Hard Money versus Paper Money

Posted by PITHOCRATES - March 17th, 2014

Economics 101

(Originally published April 1st, 2013)

Money would have No Value if People with Talent didn’t Create things of Value

Money is a temporary storage of wealth.  We created it because of the high search costs of the barter system.  It took a lot of time for two people to find each other who each had what the other wanted.  And we started trading things to have things we couldn’t make efficiently for ourselves.  Someone may have been a superb potter but was a horrible farmer.  So, instead, the potter did what he did best.  And traded the pottery he made for the things he wanted that he was not good at making.  Or growing.  Before that we were self-sufficient.  Whatever you wanted you had to provide it yourself.

As we go back in time we learn why money is a temporary storage of wealth.  For it was the final piece in a growing and prosperous economy.  And at the beginning it was people with talent, each creating something of value.  Something of value that they could trade for something else of value.  It’s the creative talent of people that has value.  And we see that value in the goods and/or services they make or provide.  Money temporarily held that value.  So we could carry it with us easier to go to market to trade with other talented and creative people.  Who may not have wanted what we made or did.  But would gladly take our money.

So we took our goods to market.  People that wanted them traded for them.  They traded money for our goods.  Then we took that money and traded for what we wanted elsewhere in the market.  Trade grew.  With some people becoming professional traders.  By trading money for goods from distant lands.  Then trading these goods for money at the local market.  People who didn’t spend time creating anything.  But bought and sold the creative talent of others.  Who were able to do that because of money.  The creative talent came first.  Then the goods.  And then the money.  For money is a temporary storage of wealth.  Which has no value if no one is making anything of value.  Because if you can’t buy anything what good is having money?

There were no more Gold Certificates in Circulation than there was Gold in the Vault to Exchange them For

These early traders used a variety of things for money.  Pigs, tobacco, grain, oil, etc.  What we call commodity money.  Which was valuable by itself.  As people consumed these commodities.  Which is what gave them the ability to store value.  But because we could consume these they did not make the best money.  Also, they weren’t that portable.  And not easy to make change with.  Which is why we turned to specie.  Such as gold and silver.  Hard money.  It was durable.  Portable.  Divisible.  Fungible.  For example, all Spanish dollars were the same while all pigs weren’t.  One pig could weigh 30 pounds more than another.  So pigs weren’t fungible.  Or durable.  Portable.  And, though divisible, making change wasn’t easy.

So in time traders big and small turned to specie as the medium of exchange.  For all the reasons noted above.  If you worked hard to produce fine pottery you trusted in specie.  You would accept specie for your pottery goods.  Because you knew this hard money would hold its value.  And you could use it in the future to buy what you wanted.  No matter how long that may be.  Why?  Because the money supply remained relatively constant.  As it took a lot of work and great expense to mine and refine ore to make specie out of it.  So there was little inflation when using hard money.  Which meant if you saved for a rainy day that hard money would be there for you.

Gold and silver could be heavy to carry around.  Anyone struggling under the weight of their specie were targets for thieves.  Who wanted that money.  Without creating anything of value to bring to market.  So we found a way to improve a little on using gold and silver.  By locking our gold and silver in a vault.  And carrying around receipts for our gold and silver to use as money.  These gold certificates were promises to pay in gold.  People could continue to use them as money.  Or they could take these receipts back to the vault and exchange them for the gold inside.  These gold certificates were as good as gold.  And there were no more gold certificates in circulation than there was gold in the vault to exchange them for.

Governments Today use nothing but Paper Money because it gives them Privilege, Wealth and Power

Some saw advantages of expanding the money supply with paper currency.  Money that isn’t backed by gold or any other asset.  Money easy to print.  And easy to borrow.  Allowing rich people to borrow large sums of money to buy more assets.  And get richer.  Giving them more power.  And if you were the one printing and loaning that money it gave you great wealth and power.  So having a bank charter was a way to wealth and power.  You could make it easy for those who can help you to borrow money.  While making it difficult for those who oppose you to borrow money.  So there were those in business and in government that liked un-backed paper money.  Because a select few could borrow it cheaply and get rich and powerful.

