Inflation for Dummies

 

Excerpts from my book, Money and Wealth: A Lifetime of Learning, Book 2

Imagine two groups of people: Those on Gold Island, who have a moral conscience, and those on Silver Island, who are a mix of those with a moral conscience and those who do not, or who are mixed within themselves. They begin trading with each other. Both have created the same system of money, using gold and silver coins of similar value.

The main difference is that Gold Island money is stamped with the words “Gold Island” and Silver Island money is stamped with the words “Silver Island.”

(Iron Island bandits don’t care about trade and coins, except for those that they can steal.)

Both Gold Island and Silver Island accept the other island’s money because the weight is the same for the same kind of coin. Both islands benefit from trade. The people of Gold Island make the best fishing poles and slingshots. They have skill sets that the people of Silver Island don’t have.

The people of Silver Island also create all kinds of different tools, silks, crafts, and other goods that the people of Gold Island can’t produce.

Since both economies have grown strong, a lot of gold and silver coins get used. Some people are getting very rich. And gold and silver coins are heavy to carry. So one of the good persons on Silver Island comes up with a new idea. Why not become a goldsmith?

A goldsmith is someone who stores gold for travelers and merchants and charges a small storage fee. The idea catches on and someone on Gold Island starts a goldsmithing business as well. Goldsmiths store gold and silver coins, have hired security to prevent the Iron Island bandits from stealing it, and charge people a small storage fee.

In place of the coins, the goldsmith gives the traveler or merchant an official slip of paper that reads something like this: “Tor has on deposit with the Silver Island Goldsmith 20 ounces in gold and 65 ounces in silver. Payable on demand.”

Each note is signed both by the goldsmith and by the traveler. The goldsmith keeps a record of all transactions. The paper is an IOU note for the gold and silver coins that are stored. The traveler can now go to market and wander around town without carrying all that weight in coins.

And the traveler does not have to worry that a bandit from Iron Island (or one of the less honest people from Silver Island) will rob him or her of those coins.

After a while, the goldsmith on Gold Island has an idea. Each paper IOU note is specifically created for each person. What if the IOU notes had a more general design that is not specific to the person? The IOU note might read something like this:

“Will pay to the bearer 20 ounces in gold, payable on demand at the Silver Island Goldsmith.”

What if the goldsmith created different values for different notes? There would be a whole set of IOU notes. And the people could trade IOU notes with each other. In other words, the traveler can get a set of IOUs from the goldsmith:

Four notes would be for 5 ounces in gold, three notes would be for 10 ounces in silver, five notes would be for 5 ounces in silver, and ten notes would be for 1 ounce in silver.

The traveler can go to local merchants and trade the paper notes for goods and services. The merchants know that they can always go to the goldsmith and receive the gold and silver coins. The goldsmith charges a small fee for each storage transaction. And everyone is happy.

Now here is where everyone’s understanding of money begins to break down. Pay close attention:

The paper notes are not money.

Paper notes are IOUs. Paper notes are symbols of money. Paper notes are NOT money. We will be exploring what less-than-honest people on Silver Island can do with paper notes in the chapter on Inflation.

For now, let’s see what other good things can come from the honest people on Gold Island.

* * *

“…banking establishments are more dangerous
than standing armies…” –Thomas Jefferson, letter to John Taylor, May 28, 1816

Thomas Jefferson obviously makes a strong statement about banking. Let’s talk about what can be good about banks run by people with a moral conscience and who believe in free choice.

When real money is saved, when wealth is saved, it can be used to do good work. How? By making money available for capital investments.

The goldsmith on Gold Island (the model island where everyone has a moral conscience) has a thriving business. Everyone trusts him. He stores people’s gold and silver, charges a reasonable fee for the service, and protects their money.

They have found the paper notes convenient to use for trade, and they can get their money from the goldsmith any time they want.

Time passes, and the goldsmith notices something. No matter how many transactions he has every day, the amount of gold and silver never falls below the equivalent of 100,000 ounces in gold.

The goldsmith has an idea. He could loan some of that gold to Tor, who wants to expand his fishing rod business. Tor has all kinds of ideas about how to make fishing rods, nets, lures, and all other fishing equipment in faster and more efficient ways. He just needs some money.

