Money

 

Money (That's What I Want)

The best things in life are free
But you can keep them for the birds and bees
Now give me money, (That's what I want)
That's what I want
(That's what I want)

But what is money?

I have blogged about this before, but it is  important enough to do it again.  Money is the medium of exchange in trades.  We rely on our sovereign to vouch for that medium.  We can agree that precious metals are a medium of exchange in each trade because they have value and they can be exchanged for other goods.  The problem is that the weight of those precious metals is not easily determined (who carries a scale around with them?) and who can be sure that that precious metal is what it is claimed to be (iron pyrite anyone?).  The solution was that coins were minted by the sovereign who attested that the coin was indeed what you expected, and was a weight of which you could be certain.

It is no accident that, in the United Kingdom the unit of money is the Pound Sterling (silver).  The US Dollar is named after the Spanish Dollar, a coin of sterling silver.  It was common to break this coin into eight pieces (pieces of eight) and to use these bits as a medium of exchange ( a shave and a haircut, two bits,  2/8th of a dollar, one quarter).  The accepted precious metal became to be gold as governments shifted away from silver ( “You shall not crucify mankind upon a cross of gold"- William Jennings Bryan).

The key to precious metals as a medium of exchange is that  they are limited and not easily created.  Alchemists spent much in resources in trying to turn lead into gold.  The search for precious metals, especially gold, drove much of the frenzy in exploring the Americas.  The forced removal of Native Americans from their ancestral lands followed the gold rush in the Carolinas in 1799 ( the Trail of Tears) and the Gold Rush in the Black Hills of the Dakotas in 1874 ( the infamous Custer expedition).  Ironically the relocation to what was long called Indian Territory, and is now called Oklahoma,  was followed by the discovery of oil there. (Black Gold.  The moral arc of the universe is long but it bends towards justice, indeed! ) The use of precious metals as currency can still be seen in today’s crypto currency.  Bitcoins have the value that they do because like gold, they are rare and there is a limited number (21 million) that can be created. The creation of new Bitcoins is called “mining:”

Precious metals are heavy, hard to weigh, hard to protect, etc.  As a result, governments’ printed paper currency that was backed by precious metals.  This led to the “discovery” that currency had value merely because the Nation said that it had value.  ( the Native Americans that had long used wampum must have FOTFLTAO when the Great White Fathers “discovered” this.) The United States went off the Gold Standard in the 1930s, but gold was still used as a medium of international trade until the Bretton Woods Conference, in 1944, where the US Dollar at a fixed price of gold, became the international trading currency.  This was maintained until the Nixon Shock, in 1971, when the US Dollar in international trade was no longer backed by gold.

This led to a predictable response by the international holders of those US dollars.  The international holders of those dollars used their dollars to bid up the price of physical goods.  The result was the spike in inflation of the 1970s.  The Federal Reserve banks, founded in 1914, were charged with maintaining a stable economy in the United States.  That they did this admirably is seen in the fact that the Consumer Price Index, CPI,  between 1913 and 1944, was virtually flat, despite economic cycles, the Great Depression and two World Wars during this period.   

Since that time the Consumer Price index has not been flat.  11-year-old me mourned when my beloved comic books increased in price from 10 cents to 12 cents in 1962.  My first year at Brown University in 1969 was less than $4000 for room board and turion.  I graduated with a grand total of $1,600 in student loans.  When my son was ready to go two days a week for a few hours a day to nursery school in 1987, it cost more for his tuition than my first year of college!

It would be tempting to say that inflation has been simple and continuous, but that is not well correlated  with the observed Consumer Price Index.  It would be tempting to say that inflation is compound and continuous, but that also does not correlate well with observations.  What does correlate well is a simple linear equation with two discontinuities which happened in 1944, the year of Bretton Woods, and 1971, the year of the Nixon Shock.  It is suggested that these years are not an accident.

Before Bretton Woods, the US Dollar was used primarily for domestic trade. The Federal Reserve did an admirable job of seeing that the supply of money was consistent with the economy.  After Bretton Woods, despite John Maynard Keynes' suggestion that the Bancor be used for international trade, the United States Dollar backed by gold was the currency used in international trade, with results that were predictable (at least to economist Robert Triffin).  Eventually international trade grew to such an extent, that the Nixon Shock of 1971 occurred, with predictable results.

The CPI has increased steadily since that time.  It would appear that the growth in international trade has not been accounted for by the Federal Reserve, and since the US Dollar is still a major international trading currency, the Federal Reserve apparently grew the US money consistent with the growth in the US economy, but did not grow the US currency consistent with the growth in international trading. Today’s current persistent inflation is the result.