While some liked these banks and that paper money there were others who bitterly opposed them.  Some who didn’t like to see so much power in so few hands.  And the hard money people.  Who wanted a money that held its value.  The common people.  People who couldn’t borrow large sums of cheap money.  But people who had to get by on less as the inflation from printing all those paper dollars raised prices.  Leaving them with less purchasing power.  Making it harder for them to get by.  Often having to turn to the hated banks to borrow money.  Again and again.  Such that the interest on their loans consumed even more of their limited funds.  Making life more tenuous.  And more bitter between the classes.  The rich who benefited from the cheap paper money.  And the common people who paid the price of all that inflation.

Rich people, on the other hand, loved that inflation.  It helped them make money.  When they bought something at a lower price and sold it at a higher price they made a lot of money.  The greater the inflation the greater the selling price.  And the more profit.  Also, the money they owed was easier to pay off with money that was worth less than when they borrowed it.  Allowing rich people to get even richer.  While the common people saw only higher prices.  And the value of their meager savings lose value.  So this cheap paper money fostered great class warfare.  The hard money people hated the paper money people.  Debtors hated creditors.  The middling classes hated the large landowners, merchants, manufacturers and, of course, the bankers.  And those who had talent to create things hated those who just made money with money.  The greater the inflation the greater the divide between the people.  And the greater wealth and power that select few acquired.  This is what paper money gave you.  Privilege.  Which is why most governments today use nothing but paper money.

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Quantitative Easing, Inflation and Gold

Posted by PITHOCRATES - September 23rd, 2013

Economics 101

The FOMC makes Money out of Nothing to Buy the Bonds for their Quantitative Easing

The Federal Open Market Committee (FOMC) decided to keep their quantitative easing.  Their monthly $85 billion purchase of Treasury Securities and mortgage bonds.  To stimulate the economy.  Which hasn’t stimulated the economy.  But it has greatly expanded the money supply.

When people buy Treasury Securities and mortgage bonds they have to first work and save up the money.  Then when they buy these investments they no longer have that money.  It’s how we buy things.  We exchange money for things.  So we can have the money or the things.  But never both.

Unless you’re the federal government.  That has the power to print money.  When they make these monthly $85 million purchases of Treasury Securities and mortgage bonds they pay for them with an electronic transfer of money.  They add money to the account of the holders of the Treasury Securities and mortgage bonds.  And that’s it.  They subtract no money from their ledgers.  Because they ‘printed’ that money.  Just made it out of nothing.  Literally.

The Danger of a highly Inflated and Devalued Currency is that it loses its Purchasing Power and People lose Faith in It

The Secret Service protects our presidents.  Ironically, the president that created the Secret Service was assassinated.  Abraham Lincoln.  Who created it not to protect presidents.  But to combat a great threat to the country.  Counterfeiting.  The scourge of paper money.

During the American Revolutionary War the Continental Congress had no hard money (i.e., precious metals) to pay the Continental Army.  So they resorted to printing paper money.  Igniting massive inflation.  The more money they printed the greater the inflation.  And the greater they devalued the dollar.  Requiring more and more of them to buy what they once did.  Until no one would accept them in payment anymore.  Forcing the army to take what they needed from the people.  Leaving behind IOUs for the Congress to honor.  Once they figured out how to do that.

This is the danger of a highly inflated and devalued currency.  It loses its purchasing power.  Until it gets so weak that the people lose faith in it.  And refuse to accept it anymore.  Returning to the barter system instead.  Trading things that hold their value for other valuable things.  But the barter system has high search costs.  It takes a lot of time for people to find each other that can trade with each other.  Greatly reducing economic activity.  And crashing a nation’s economy.  Which is what Abraham Lincoln wanted to prevent.  And why a lot of America’s enemies have tried to flood the American economy with counterfeit bills.

The Hard-Money Prices remained Relatively Constant during the Inflationary Periods of the Revolutionary War

With the FOMC’s decision to continue their quantitative easing the stock market soared.  As investors were instead expecting a ‘tapering’.  A reduction in their purchases of Treasury Securities and mortgage bonds.  And if the government stopped creating this money out of nothing to buy bonds from these investors these investors could not continue to buy and sell in the market like they were doing.  Pocketing handsome profits in the process.  Which is why they were so happy to hear the FOMC would continue their currency devaluation to continue buying like they had been.

