Tuesday, November 11, 2008

Ron Paul, The Fed, Confederate Money, and Inflation

"Inflation is an increase in the money supply" - Ron Paul

A group of Libertarians is meeting in Dallas on November 22nd to protest outside the Federal Reserve Bank.

It's not quite as easy to understand as a protest outside The White House, or a nuclear power plant, or Lockheed-Martin.

Let me try to explain.....

This is Confederate money.
It was "backed" by cotton.
Back in the day, the idea of paper currency that wasn't redeemable for any commodity seemed a bit silly. Without a government guarantee that you could swap the paper for something rare, currency was just a piece of paper.
Confederate money was essentially a Gift Certificate for a set amount of cotton. (Various members of the rebellious planter class contributed the cotton.)

The South lost the war, and the money lost its value (the Union blockaded the Southern ports, killing the cotton market, plus England saw the war coming and had stocked up on plenty of cotton ahead of time). By the end of the war, people were wallpapering their houses with this stuff; the Confederate printing presses were running 24/7 from trying to cover all the debts and pay all the soldiers.
Backing a currency with cotton didn't work out very well since the Confederacy eventually gave in to the temptation of backing their currency with cotton that had not yet been planted. These dollars were "worth 95 cents on the dollar in gold when first issued, (then) Confederate currency dropped to 33 cents by 1863, and 1.6 cents by Appomattox (April 9, 1865). May 1, 1865 was the last active trading in Confederate notes at 1,200 for 1."

In other words, Confederate dollars became valueless. But here's a Confederate dollar selling on ebay for $40. Even though this dollar can no longer be swapped in Atlanta for a bale of fiber, it now has value.
Because it is scarce.
They aren't printing any more of them.

Here's a 1923 Silver Certificate. Note the text below George Washington's picture...."One Silver Dollar Payable To The Bearer On Demand". This piece of paper was a Gift Certificate for a piece of silver that was worth (in 1923) one dollar. You can't take it to the bank and redeem it for silver any longer, but it still has some value.
Because 1923 silver certificates in mint condition are scarce. Collectors want them. This same bill in mint condition sells for almost $50.00 (adjusted for inflation, that's roughly what a dollar was worth in 1923 !)

Here is a Nolan Ryan/Jerry Koosman 1968 baseball card.

Unlike the Confederate currency and the Silver Certificates, these things didn't have any real value when they were printed. Either they were a freebie with the bubble gum, or the bubble gum was free with the baseball cards. However, one of these in mint condition now sells for $1600.00
Plenty of kids had them in 1968 and threw them away because Nolan Ryan hadn't gone into the Hall of Fame, or pitched his famous 7 no-hitters. Back then, Nolan Ryan had to work at an Alvin, Texas gas station in the off-season.

Now these cards are very scarce. You could say that a Ryan/Koosman mint condition rookie card is like a Gift Certificate for $1600.00, right?
But what would happen if someone was exploring in the basement of Jerry Koosman's mother's house, and found 20,000 of these and suddenly released them into the marketplace?
Could each of them still be swapped for $1600.00? Or do you think their worth would decline?

Which brings me to Marvel Variants....My boss is getting rich because he took his childhood obsession with comic book collecting and used it to wisely invest in something called "variant" comics. The details are too tiresome to go into here, but Variant Comics are rare. My boss has them. Very few other people do. Ten years ago. very few people even knew what they were.
But every time someone finds the "Kid Colt Outlaw" mint condition "Variant"comic book at a garage sale, has it evaluated and puts it on the market, the value for that particular title declines a bit. The "Kid Colt Outlaw" variant isn't quite as scarce as it was on the day before the garage sale.

Speaking of things that are no longer scarce.....the dollar bills shown below were once more difficult to find than they are now.

The U.S. Currency used to be the worldwide benchmark for something called "The Gold Standard". Wikipedia, as usual, has the most succinct explanation for how it was supposed to work with our currency and the financial systems of the rest of the world: After the Second World War, a system similar to the Gold Standard was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the US dollar. The US promised to fix the price of gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold, However, under the fiscal strain of the Vietnam war (AHEM), President Richard Nixon eliminated the fixed gold price in 1971, causing the system to break down.
In my early childhood, one of these dollars could be exchanged for 10 Coca-Colas. Then we totally disconnected the currency from any gold price. The paper in my wallet isn't backed by anything other than goodwill. Now it's difficult to find a vending machine willing to swap 2 Coca-Colas for a dollar.