So the goldsmith and Tor talk with some of the depositors who use the goldsmith’s service. They have an idea that will make everyone money. Tor will borrow 10,000 oz. of gold for six months. He will pay it back with an interest rate of 1%. In other words, he will pay back 10,100 oz. of gold for the privilege of borrowing the gold.

Two depositors agree to allow the goldsmith to loan 5,000 oz. of gold from each of them. In return, each depositor will get 45 oz. of gold (a total 90 oz.), and the goldsmith will get 10 oz. of gold for making the arrangements.

Everyone understands they are taking a risk. Tor’s idea may not work. Something may happen that will make it impossible for him to pay back the gold.

But everyone thinks the risk is worth it.

Tor borrows the money, hires workers (creates jobs), creates new products (creates wealth in the form of capital goods), and his business takes off. After six months he is already making more than 100 gold oz. each month.

Tor easily pays back the loan, plus interest. Everyone makes money by making the saved money do extra work. The risk paid off.

Now the goldsmith has become a banker.

* * *

“All the perplexities, confusion and distress in America arise, not from the defects in their constitution or confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.” —John Adams, letter to Thomas Jefferson, August 28, 1787

When everyone is honest, bankers, government workers, wealth creators, and taxpayers all benefit.

But what happens when people are less than honest? Let’s follow the thinking of the goldsmith on Silver Island, who sees things just a little different from the goldsmith on Gold Island.

Like the goldsmith on Gold Island, the goldsmith on Silver Island creates paper notes (IOUs) to represent the actual money (gold and silver) that people deposit with him.

The amount of the notes exactly equals the amount of gold and silver coins he has on deposit. If there are 100,000 oz. of gold and silver on deposit, there are notes equaling 100,000 oz. of gold and silver in circulation.

How much money is there in total? If you answered 200,000…

No! No! No!

The total is still only 100,000 in money. Only the gold and silver coins on deposit are money. The paper notes are symbols of that money. Paper notes are NOT money. They are currency.

But the goldsmith on Silver Island (the island with a mix of people with and without a moral conscience) notices that almost everyone who uses the paper notes thinks of them as money. Some people almost never come to redeem their notes for actual money.

They are happy to use the paper notes for trade and payment.

Workers begin asking employers to pay them in paper notes rather than gold and silver coins. The workers know they can trade them in at any time, but why bother?

Paper notes are so much more convenient to carry.

The Silver Island goldsmith then has a crafty idea. What if he printed up extra notes? And spent them? Who would notice?

You can see how tempting it would be to the goldsmith who is normally honest, but who suddenly has a medical expense.

Remember, this is Silver Island. The people here are a mix of good and bad. Sometimes they know it, and sometimes they don’t. On Silver Island, some otherwise good people can rationalize something bad as being good.

The goldsmith’s child needs help and he is short on money. Why not just “borrow the money” now by printing up a few extra paper notes to pay the doctor? Then just pay it back later by destroying the other paper notes when he collects his storage fees? No one would know. And besides, it’s good for the child.

So the goldsmith does print up the extra notes. And nobody notices. And the child gets better. And the goldsmith pays back the “money.” What he does is a good thing, right?

As time goes by, the goldsmith rationalizes other bad actions as being good. Why not print extra paper notes to buy better food, pay someone to rebuild the fence, and get his wife a nice gift? He figures that since nobody notices, why should he even pay it back? He works hard for a living. So what if he has a few extra nice things. Nobody notices. Nobody cares.

Soon for every 100 oz. of gold stored, there are notes circulating for 110 oz. of gold.

And prices around town begin to mysteriously rise.

What the goldsmith on Silver Island does not realize, and almost everyone else as well, is this: When more paper notes are “spent” and put into circulation, merchants notice that more goods are in demand. When demand rises, the value of what people buy rises, and therefore merchants naturally charge more.

More paper notes = Rising demand = Rising prices

Supply and demand. Cause and effect. Choice being exercised in a free society.

A year later, the goldsmith on Silver Island decides to support another islander for election to the local council. Together they hatch a scheme to outspend their opponent. The goldsmith prints up a lot of extra paper notes and donates it to the candidate’s campaign. Because, you know, his opponent has bad ideas, so the extra paper notes are really a good thing, you know, for the good of everybody.