But this continued currency devaluation has a down side.  For it can’t go on forever.  There will come a point when it ignites inflation.  Causing prices to soar.  Requiring more and more dollars to buy what they once bought before.  So with this possibility on the horizon and with continued currency devaluation some people were taking steps to protect their assets.  Especially their cash.  For there is nothing worse than having a lot of cash when it’s losing its purchasing power at an alarming rate.  So they convert that cash into something that holds it value better.  Such as precious metals.  Which is why when the dollar tanked (after the FOMC decision) the price of gold surged.

So what’s the difference between gold and paper money?  Well, the government can’t print gold.  They can’t create gold out of nothing and add it to someone’s account.  So they can’t devalue gold.  And because of this gold will hold its value during inflationary periods.  Which was why during the Revolutionary War people sold things with two prices.  One was in paper Continental Dollars.  With these prices increasing sometimes daily.  And one in hard money (i.e., precious metals).  The hard money prices remained relatively constant.  Even during the inflationary periods of the Revolutionary War.

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Rand Paul says Milton Friedman would oppose the Fed’s Bond Buying Program

Posted by PITHOCRATES - August 17th, 2013

Week in Review

What’s the difference between hard money (gold, silver, etc.) and paper money?  You can’t print hard money.  Which is why big-spending governments hate hard money.  And love paper money.  They use lofty economic explanations like having the money supply grow at a rate to support an expanding economy.  But the real reason they love paper money is because there is no limit on what they can spend.

This is why some people would prefer bringing back the gold standard.  To make the government as responsible as the rest of us.  Governments and their liberal friends hate this kind of talk.  And try to dismiss it with all-knowing condescension.  Because they sound so learned in their defense of their monetary policies despite a long record of failure they get to keep trying the same failed policies of the past.

Now it’s Rand Paul talking about the gold standard.  Invoking the name of Milton Friedman.  A monetarist.  And receiving the expected criticism (see Rand Paul is dead wrong about Milton Friedman by James Pethokoukis posted 8/13/2013 on the guardian).

Friedman understood the power of monetary policy, for both good and ill. He would almost certainly have been aghast that the Fed blew it again in 2008 by its tight money policies that possibly turned a modest downturn into the Great Recession. And he almost certainly would have been appalled at Republicans pushing for tight money – or, heaven help us, a return to the gold standard – with the economy barely growing and inflation low. It is certainly inconvenient for Paul that Friedman – a libertarian, Nobel-laureate economist – would have little use for the senator’s supposedly Hayekian take on the Fed or monetary policy.

Although the Bernanke Fed has imperfectly executed its QE programs, they are a big reason why the US is growing and adding jobs – despite President’s Obama’s regulatory onslaught and tax hikes – and the EU (and the inflation hawk ECB) is back in recession. Paul is wrong on Friedman and wrong on the Fed. It’s not even close.

One of Friedman’s criticisms of the gold standard is that to maintain the international price of gold—and price stability—governments would have to give up control of their domestic policies.  As a gold standard would prevent them from expanding the money supply at will.  So they couldn’t print money and devalue their currency to increase government spending.  To give themselves an unfair trade advantage.  And to monetize their debt from past irresponsible government spending.  But governments being governments they will do these things even with a gold standard.  As Richard Nixon and the US government did in the 1970s.  Rapidly devaluing the dollar.  Causing a great outflow of gold from the US as our trading partners preferred to hold onto gold instead of devalued US dollars.

The idea of monetarism was to have something similar like a gold standard while having the ability to expand the money supply to keep up with the growth in GDP.  And this would work if responsible people were in charge.  Who would resist the urge to print money.  Like Ronald Reagan.  Under the advice from none other than Milton Friedman.  Who served on the President Reagan’s Economic Policy Advisory Board.  Reagan shared Friedman’s economic views.  Believed in a limited government that left the free market alone.  So Reagan cut taxes, reduced government spending (other than defense) and deregulated an overregulated free market wherever he could.  All things Friedman endorsed.

It is unlikely that Friedman would endorse any quantitative easing.  Because a lack of credit is not causing our economic woes.  It’s a complicated tax code.  High tax rates.  And way too much governmental regulation and interference into the free market.  Especially Obamacare.  That has frozen all new hiring.  And pushed full-time workers into part-time positions.  Or out of a job entirely.  More money in the economy is not going to fix this anti-business climate of the Obama administration.  In fact, the only people making any money now are rich people.  Who are using all that new money to make more money in the stock market.  And when the government shuts off the quantitative easing tap those rich people are going to bail out of the stock market.  To lock in their profits.  Causing the stock market to crash.  And putting an end to the phony illusion of an economic recovery.  And the worst economic recovery since that following the Great Depression will get worse.

