Tuesday, March 6, 2012

What is money, really?

Well, it used to precious metals, stamped into a uniform size, with a date and a portrait and milled edges to prevent "clipping" (filing off gold or silver around the edge of the coin, keeping the filings, and passing the coin off as full weight). And having money gets us out of the barter business, an obvious goodness.
Then we invented paper money. It took a while for paper money to become pure paper. I can still remember "silver certificates" which promised to pay $1 in silver coin upon demand. The "Federal Reserve Notes" looked about the same, but made no promises to redeem the bills in coin.
Once we moved on to a pure paper money, some wonderful things become possible. We can print as much paper money as we like. If you are the treasurer of the United States, and you need to meet payroll, printing money is a wonderful thing. You have no idea how surly people get when they don't get paid on time.
The not so wonderful part of printing money is inflation. Print dollar bills by the carload, and pretty soon everybody has dollars, and storekeepers ask for more dollars for their goods. Customers grumble, but they have the dollars and they want or need the goods. So prices go up. I can remember a time when gasoline was 4 gallons to the dollar. After half a century of dollar printing, it's the other way round, 4 dollars to the gallon.
Inflation is tough on savers. We all want to save money, for the house, for the college education, for retirement. But if the money we put away last year is worth less this year, we know we have been robbed. (Actually we have been taxed, but that doesn't make us feel any better about it.)
Borrowers love inflation. Borrow the money today and pay it back with tomorrow's cheaper dollars. Such a deal.
US monetary policy has been a hot political issue since Alexander Hamilton's time. The savers and the lenders want "sound money" (i.e. no printing of new money) and the borrowers want the opposite. Ron Paul's push for a pure gold currency is the modern form. Over all of US history, the savers and lenders have had the votes, just barely, to limit the printing, mostly. Only existential emergencies, the Great Depression and the two World Wars, pressed the US government into heavy duty money printing.
Today we are faced with Great Depression 2.0. And the democrats want to print carloads of money, supposedly to cure Great Depression 2.0 but also having carloads of dollars to hand out to friends and supporters improves their chances of re election.
Unless the voters get wise and figure out that all that printing, causes inflation, which steals their savings.

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