More notes begin to circulate as the candidate spends the extra notes for political influence. And prices mysteriously rise.

The candidate is elected and begins putting pressure on the goldsmith. Print up more notes so that the government can hire extra people. And spend money on community projects.

The goldsmith does. And prices mysteriously continue to rise.

Who is to blame for the higher cost of living? The politician blames the greedy merchants. And the merchants don’t know what to say. They do not understand the real cause of the rising prices. But the merchants, and actual creators of wealth, continue to be called greedy and uncaring. They do not realize that the rising prices are a natural result of the inflation.

What is meant by inflation? You know what happens when you inflate a balloon. As more air is pushed into the balloon, the amount of air increases. What increases when you have economic inflation?

The supply of paper notes (currency).

Government, and people who make a living off of debt, will tell you that inflation is rising prices, just a natural force of nature, without anyone causing it. Right?

Wrong!

Inflation is NOT rising prices. Inflation CAUSES prices to rise.

As the currency supply increases, prices are forced to rise. If you think the definition of something makes no difference, then you are a good target for con artists.

What if I can plant the idea in your mind that inflation is merely the rising of prices?  I can keep you from seeing the cause-and-effect relationship between printing paper notes (or digital currency) and rising prices.

And if I can plant the idea in your mind that government debt is a good idea, then government can continue creating money out of thin air. To do what? To finance projects, wars, entitlements, and many other government “goods.”

Who pays? Workers who create wealth and become taxpayers are the ones who pay. Not the ones whose income is paid out of tax money.

The bankers and politicians on Silver Island soon tell the public that they have to withdraw gold and silver from circulation. Why? Because there’s not enough to go around, and besides, the paper notes work well as money.

And almost everyone believes them, except a few kooks who talk about some kind of conspiracy between bankers and politicians. But nobody really believes them.

[There’s more in my post on Snap Out of It, Part 3.]

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  1. Saint Augustine Member
    Saint Augustine
    @SaintAugustine

    Mark Alexander:

    What is meant by inflation? You know what happens when you inflate a balloon. As more air is pushed into the balloon, the amount of air increases. What increases when you have economic inflation?

    The supply of paper notes (currency).

    Government, and people who make a living off of debt, will tell you that inflation is rising prices, just a natural force of nature, without anyone causing it. Right?

    Wrong!

    Inflation is NOT rising prices. Inflation CAUSES prices to rise.

    I gotta remember that. Thank you.

    • #1
  2. Saint Augustine Member
    Saint Augustine
    @SaintAugustine

    https://usdebtclock.org/

    It’s bad.

    • #2
  3. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    Saint Augustine (View Comment):

    Mark Alexander:

    What is meant by inflation? You know what happens when you inflate a balloon. As more air is pushed into the balloon, the amount of air increases. What increases when you have economic inflation?

    The supply of paper notes (currency).

    Government, and people who make a living off of debt, will tell you that inflation is rising prices, just a natural force of nature, without anyone causing it. Right?

    Wrong!

    Inflation is NOT rising prices. Inflation CAUSES prices to rise.

    I gotta remember that. Thank you.

    See my post on Evil Dictionaries.

    • #3
  4. Kozak Member
    Kozak
    @Kozak

    Saint Augustine (View Comment):

    https://usdebtclock.org/

    It’s bad.

    At this point it’s purely academic.  It’s been a long time since we had any hope of ever paying the debt down or off.

    Now it’s just a question seeing how long we can go before we crash. 

    It’s like jumping off a tall building. “So far so good”.

    The question is do we hit the ground next year or in 50 years?  

    • #4
  5. Seawriter Contributor
    Seawriter
    @Seawriter

    Doesn’t the money supply have to grow along with the economy?

    Let’s take the example of Tor. His capital improvements result in more fish being taken. But the money supply remains constant. The result? Each fish Tor catches is worth less than the fish he caught prior to borrowing the money. Where before he brought in 100 fish and got 1 unit of silver for each fish. Now he brings in 200 fish each day.

    His original harvest represented 100/100,000th (1/1000th) of the  total money supply of the island. Now he has twice as much fish, but there is still the same amount of money. So where one fish was 1/100oth of the money supply with twice the number of fish each fish is worth half that amount: 5/10,000th.