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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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Hard Money versus Paper Money

Posted by PITHOCRATES - April 1st, 2013

Economics 101

Money would have No Value if People with Talent didn’t Create things of Value

Money is a temporary storage of wealth.  We created it because of the high search costs of the barter system.  It took a lot of time for two people to find each other who each had what the other wanted.  And we started trading things to have things we couldn’t make efficiently for ourselves.  Someone may have been a superb potter but was a horrible farmer.  So, instead, the potter did what he did best.  And traded the pottery he made for the things he wanted that he was not good at making.  Or growing.  Before that we were self-sufficient.  Whatever you wanted you had to provide it yourself.

As we go back in time we learn why money is a temporary storage of wealth.  For it was the final piece in a growing and prosperous economy.  And at the beginning it was people with talent, each creating something of value.  Something of value that they could trade for something else of value.  It’s the creative talent of people that has value.  And we see that value in the goods and/or services they make or provide.  Money temporarily held that value.  So we could carry it with us easier to go to market to trade with other talented and creative people.  Who may not have wanted what we made or did.  But would gladly take our money.

So we took our goods to market.  People that wanted them traded for them.  They traded money for our goods.  Then we took that money and traded for what we wanted elsewhere in the market.  Trade grew.  With some people becoming professional traders.  By trading money for goods from distant lands.  Then trading these goods for money at the local market.  People who didn’t spend time creating anything.  But bought and sold the creative talent of others.  Who were able to do that because of money.  The creative talent came first.  Then the goods.  And then the money.  For money is a temporary storage of wealth.  Which has no value if no one is making anything of value.  Because if you can’t buy anything what good is having money?

There were no more Gold Certificates in Circulation than there was Gold in the Vault to Exchange them For

These early traders used a variety of things for money.  Pigs, tobacco, grain, oil, etc.  What we call commodity money.  Which was valuable by itself.  As people consumed these commodities.  Which is what gave them the ability to store value.  But because we could consume these they did not make the best money.  Also, they weren’t that portable.  And not easy to make change with.  Which is why we turned to specie.  Such as gold and silver.  Hard money.  It was durable.  Portable.  Divisible.  Fungible.  For example, all Spanish dollars were the same while all pigs weren’t.  One pig could weigh 30 pounds more than another.  So pigs weren’t fungible.  Or durable.  Portable.  And, though divisible, making change wasn’t easy.

So in time traders big and small turned to specie as the medium of exchange.  For all the reasons noted above.  If you worked hard to produce fine pottery you trusted in specie.  You would accept specie for your pottery goods.  Because you knew this hard money would hold its value.  And you could use it in the future to buy what you wanted.  No matter how long that may be.  Why?  Because the money supply remained relatively constant.  As it took a lot of work and great expense to mine and refine ore to make specie out of it.  So there was little inflation when using hard money.  Which meant if you saved for a rainy day that hard money would be there for you.

Gold and silver could be heavy to carry around.  Anyone struggling under the weight of their specie were targets for thieves.  Who wanted that money.  Without creating anything of value to bring to market.  So we found a way to improve a little on using gold and silver.  By locking our gold and silver in a vault.  And carrying around receipts for our gold and silver to use as money.  These gold certificates were promises to pay in gold.  People could continue to use them as money.  Or they could take these receipts back to the vault and exchange them for the gold inside.  These gold certificates were as good as gold.  And there were no more gold certificates in circulation than there was gold in the vault to exchange them for.

Governments Today use nothing but Paper Money because it gives them Privilege, Wealth and Power

Some saw advantages of expanding the money supply with paper currency.  Money that isn’t backed by gold or any other asset.  Money easy to print.  And easy to borrow.  Allowing rich people to borrow large sums of money to buy more assets.  And get richer.  Giving them more power.  And if you were the one printing and loaning that money it gave you great wealth and power.  So having a bank charter was a way to wealth and power.  You could make it easy for those who can help you to borrow money.  While making it difficult for those who oppose you to borrow money.  So there were those in business and in government that liked un-backed paper money.  Because a select few could borrow it cheaply and get rich and powerful.