Now these damn things are everywhere. Every one of them that my parents saved is now worth 50 cents.
Here's a Reddit discussion page where some bewildered people are wondering why 12 packs of Coca-Cola have disappeared, only to be replaced by 8 packs at the same price. None of the commenters get it. They try to blame it on the grocery stores !
Unfortunately, the supply of Coca-Cola has remained more or less the same. The money supply has increased. Coke, therefore, is worth more. Dollars are worth less.

Here's Texas Congressman Ron Paul:

The root of our current economic malaise, the weak dollar, the high price of oil, and the collapse of the housing market, comes about because almost no one understands what inflation is. Inflation is an increase in the money supply, which occurs by various methods, the printing of currency, low reserve requirements, Federal Reserve open market operations, etc.

But why would the government want to print more money?

Until the cause of inflation is understood, no effective strategy can be undertaken to combat it. The problem, however, is that the government does not want inflation to be done away with. Inflation benefits debtors and harms creditors, and the United States government is the biggest debtor of all. The United States government, the banking monopoly under the Federal Reserve System, and politically-connected firms and industries are the first entities to take advantage of new money injected into the system, before prices increase.

And who does this hurt the most?

As the increased supply of money begins to chase the same number of goods, prices rise, and the average American suffers. Poor and middle-class Americans are always the hardest hit by inflation, as the weakening dollar makes the imported goods that many Americans depend on more expensive.

So exactly how much money have they printed since Nixon shut down "the gold window"?

Good Lord In Heaven.
What has ending the Gold Standard and shutting "the Gold window" and printing all this paper done to the value of a dollar?

And that's why a group of Libertarians are gathering to protest outside the Federal Reserve Bank in Dallas on November 22nd.

They're stealing from you, but you never notice anything missing. Things just cost a little more than they used to every month, but you don't get a bill from them in the mail. You'll never hear the burglar alarm go off.

Wake up.


Browncoat Libertarian said...

Excellent stuff, as usual, Thanks WS...

Sew daze said...

I took one dollar and converted to a Euro. It really cost me 1.50. I took the Euro and got some Canadian, I got 1.25. So I went to China and got me some Yen....A whole butt load of Yen....I could get my ears cleaned for 17 cents. I took my Yen to Russia and got a crap load of Rubels and learned that toilet paper is controlled by the Mafia....I came back to the USA with 56 cents and Swatzticker tattoed on my butt.

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The Whited Sepulchre said...

Obivously? Respectible?
As logn as yuor knot taechinng speling I dunt thinc ull doo my "liberalistic" raeders much harm....

blog deleted said...

We may not know how to spell very well...but we make you feel good...

Sew daze said...

Looks like you have made a friend Whited.....

TarrantLibertyGuy said...

I would've thought fembuttx would've stopped by Switzerland through his/her jaunt through Europe and converted them to Swiss Francs.

Being one of the few remaining major industrialized countries that has a gold backing - That is up until 2000, the Swiss Franc was mandated to have 40% backing by Gold and now has slid to 20% in Gold Reserves. Compare the CHF vs. the Euro and US$...The dollar/Euro chart looks like the downside slope of the Matterhorn. Even with 'just' 20% gold backing, the CHF has kicked our butt in the currency department.

But, so what if their hard currency is strong vs. $/EU debt backed currency? Well, their unemployment rate is half that of the Euro Community, their income tax is a fraction of other 'developed country's', 11.5% for individuals and 8.5% of Corporate taxes... It goes on and on.

Unknown said...

Actually, U.S. money is backed (as indicated on the bills themselves) by God.

Since God is scarce (about as scarce as anything imagined), the value of the actual bills should be skyrocketing. I'm not sure I understand why they aren't.

Oh, wait, I have that all backwards. It's the scarcity of the little bits of paper, themselves, that makes them valuable. Too bad I can't trade mine in for a bit of that God stuff. I hear it makes you rave like a lunatic and not have to think much, if at all.

Seriously, though, you're right on target. Monopoly money is Monopoly money is Monopoly money.

Here's a question for you: If you won a $40,000,000 lottery that either pays you annually (for 20 years) $2m OR pays you $20m in a lump sum, which would you do, and why? And would you try to buy up a bunch of assets to offset the potential hazard of having all your money in "money"?

Not that I've won the lottery, but I'd like to know whether anyone who did should trust the government to pay out for 20 years, or whether the value of the dollar will decrease so much over 20 years, that in that time, you'll be being paid the equivalent of pocket change, or whether cashing out immediately would be even more of a risk.

LazerusPaladin@aol.com said...

I had no clue, but i assumed the worst. My question is simply: How do we kill the king?