    Unless the money supply increases the price for his fish has to go down. He is making the same amount of money as he was before he took out the loan. Now he has to service the debt from the same amount of money he was making before he borrowed the money.

    Note that there were several recessions caused by this very effect. Only discoveries of gold in Australia and Alaska got the world out of one such recession in the 1880s and 1890s.

    • #5
  6. RufusRJones Member
    RufusRJones
    @RufusRJones

    Seawriter (View Comment):
    Doesn’t the money supply have to grow along with the economy?

    As long as it matches population growth, you won’t have a problem. 

    Inflation makes lending safer which expands the economy. Then they totally overdo it.

    Militarism, which means the United States protecting trade routes, means you have to have an inflationist system.

    Feel free to make this complicated and long. lol

     

     

    • #6
  7. RufusRJones Member
    RufusRJones
    @RufusRJones

    The problem is trade and progress are deflation. Better living through purchasing power. When you have technology and globalized trade forcing wages down and killing jobs, I don’t see why anything should be going up in price. Too many Republicans don’t get the dynamic. They need to be more sensitive.

    • #7
  8. RufusRJones Member
    RufusRJones
    @RufusRJones

    Skip all of the stuff about investing and just pay attention to what they are saying about the Federal Reserve inflating too much and buying too many assets.

     

     

     

     

    • #8
  9. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    Seawriter (View Comment):

    Doesn’t the money supply have to grow along with the economy?

    Let’s take the example of Tor. His capital improvements result in more fish being taken. But the money supply remains constant. The result? Each fish Tor catches is worth less than the fish he caught prior to borrowing the money. Where before he brought in 100 fish and got 1 unit of silver for each fish. Now he brings in 200 fish each day.

    His original harvest represented 100/100,000th (1/1000th) of the total money supply of the island. Now he has twice as much fish, but there is still the same amount of money. So where one fish was 1/100oth of the money supply with twice the number of fish each fish is worth half that amount: 5/10,000th.

    Unless the money supply increases the price for his fish has to go down. He is making the same amount of money as he was before he took out the loan. Now he has to service the debt from the same amount of money he was making before he borrowed the money.

    Note that there were several recessions caused by this very effect. Only discoveries of gold in Australia and Alaska got the world out of one such recession in the 1880s and 1890s.

    I don’t think you are reading me closely. “Money supply” in my discussion is gold and silver. Nothing else can properly be defined as money (although other precious metals or gems could qualify). The idea that fiat currency constitutes a money supply is a language implant used by con artists. Money, by definition, has intrinsic value. Paper IOUs do not.

    We are standing on two different foundations, you and I.

    Remember, a silver quarter today still has the intrinsic value today to buy a gallon of gas in most places, minus govt taxes.

    • #9
  10. Guruforhire Member
    Guruforhire
    @Guruforhire

    Gold and Silver as money is just another flavor of fiat.  Its just a government created token.  So called precious metals don’t even meet the technical requirements for a commodity currency, as they do not have a universal and inherent value apart from use as money.

    • #10
  11. RufusRJones Member
    RufusRJones
    @RufusRJones

    Guruforhire (View Comment):

    Gold and Silver as money is just another flavor of fiat. Its just a government created token.

    It’s not fiat if the price of gold and silver float and they exchange the pieces of paper for what is written on the paper. Fiat means it’s arbitrary and set by the authorities anytime they want.

    • #11
  12. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    Guruforhire (View Comment):

    Gold and Silver as money is just another flavor of fiat. Its just a government created token. So called precious metals don’t even meet the technical requirements for a commodity currency, as they do not have a universal and inherent value apart from use as money.

    You are mistaken, in my view. Gold and silver have intrinsic value outside of being a medium of exchange or a store of value. They are highly desirable for jewelry and art, and for certain electronic applications, among other things. 

    Paper’s intrinsic value? Well, you can burn it… Not that highly desirable.

    In the 1960s, a silver silver dollar could buy 4 gallons of gas, as could one Federal Reserve Note.

    Today, that silver dollar can still buy a 4 gallons of gas, but one Federal Reserve note cannot come even close.

    Do you get that distinction? It’s important to understand the nature of the con.

    • #12
  13. RufusRJones Member
    RufusRJones
    @RufusRJones

    The other fun fact is, you can’t tax “better living through purchasing power”. You can only tax inflation. 