While some liked these banks and that paper money there were others who bitterly opposed them.  Some who didn’t like to see so much power in so few hands.  And the hard money people.  Who wanted a money that held its value.  The common people.  People who couldn’t borrow large sums of cheap money.  But people who had to get by on less as the inflation from printing all those paper dollars raised prices.  Leaving them with less purchasing power.  Making it harder for them to get by.  Often having to turn to the hated banks to borrow money.  Again and again.  Such that the interest on their loans consumed even more of their limited funds.  Making life more tenuous.  And more bitter between the classes.  The rich who benefited from the cheap paper money.  And the common people who paid the price of all that inflation.

Rich people, on the other hand, loved that inflation.  It helped them make money.  When they bought something at a lower price and sold it at a higher price they made a lot of money.  The greater the inflation the greater the selling price.  And the more profit.  Also, the money they owed was easier to pay off with money that was worth less than when they borrowed it.  Allowing rich people to get even richer.  While the common people saw only higher prices.  And the value of their meager savings lose value.  So this cheap paper money fostered great class warfare.  The hard money people hated the paper money people.  Debtors hated creditors.  The middling classes hated the large landowners, merchants, manufacturers and, of course, the bankers.  And those who had talent to create things hated those who just made money with money.  The greater the inflation the greater the divide between the people.  And the greater wealth and power that select few acquired.  This is what paper money gave you.  Privilege.  Which is why most governments today use nothing but paper money.

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Cyprus and the Eurozone Crisis shows why we’d be better off with a Gold Standard

Posted by PITHOCRATES - March 30th, 2013

Week in Review

Debtors love inflation.  They love to borrow cheap dollars.  And love even more to repay their loans with even cheaper dollars.  Creditors, on the other hand, hate inflation.  Because they are on the other side of that borrowing equation from the debtor.  And when a debtor repays a loan with depreciated dollars the creditor who loaned that money loses purchasing power.  Causing the creditor to lose money.  Just because they had the kindness to loan money to someone who needed it.  Which is a strong disincentive for making future loans.

This has long been at the heart of all banking wars.  And banking crises.  The fight between paper money and hard money.  Printed dollars versus specie (gold and silver).  People who want to borrow money love paper.  Because banks could make a lot of it to lend.  Something they can’t do with gold and silver.  Because it takes a lot more effort and costs to bring new gold into the economy.  Those who want to borrow money argue that hard money hinders economic activity.  Because there is a shortage of money.  And because governments are always interested in boosting economic activity they are always in favor of expanding the paper money supply.  This generous expansion of credit is currently miring the Eurozone in a sovereign debt crisis.  And launched a confiscation of wealth in Cyprus.  Greatly threatening the banking system there.  As few depositors trust their money will be safe in their bank.  Causing people to return to specie (see Cypriot bank crisis boosts demand for gold by Ian Cowie posted 3/27/2013 on The Telegraph).

The Cypriot banking crisis reminds even the most trusting savers that not all banks or jurisdictions are safe – and is boosting demand for gold, bullion dealers claim.

As if to prove the old adage that it’s an ill wind that blows no good, enthusiasts for the precious metal argue that financial shocks in the eurozone are reminding savers of gold’s attractions…

[Daniel Marburger, a director of Jewellers Trade Services Partners (JTS)] said: “The situation in Cyprus has reignited the wider Eurozone sovereign-debt crisis. At a time like this, people are attracted to gold because it is the ultimate crisis commodity.

“The proposed levy on deposits of Cyprus’s savers has not only shaken confidence in the single-currency Eurozone, it illustrates the fragility of savings held within the banking system. In our experience, clients are attracted to gold because it offers insurance against extreme movements in the value of other assets. Unlike paper currency, it will never lose its intrinsic value…”

“The events in Cyprus prove once again that bank customers do face risks as creditors who are owed money…”

When you deposit your money into a bank you become a creditor.  You are loaning your money to the bank.  Who pays you interest to loan your money to others.  If the inflation rate is greater than the interest you earn your money actually shrinks in value.  And the more they print money the more it shrinks in value.  That’s why as a creditor you won’t like the harmful effects of inflation.  Even if it makes the people happy who borrow your money from the bank.  Because they get a real cheap loan at your expense.

