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[A true story and a book review]

The $20 bill

My eight year old grandson is very bright, curious, and observant.  The other day he found a $20 bill on the kitchen counter and came running over to me.  “Opa!” he said (for that’s what the grandchildren call me), “Look at this.  This is just a piece of paper with a bunch of stuff printed on it.”

Why is it that we can’t use a different piece of paper – say Monopoly money – to buy things?  What’s the difference? Is there a difference?  Why can’t I print a piece of paper and use it to buy things?  In fact I can.  Everyone can, and everyone does this all the time.  Let me explain.

Whenever a person purchases something of great value on credit, such as a car or a house, that person exchanges a signed piece of paper for something of value.  Does that transaction make the paper have inherent value equal to a house or a car?  Absolutely not!  What makes that paper valuable is the expectation that the individual is actually going to exchange the paper for something of equal or greater value according to agreed upon terms.  This expectation is founded upon an accurate evaluation of the person’s real wealth, firm promise, and trustworthy character.  If either the wealth or character is flawed, the paper is worthless because the promise will never be fulfilled.  If the promise itself is flawed (such as a promise full of loopholes), the paper is worthless because the promise will never have to be fulfilled.

So, let’s get back to the $20 bill.  What gives it value in excess of the value of just the paper it’s printed on?  What assures the possessor of the $20 bill that it will still purchase the same amount of goods tomorrow as it does today?  Nothing.  It used to be that the Federal Government promised to redeem the paper for a certain amount of gold or silver, but lacking the necessary gold in its vaults, it reneged on the promise in 1972.  As my 8 year old grandson so astutely observed, now it’s just a piece of paper – backed by character and a promise.

So will that $20 bill buy the same amount of goods tomorrow as it does today?  No.  In fact, we have all become trained to accept a perpetual condition whereby $20 today is expected purchase fewer goods tomorrow.  This condition is known as inflation.  If inflation is small, we learn to live with it.  But we have no assurance inflation will remain small indefinitely other than the character of the government that prints the paper.  Unfortunately the government’s character is unreliable and changes dynamically as leaders come and go, and the promise is non-existent.

The more paper the government prints, the less each dollar is worth per the law of supply and demand.  Since there is nothing tangible preventing the government from printing as much money as it desires, we can be 100% certain that it will do so without restraint, and the paper will not retain its current value into the future.

Here is the proof:  In 1972 one could buy an ounce of gold for $35.  Today it costs $1500.  By that measure today’s dollar is worth only about 3¢.  Using the Government’s own inflation calculator gives a little better result of 18¢ today, but it’s still a huge drop in value.[1]

I remember my dad telling me of inflation so great in the early 1900s that he could only purchase half as much stuff with his money on any given day as on the day before.  First he had to take sacks of money to the store, and he made sure to go the day he received the money.  Before long he was going to the store carrying the money in a wheelbarrow; shortly thereafter he simply refused to accept money for his services and would demand payment only in chickens, eggs, milk, or other stuff of inherent value he could use.

With our Federal debt spiraling out of control much faster than the wealth generated by the economy, we could be on the verge of a similar – if not so dramatic – situation because sooner or later the debtors will want to be repaid.  That can only be accomplished by printing lots more money, by selling our country’s assets to our debtors, or declaring national bankruptcy.  None of these solutions is particularly appealing.

I hate to say this but my grandson was right.  He understood a truth few of us really comprehend today:  The $20 bill is nothing more than a worthless piece of paper with fancy printing on it.

Book Review:  “The Case for Gold”

I recently read a very interesting book, “The Case for Gold (Ron Paul set)”, that made a very similar argument.  I purchased the book for my Kindle to read on the long flights back and forth to Europe primarily because of its incredibly low price of 1¢.

The book is effectively the minority report of the 1982 U.S. Gold Commission chartered to evaluate the role of gold in the U.S. monetary system.[2]  The book provides an outstanding and captivating history of our financial system and of the dollar.  I never expected banking, finances, and economics to be so stimulating that I could stay awake and continue reading on a long trans-Atlantic flight!  But it was.

Furthermore, historical charts clearly and abundantly demonstrate how the dollar remained comparatively stable from 1792 through 1972 while on the gold standard, but its value began a precipitous decline immediately after the dollar was removed from the gold standard.  I would love to see Ron Paul update the book with current statistics!  Some may find the book a bit dry, but it is definitely worth perusing because:

All is not as it looks.


[1] One has to closely evaluate the government’s inflation numbers because the “market basket” calculation is changed from time to time to make inflation appear less than it really is.  For example, today the cost of energy and food are often excluded from the calculations.

[2] The Commission recommended staying off the gold standard; the minority report urged a return to the gold standard.

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