    They have to force wages, income, and revenue up at all times in aggregate or the whole thing collapses. Neat system, isn’t it?

    • #13
  14. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    In the best sense, money is what people agree to use as:

    1) A unit of account

    2) A medium of exchange

    3) A store of value

    4) A unit of deferred payment.

    Historically, precious metals, mainly gold and silver, best fulfill all four functions.

    Why do gold and silver work best as money? Let’s break down the four functions of good money:

    1. A Unit of account

    On Gold Island, how many fish equal one woven basket? What if the fisher thinks the basket is not worth two fish, but agrees that it’s worth more than one? What if the basket weaver does not need fish, but the person wanting the basket has only fish to trade?

    You can see the problem.

    The basket weaver wants several things, but not fish. The fisher would then have to go to other people and make trades for things the basket weaver wants. Then after much work and several trades, the fisher can trade these items for baskets.

    Now… let’s say that the local council begins to create standard gold and silver coins.

    They create small gold coins that weigh 1 ounce (oz.), 1/2 oz., 1/4 oz., 1/10 and 1/20 oz. These coins were measured in Troy ounces, which means 12 ounces per pound rather than the standard 16 ounces. The silver coins are of the same weight. However, it takes 15 silver coins to equal a gold coin of the same weight. So 15 silver coins weighing 1 oz. equals one gold coin weighing 1 oz.

    15 silver coins = 1 gold coin.

    Now the people on Gold Island can price all of their goods in terms of gold and silver coins (also known as specie). The fisher does not need to make all those trades just to get baskets. The fisher can price the fish, and then trade the fish for gold or silver coins. The basket weaver sets a price for baskets and accepts the gold and silver coins in trade. The gold and silver coins become a “unit of account” that helps everyone easily relate the value of one item to another.

    Anything of value that can be traded, both goods and services, now has a price in gold and silver coins. And the economy of Gold Island speeds up.

    Why?

    Because money functions as a medium of exchange.

    2. A medium of exchange

    Obviously, the people of Gold Island can now exchange their goods and services much more easily.

    • Money simplifies and speeds up trade.
    • Money makes possible more division of labor.
    • Money allows workers to price their skills more easily creating specialized skills.

    Prices can change easily, even day by day. If a product is suddenly in greater demand, the price can be raised.

    If people think the price is too high and stop buying, the price can be dropped immediately.

    The community becomes more effective and efficient. And the people’s standard of living begins to rise more rapidly.

    • #14
  15. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    3. A store if value

    Tor can pay his fishers gold and silver for the fish they catch rather than pay them in fish. The fishers can spend the money right away, or they can save and store it to use later.

    When money and prices are stable, the stored money can buy as much later as it does the day it’s stored. In other words, in a stable economy the money maintains its purchasing power, and then saving money can be encouraged.

    Saved money can create capital.

    As Tor builds his business, and his fishers and coconut gatherers continue working for him, he begins saving gold and silver coins.

    This savings gives him flexibility. He can build his business by hiring more laborers, or he can build more fishing rods and slingshots to sell later.

    These fishing rods and slingshots, otherwise known as durable goods, are called capital assets.

    Capital creation can only happen out of stored savings. A community or society with increasing capital can increase the quantity of goods. Therefore, sound money, like gold and silver coins, results in an increasing standard of living for the community.

    4. A unit of deferred payment

    Money can be loaned to others when they have a strong need for it. The person who lends the money expects that the money repaid equals in value the money loaned, not counting interest.

    In other words, the amount of goods and services the lender can buy now equals the amount the lender can buy later, once the borrower repays the loan.

    If someone who has saved money discovers that the money will have less value over time, they will probably not save it. They would rather spend it now while it has more value.

    When money loses purchasing power due to rising prices (popularly, but wrongly, called inflation), interest rates rise to compensate for the loss.

    One day, Alex comes to Tor and wants to borrow 20 gold coins to invest in a project. Tor thinks Alex has a good idea and decides to loan the 20 gold coins, but with interest. Tor expects Alex to pay him back 22 gold coins in six months. Payment is therefore deferred for six months.

    But the gold coins work only as units of deferred payment as long as the value of the coins is the same, six months later, as they are at the time he makes the loan.

