

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