Currency

foolness commented on the word Currency

http://www.nolanchart.com/article7009.html

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Most people seem to treat money as if it were an object.

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...and for most people, money is an object:

...or to put it better: Acquiring money is an objective.

In reality, money should not be viewed as an object, but rather as a tool.

Money serves three main purposes:

*as a medium of exchange

*as a unit by which to measure economic value

*as a means by which to store wealth.

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Unit to Measure Economic Value

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More importantly, money serves as a unit by which to measure the value of all goods and services in an economy.

By creating a standard unit of economic measure, we can easily compare the value of different goods and services.

Using money as a measurement, we can have a pretty good idea how much our labor is worth, and what it will cost us to buy food, clothing, building materials, fuel, and anything else — and it is relatively easy to compare the value of each of these, and manage our budgets accordingly.

Without money, however, we would be stuck with a barter system.

For a chicken farmer who wants to build a new barn, he would have to know how many eggs he needs to trade for lumber.

And that will be different for different lumbermen according to their need for eggs or who they might know who would want to trade eggs for something else they want.

How many eggs is a pound of nails worth?

How many pounds of nails would it take to buy a car?

How many cars would you need to trade for a house?

How many pounds of beef could you buy with your piano?

Without money as a standard unit of measurement, the barter system can be rather capricious, and the value of goods and services might vary wildly depending on what each trader needs at that moment, and how perishable the commodities are.

Maybe one board is worth two dozen eggs to the lumber man, and the egg farmer is willing to pay it.

But say the farmer needs five-hundred boards; that means he would have to trade a thousand dozen eggs for the lumber to build his barn.

Can he get a thousand dozen eggs together all at once?

And even if he can, what is a lumber man going to do with a thousand dozen eggs?

If he doesn’t need them, he certainly wouldn’t trade for them!

And so this touches back on the use of money as a medium of exchange, but it also leads to the third purpose of money.

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For most of human history, money has been coined, not printed.

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And even when currency was printed, it was not actually money.

For instance, most printed currency in the United States was merely a note that was redeemable for gold or silver (called "specie").

The gold and silver was legal tender — that is gold and silver was actually money.

Currency was merely a note that was intended to represent the specie.

From time to time, governments have issued paper currency without backing it with any commodity.

The revolutionary colonies printed "Continentals", and during the American War Between the States, the U.S. printed "Greenbacks."

But for most of this country’s history (and indeed the long history of civilization), most legal tender has been in the form of gold, silver, copper or other coin, or measured by metal bullion.

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With the creation of the Federal Reserve in 1913

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We started to see a momentous shift by large banking interests to create a system of fiat money.

In 1934, when the federal government confiscated all privately-held gold in the United States, the value of the U.S. dollar was defined in terms of gold, being 0.048379... troy ounces of gold per dollar (or $20.67 per troy ounce of gold).

Even after this, and up until 1972, the value of the dollar was defined by law in terms of gold.

But after a half-century of money-manipulation, the bankers finally got their way, and the value of the U.S. Dollar was allowed to be determined by other means.

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Back up about 200 years.

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The statesmen of the young United States realized the dangers of fiat currency.

They saw the value of the "Continentals" printed during the American War for Independence evaporate in short order.

For this reason, when they drafted the U.S. Constitution in 1787, they specified that no state shall make anything but gold or silver legal tender.

Furthermore, they vested the power to coin money and regulate the value thereof specifically in Congress—and up to 1913, Congress exercised this power without much problem.

Then they created the Federal Reserve, and the power to regulate the value of money began to shift from Congress to this banking cartel.

I call the Federal Reserve a banking cartel, because that is what it is.

It is a quasi-public entity, chartered by Congress with certain duties and responsibilities, which has been granted a monopoly on managing the money supply in the United States.

But it didn’t happen all at once, because at the time it was created, gold and silver were still legal tender, and U.S. treasury notes were still redeemable for specie at a fixed value.

It took the crisis of the Great Depression to allow the confiscation of all privately-held gold in the country and replace it with fiat currency, Federal Reserve Notes, which is what we have today. (This is a subject worth a very thick book.)

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What is the value of the Federal Reserve Notes in your wallet?

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Well, the value now fluctuates daily, hourly, by the second.

Money traders and banking houses now manipulate the value of currencies all over the world.

Since its inception, the monetary policies of the Federal Reserve have created constant fluctuation.

But over time, it results in continual inflation: what $1 buys today would have cost less than 5-cents in 1913.

But except for a few periods of rampant inflation, this devaluation of the dollar has been relatively gradual, so maybe it isn’t such a big deal.

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Who is Favored by Inflation?

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Debtors

If I owe money to someone, and inflation occurs, when I end up paying that money back, it is worth less than when I first borrowed it, and may be easier to get.

But then of course, there is interest, and the lender must be assiduous to make sure the interest is enough to ensure a profit after considering inflation.

And if dollars are worth less in the future, that means I’ll have to make sure whatever line of work I am or whatever products I produce, my income at least keeps up with inflation, if I am to pay back that loan, the interest, and come out ahead.

IRS

When you buy or sell anything, the IRS makes you determine your capital gains by subtracting the base value from the gross sale price (and perhaps subtracting other associated costs).

Let’s use an example: say Mr. and Mrs. Peterson bought a house in 1970 for $35,000 and they sold it in 2000 for $155,000.

Their profit, for tax purposes, was $120,000.

At a 15% tax rate, they owe $18,000 in capital gains taxes.

But what did the value of the dollar do in those 30 years?

Well, there are a number of things you might compare: the consumer price index, average annual wages, the value of a commodity like silver or gold, etc.

Let’s just use the U.S. Bureau of Labor Statistics’ Consumer Price Index.

It says that $35,000 in 1970 dollars would be equivalent to about $155,000 in 2000 Dollars.

So, if the dollar lost so much value that it takes $155,000 in 2000 to buy the same amount of goods and services as $35,000 in 1970, what was Mr. and Mrs. Peterson’s actual profit?

What they had to sell and work for the buy the house in 1970 is actually equal to what they would have to sell and work for to by the same house in 2000!

Realizing the inflation of the Dollar, there was no actual profit!

But to the IRS, Mr. and Mrs. Peterson owe $18,000 in taxes (in 2000 Dollars). And so there’s one example of how inflationary policy favors government tax collection at the expense of tax payers.

The people who get to spend the new money first.

When the money supply grows faster than the aggregate of all the goods and services in an economy, the result is inflation.

But when new money is printed, the person who spends the money first gets to enjoy the value of that cash before the general value of the currency decreases. And so who is it that usually spends that money first? Banks.

Those who borrow new money from banks. Government. Contractors who are paid by the government.

These are the folks who realize an advantage by spending the new money before inflation occurs from the increased money supply.

And there is a third class of people who benefit from a monetary policy that allows the value of money to fluctuate: banks and money-traders.

As I will explain with an allegory, while over the long-term tendency is for inflation to devalue fiat currency, in the short-term the value of a given currency might go up and down.

This allows for clever traders to capitalize on these exchange differences, acquire when the exchange is down, and trade when it goes up, and pocket the difference.

Such trading activity does nothing to add value to the money, nor does it create any wealth or contribute in any positive way to economic prosperity.

But it is a simple way to make a profit, and a small percentage of this exchanged money is continually skimmed by the banks and other money-changers.

January 3, 2010