    If prices rise steadily, then Tor will build into the rate of interest the amount of the rising prices.

    If what 20 gold coins buy today will cost 21 gold coins in six months, Tor will add an additional gold coin to the amount to be paid back: a total of 23 gold coins.

    Money that maintains its value as a unit of deferred payment helps keep interest rates low.

    Low interest rates, and saved money that maintains its value, make long-term financing of projects possible.

    Again, sound money increases a community’s standard of living.

    • #15
  16. Saint Augustine Member
    Saint Augustine
    @SaintAugustine

    Mark Alexander (View Comment):
    Money, by definition, has intrinsic value. Paper IOUs do not.

    Republic credits are no good - Album on Imgur

    • #16
  17. Seawriter Contributor
    Seawriter
    @Seawriter

    Mark Alexander (View Comment):

    Seawriter (View Comment):

    Doesn’t the money supply have to grow along with the economy?

    Let’s take the example of Tor. His capital improvements result in more fish being taken. But the money supply remains constant. The result? Each fish Tor catches is worth less than the fish he caught prior to borrowing the money. Where before he brought in 100 fish and got 1 unit of silver for each fish. Now he brings in 200 fish each day.

    His original harvest represented 100/100,000th (1/1000th) of the total money supply of the island. Now he has twice as much fish, but there is still the same amount of money. So where one fish was 1/100oth of the money supply with twice the number of fish each fish is worth half that amount: 5/10,000th.

    Unless the money supply increases the price for his fish has to go down. He is making the same amount of money as he was before he took out the loan. Now he has to service the debt from the same amount of money he was making before he borrowed the money.

    Note that there were several recessions caused by this very effect. Only discoveries of gold in Australia and Alaska got the world out of one such recession in the 1880s and 1890s.

    I don’t think you are reading me closely. “Money supply” in my discussion is gold and silver. Nothing else can properly be defined as money (although other precious metals or gems could qualify). The idea that fiat currency constitutes a money supply is a language implant used by con artists. Money, by definition, has intrinsic value. Paper IOUs do not.

    If there is no increase in the supply of money, then an economy is static. Let’s take the example you used of Tor borrowing 10,000 oz. of gold for six months. He spends that on capital improvements. That is one-tenth of the available money in the economy. At the end  of the six months he has  purchased 10,000 of capital improvements.  So, how does he pay off that 10,000 unit loan? Not by selling fish. The fish he has caught are worth much less because they have to be purchased with the same 100,000 units in the economy.

    He also cannot liquidate his capital improvements, the fishing rods, nets, lures, and all other fishing equipment he had created, at the same price he purchased them because they are not worth 10% of the available money supply. They represent only only 9% of the total capital goods in the economy. He has to sell them at a loss for (at best) 9090 units. Which means he still owes 910 units and the 100 unit interest. 

    The whole experiment ends up being known as “Tor’s Folly.”

    Money supply has to increase with the size of the economy. It can increase by mining more silver and gold. This is one reason the European economy grew so dramatically after the opening of the New World. Improvements in mining technology in Europe and mines in the New World expanded the money supply.

    As long as the growth of money matches the growth of the economy, everything is well. If the money supply shrinks relative to the economy, deflation and economic stagnation result. (If what you make drops in value if you produce more, you stop producing.) If the money supply grows relative to the economy inflation results. It is easier to grow the size of the money supply (when non-metallic money is used) than to grow the size of the economy. That is a big reason why inflation occurs more than deflation. 

    • #17
  18. Saint Augustine Member
    Saint Augustine
    @SaintAugustine

    If you're going to go to all the trouble of having an opinion, at least  have the courtesy of making it an informed opinion. | Dilbert comics, Nerd  alert, Stripping

    • #18
  19. RufusRJones Member
    RufusRJones
    @RufusRJones

    cantillon effect

    • #19
  20. The Scarecrow Thatcher
    The Scarecrow
    @TheScarecrow

    Mark Alexander (View Comment):

    Guruforhire (View Comment):

    Gold and Silver as money is just another flavor of fiat. Its just a government created token. So called precious metals don’t even meet the technical requirements for a commodity currency, as they do not have a universal and inherent value apart from use as money.

    You are mistaken, in my view. Gold and silver have intrinsic value outside of being a medium of exchange or a store of value. They are highly desirable for jewelry and art, and for certain electronic applications, among other things.

