30th July 2008 - By Aaron Gadberry
I’ve been doing a lot of thinking about the currency of the United States. What is a dollar? If you ask an average person they will respond that a currency exists to make wealth easily transferable. Without currency you’re trying to pay at Wal-Mart with a goat. Most people stop thinking here and just assume that our currency is implemented in the best possible manor. This is what I’ve begun to question.
Looking back throughout history most people are aware that we used to have sound money. No one seems to know what that means though, and mentioning the gold standard results in virtually no intelligent conversation. Technically our country was never on the gold standard, but was on the silver standard. Here is an excerpt from the Coinage Act of 1792.
Dollars or Units—each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenths parts of a grain of pure, or four hundred and sixteen grains of standard silver.
Cents—each to be of the value of one hundredth part of a dollar, and to contain eleven penny-weights of copper.
What did the currency look like after the Coinage Act of 1792? It was pretty simple actually. The requirements for currency were set forth in that act and included a standard amount of copper, silver or gold to be in each coin, certain markings on the coins, and that it had to be coined in a United States Mint. You could bring your copper (for half cents and cents), silver (for half dismes, dismes, quarter dollars, half dollars and dollars) and gold (quarter eagles, half eagles and eagles) to a United States Mint and have it coined for you. This made precious metals very easy to use in trade, because every coin had a guaranteed standard value.
At this time the value of the currency was contained within the currency itself. Yes, the value of metals fluctuate on the market, but so does everything else. It just depends on what you view as your base. It’s hard to adjust your thinking because the dollar has become so ingrained in our lives, but try making a transition to look at gold (or worth) as the base and the dollar as fluctuating.
The truth is the dollar has had 7.5% devaluing from Jan 1st, 2008 through June 30th, 2008. Thinking of the dollar as the base means that’s your default holding. Your salary, bank account, and retirement fund just took a 7.5% loss! If you were paid in oil futures instead of dollars you’re salary would have doubled over that same period of time.
The removal of a commodity backing from our currency made the currency itself an independently tradeable item on the market. No longer was it tied to the supply and demand of gold or silver or copper, but only to the demand of itself. Given that paper has little to no intrinsic worth, that’s a pretty dangerous position to hold. If the IRS stopped accepting Federal Reserve Notes then they would become worthless overnight.
The four steps of currency in our country:
1) Currency is made (literally) of our wealth
2) Currency is a note exchangeable for wealth (but easier to carry with you)
3) Currency is a note exchangeable for wealth only if you are a foreign country
4) Currency is no longer a note and not directly exchangeable for wealth
The problem with our current position, (4), is that the Fed prints money, not wealth. They bail out Bear Sterns, Fannie and Freddy by printing money. There is now more supply and therefore less demand.
Imagine yourself in a simpler time. You have a bunch of gold. Would you rather hang on to the gold or trade it for a note? Many would put it in a bank vault and take a note in return (remember the note is for your original gold, not for dollars). A note is easier to store, easier to trade, etc. Maybe the bank comes out with a currency, and instead of giving you a note for your original gold, they will buy your gold from you in exchange for some of this currency. The problem is they control the currency, and have ability to flood the market at any time. All of a sudden your gold could cost twice as much to get back. Sound like a deal?