Which is why people are drawn to gold.  Because they can’t print gold.  So it holds value better than paper.  And the government can’t just confiscate a percentage of your savings if it isn’t in the bank.  Another reason why people are drawn to gold.  If the banking system collapses, or if the government seizes people’s retirement savings to ward off a banking system collapse, people can take their gold and move somewhere else that isn’t having a financial meltdown.  And not lose any of their wealth.

Which is, of course, the last thing you want to happen in a country.  For a sound banking system is essential for a prospering middle class (if it weren’t for banks only rich people would own homes, cars, go to college, etc.).  Which is why a responsible monetary policy, and responsible people in government, is a prerequisite for a sound banking system.  Which few nations in the Eurozone have.  As few nations throughout the world have.  For they all want to buy votes by giving away free stuff.  And having the power to print money allows them to give away a lot of free stuff.  Pensions.  Health care.  College educations.  Lots and lots of government jobs.  Etc.  But there comes a point when you give away too much.  And you have sovereign debt crises.  As well as confiscations of wealth.

This was the advantage of a gold standard.  Like when we coupled the value of our world’s currencies to the price of gold.  It did not allow any nation to inflate their currency.  For if they did people would exchange that devalued currency for the fully-valued gold.  A strong incentive not to devalue your currency.  Which was nothing more than a promise to pay in gold.  The gold standard kept governments responsible.  But because it made it so difficult to buy votes everyone cheered when President Nixon decoupled the dollar from gold.  Putting an end to the last vestiges of a gold standard.  Allowing governments everywhere to be irresponsible.  Bringing on financial crises.  And the confiscation of wealth.  As we see happening in Cyprus.  And will no doubt see elsewhere.

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Continental Army, Continental Congress, Inflation, Wage & Price Controls, Paper Money, Specie, IOUs, Impressment and Repudiation

Posted by PITHOCRATES - May 3rd, 2012

Politics 101

The Articles of Confederation made the United States of America a Confederacy of Sovereign States that had Little Power to Raise Revenue

By the time the Continental Army left Valley Forge they could hold their own against the British Army.  The British couldn’t push them around any longer.  They became so good that they fought the war to a standstill.  They came close to some major wins on the field of battle.  But close didn’t diminish the staying power of the British Army.  And they stayed.  On the battlefield.  And in their cities.  Dragging the conflict out for a total of 8 years.  And no matter what era of warfare you use to measure war-years 8 years of war is very costly.  Someone has to pay for it.  And, ultimately, it’s the people.  Either through taxation.  Or the loss of wealth through inflation.  Or simply the loss of wealth through the losing of your stuff.  And going without.  Because the army fighting for your liberty had no choice but to take what was yours.

This made the Revolutionary War unlike other wars.  For this war was about liberty.  Property rights.  The tyranny of a distant power.  And unjust taxation.  In other words this war was against all the things that made fighting a war possible.  You can’t really draft men to fight in a country that stands for liberty.  You just can’t confiscate the things you need to wage war from your people in a country built upon the principle of property rights.  You can’t declare martial law and suspend the rule of law on people you deem not to be patriotic enough in supporting the cause when you’re fighting the tyranny of a distant power that does.  (Even the Americans gave British soldiers a fair trial for the Boston Massacre).  And taxes?  The people that dumped tea into Boston Harbor over the principle of no taxation for revenue purposes without representation in Parliament was not going to be able to tax their people on a federal level.  Which proved a big obstacle in paying for the war to win their liberty.

The Articles of Confederation made the United States of America a confederacy of sovereign states.  And those sovereign states held the real power.  Virginia.  Massachusetts.  Pennsylvania.  New York.  And the other 9 sovereign states.  Not the United States of America.  That confederation that was waging war against the mightiest power in the world.  Which made raising funds difficult.  For without the power to levy taxes all they could do was ask.  Just like George Washington did all of the time.  Especially during that horrible winter at Valley Forge when his army was naked and starving.  He asked the Continental Congress for provisions.  And the Continental Congress asked the several states for their apportioned funds raised by their state legislatures.  Per the Articles of Confederation.  If they didn’t pay these funds timely or in full (or at all) they could ask again.  And that’s all they could do.  Which is why George Washington’s army suffered through that horrible winter.  Because the funds weren’t there to buy Washington the provisions his army needed.