    Paper’s intrinsic value? Well, you can burn it… Not that highly desirable.

    In the 1960s, a silver silver dollar could buy 4 gallons of gas, as could one Federal Reserve Note.

    Today, that silver dollar can still buy a 4 gallons of gas, but one Federal Reserve note cannot come even close.

    Do you get that distinction? It’s important to understand the nature of the con.

    Now I’m confused.  Wouldn’t this have to do with how much gas there is now, and how easy or hard it is to produce?  Also how much silver there is, and how easy or hard it is to dig up and refine?  Compared to what the supply of both were in 1960? I don’t mean to go outside of your example.

    I remember a story about aluminum. It was once a rare precious metal.  Rich people proudly set their tables with aluminumware.  They were going to plate the Capital dome with it when they were building it.  Then one fateful afternoon somebody figured out a simpler process to refine it more easily out of bauxite, and suddenly we were swimming in frickin aluminun. Practically overnight the trading price of it dropped like 5000%. (Maybe it was 50,000%.)

    I’m sure you know this story better than I do, but my point is that the sudden increase in the amount of aluminum you could buy for a bank note (or trade for an ounce of gold) had nothing to do with the government screwing around with printing more paper.  

    So I get that gold is used for jewelry and manufacturing and stuff, but it’s value as a trading commodity – “the peasants are starting to hoard gold” – still rests in how much you think you’re going to be able to trade it for food and whatever if people lose confidence in paper money. Since you’re not just trading with jewelry makers, the gold itself is really just a stand-in for whatever goods you would have to trade for the food, if we used a direct barter system. 

    Right, or am I still confused?

     

    • #20
  21. Muleskinner, Weasel Wrangler Member
    Muleskinner, Weasel Wrangler
    @Muleskinner

    Mark Alexander (View Comment):

    In the best sense, money is what people agree to use as:

    1) A unit of account

    2) A medium of exchange

    3) A store of value

    4) A unit of deferred payment.

    That is how money functions, but what makes money, money? What gives it “moneyness”?

    Nearly anything can serve as a numéraire, and in microeconomics almost everything does. 

    • #21
  22. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    Seawriter (View Comment):
    cantillon effect

    How are you defining inflation?

    • #22
  23. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    The Scarecrow (View Comment):

    Mark Alexander (View Comment):

    Guruforhire (View Comment):

    Gold and Silver as money is just another flavor of fiat. Its just a government created token. So called precious metals don’t even meet the technical requirements for a commodity currency, as they do not have a universal and inherent value apart from use as money.

    You are mistaken, in my view. Gold and silver have intrinsic value outside of being a medium of exchange or a store of value. They are highly desirable for jewelry and art, and for certain electronic applications, among other things.

    Paper’s intrinsic value? Well, you can burn it… Not that highly desirable.

    In the 1960s, a silver silver dollar could buy 4 gallons of gas, as could one Federal Reserve Note.

    Today, that silver dollar can still buy a 4 gallons of gas, but one Federal Reserve note cannot come even close.

    Do you get that distinction? It’s important to understand the nature of the con.

    Now I’m confused. Wouldn’t this have to do with how much gas there is now, and how easy or hard it is to produce? Also how much silver there is, and how easy or hard it is to dig up and refine? Compared to what the supply of both were in 1960? I don’t mean to go outside of your example.

    I remember a story about aluminum. It was once a rare precious metal. Rich people proudly set their tables with aluminumware. They were going to plate the Capital dome with it when they were building it. Then one fateful afternoon somebody figured out a simpler process to refine it more easily out of bauxite, and suddenly we were swimming in frickin aluminun. Practically overnight the trading price of it dropped like 5000%. (Maybe it was 50,000%.)

    I’m sure you know this story better than I do, but my point is that the sudden increase in the amount of aluminum you could buy for a bank note (or trade for an ounce of gold) had nothing to do with the government screwing around with printing more paper.

    So I get that gold is used for jewelry and manufacturing and stuff, but it’s value as a trading commodity – “the peasants are starting to hoard gold” – still rests in how much you think you’re going to be able to trade it for food and whatever if people lose confidence in paper money. Since you’re not just trading with jewelry makers, the gold itself is really just a stand-in for whatever goods you would have to trade for the food, if we used a direct barter system.