Thanks to Inflation the Continental Army often had No Choice but to Take what they Needed from the People they were Fighting For 

The Americans never had enough money.  Which makes it amazing that they held off losing for 8 years.  Eight very costly years.  And won.  Especially considering how bad the economy was during the war.  Unable to tax or get sufficient loans from Europe they had little choice but to print money.  Which caused a whole lot of trouble.  For the more money they printed and put into circulation the more the value of their currency fell.  And soon a Continental was “not worth a Continental.”  And when the currency lost its value it took more of it to buy things.  Which led to price inflation.  The price of material and parts grew so high that it increased the cost of American manufactured muskets over the cost of imported French muskets.  Which they had to bring in through a British blockade.  Giving what should have been a cost advantage to the Americans.  Had it not been for the inflation.

To try and keep prices under control they implemented wage and price controls.  Which didn’t work.  The continued devaluation of the currency forced sellers to raise their prices to cover their rising costs.  Forcing them to sell below their costs would just put them out of business.  Voluntarily.  Or involuntarily.  Creating shortages in the market place.  Some offered lower prices for specie (gold and silver coins).  You can’t print hard money (specie).  So it held its value.  Unlike the paper money.  So a little of specie went a long way compared to paper money.  Of course, this didn’t help their wage and price controls.  It just made the paper more worthless.  And raised prices further.

There was yet another ugly side to this sordid business.  High prices and shortages created opportunity to profit handsomely.  There was speculation and market manipulation (hoarding, cornering the market, etc.) to take advantage of those highly priced items that were in scare supply.  Further raising prices for the people.  And compounding the problems of provisioning the army.  Which infuriated the low-paid soldiers.  Who the Continental Congress paid in that worthless paper money.  Angry mobs arose to address this profiteering.  As well as new laws and enforcement.  But they helped little.  The army often had no choice but to take what they needed from the people they were fighting for.  Either outright.  Or in exchange for IOUs.   Promises that the Continental Congress of the United States of America would make good on.  Just as soon as the several states paid their apportioned funds raised by their state legislatures. 

If you Violate the Ideals you’re Fighting for while Fighting for those Ideals it can Complicate the Peace

Fighting for an ideal makes war complicated.  If you’re just a tyrannical dictator looking to rape and pillage it makes things easier.  You don’t have to worry about liberty.  Property rights.  Debt.  Or taxes.  In the short term.  Or the long term.  Which made the American Revolutionary War a very difficult war to fight.  Because at the heart of the United States of America were those ideals.  To win this war to grant liberty to the people required taking their liberty away.  A little.  To win this war to guarantee property rights you had to violate property rights.  A little.  To win this war against tyranny you had to use excessive force against your people.  A little.  To win this war to establish taxation only with representation caused the destruction or personal wealth.  A lot.  Through impressment (taking things from the people).  Borrowing from foreign countries.  Or through inflation.

When the French joined the Americans in 1778 inflation was already out of control.  They printed twice as many Continentals in 1778 as they did in the last three years combined.  And there was serious discussion about doing the unthinkable.  Repudiation.  To simply escape the inflation by escaping the currency.  To retire the bills from circulation.  At a fraction of their value.  And that’s what they did in 1780.  Issuing new currency based on specie for the old currency at a 40 to one ratio.  The states were to tax their people to raise the funds for the new currency.  So the people took a huge short-term loss.  For a stable long-term future.  Based on specie.  That they couldn’t inflate.  This hard money would come from in large part the Spanish and the French.  The Spanish in Cuba buying American flour with specie.  And French aid.  As well as their army and navy spending their hard money in the American economy.

Wars are costly.  And they are rarely nice.  Trying to make them nice can make them last longer.  Which will make them more costly.  Of course, if you violate the ideals you’re fighting for while fighting for those ideals it can complicate the peace.  Luckily, for the Americans, they won their peace.  Their allies, the French, were not so lucky in their revolution.  The French Revolution.  Fought less than a decade after the American Revolution came to a close.  And unlike the Americans the French peace that followed was a bloody one.  That would eventually replace the king they executed with an emperor.  Napoleon Bonaparte.  Who the Americans helped bring to power in part due to the crushing debt King Louis XVI incurred supporting the Americans in their revolution.

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