    Right, or am I still confused?

     

    The point is less about the price of gas and more about illustrating how gold and silver are a store of value, especially when govt artificially increases the paper currency supply.

    • #23
  24. RufusRJones Member
    RufusRJones
    @RufusRJones

    The market price of gold always ends up matching the real costs of commodities and production.  It doesn’t exceed it because we pull it out of the ground at the same rate the population grows.

    • #24
  25. The Reticulator Member
    The Reticulator
    @TheReticulator

    Saint Augustine (View Comment):

    Mark Alexander:

    What is meant by inflation? You know what happens when you inflate a balloon. As more air is pushed into the balloon, the amount of air increases. What increases when you have economic inflation?

    The supply of paper notes (currency).

    Government, and people who make a living off of debt, will tell you that inflation is rising prices, just a natural force of nature, without anyone causing it. Right?

    Wrong!

    Inflation is NOT rising prices. Inflation CAUSES prices to rise.

    I gotta remember that. Thank you.

    And it’s not the only thing that causes prices to rise.

    • #25
  26. The Reticulator Member
    The Reticulator
    @TheReticulator

    By the way, Tor is a cool name, but for a topic like this his brother ought to be called Tare.

    • #26
  27. RufusRJones Member
    RufusRJones
    @RufusRJones

    It’s been a million years since I’ve seen this, but this video might be directed pretty well at this conversation. It has something to do with the production of energy and food and how it relates to gold. If this isn’t the right one, look for other interviews of this guy.

     

     

     

    • #27
  28. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    Plato once said, somewhere, that he who wants more than his share has not studied mathematics, for had he done so, he would appreciate the beauty of proportion.

    There are always those who strive to hoard gold and silver, and so are all in favor of getting it out of the hands of the ordinary workers.

    When the first Federal Reserve Notes were printed and the elites began withdrawing silver certificates that were still redeemable, you could deposit your silver dollars into your savings account, and then when heading to the door, turn around and tell the teller, “Oh it’s my daughter’s birthday tomorrow and I want to give her a silver dollar.”

    And the teller would respond, “Oh, I’m sorry sir, but silver coins are being withdrawn from circulation, but you can use this new Federal Reserve Note which is now money, and give it to you daughter.”

    So… who got the silver coins?

    We can use all kinds of academic logic to argue why we must have intrinsically worthless paper, but we still end up where we are… a coming massive hyperinflation that, in the current case, lines the pockets of the Totalitarians who believe in survival of the fittest and might makes right, who are so good at protecting themselves at our expense.

    No. Intrinsically worthless paper or digital currency is always a con, and we have been played by govts for millennia. (Think of those old Roman coins with those holes punched out of them, with the punched out gold and silver chunks being melted down and made into coins to keep the parties going, while the citizens are “required” to accept the punched out coins at full face value.)

    Remember, the original definition of counterfeiting was a difference between the stated value on the coin and the content of gold and silver.

    That’s why there are mill marks on the edge real silver and gold coins, to prevent they’re being shaved, when someone wants to take little bits from each to compile (another method of the Caesars.)

    Since today’s coins are made of base metals (original pennies and nickels did not need mill marks), why preserve the mill marks? To preserve the illusion of money,mperhaps?

    Nothing to see here, people. Move along.

    • #28
  29. DonG (2+2=5. Say it!) Coolidge
    DonG (2+2=5. Say it!)
    @DonG

    Mark Alexander:

    Soon for every 100 oz. of gold stored, there are notes circulating for 110 oz. of gold.

    And prices around town begin to mysteriously rise.

    Or not.  As they say, “you can never reason from a price change”.   Price is the intersection of two curves that both move. 

    • #29
  30. Mark Alexander Coolidge
    Mark Alexander
    @MarkAlexander

    DonG (2+2=5. Say it!) (View Comment):

    Mark Alexander:

    Soon for every 100 oz. of gold stored, there are notes circulating for 110 oz. of gold.

    And prices around town begin to mysteriously rise.

    Or not. As they say, “you can never reason from a price change”. Price is the intersection of two curves that both move.

    I’m illustrating a point in a clear, contained example, without introducing more complexity that can obscure the essential point, one that most people seem not to understand.

    • #30