Topic: Monetary Policy
If You Could Print Dollars Paper money is bankrupting us. We need the Gold Standard for sound money, to prevent inflation.by Peter Namtvedt
(Libertarian)
Sunday, October 7, 2007
If You Could Print Dollars: How Paper Money Is Bankrupting Us
Private printing of money a crime
If you could print dollars that would fool anyone, you would run the risk of being tried for a federal crime. This would be true also if some friends joined in, even if helped by hundreds. The more people involved, the farther you could spread the dispersal of your dollars. But it would not reduce the chance of being caught, tried and jailed. But it must be possible. How?
What Money Is
Instead of trading apples for oranges, we use money. Money is the medium of exchange that makes trading easy. Your neighbors do not have everything to trade with you that you want. The next neighbor does not either. However, middlemen such as the grocers, hardwares, pharmacies, etc. do have most of what you need. Other mass-traders are a little farther away. You pay them for a product and they pay someone farther away to get the product. Money is the essential ingredient to make long-distance trading work.
Whatever the money is made out of, it has to be uniform, and it has to be a trusted medium of exchange. Whoever creates the money must be trusted. There has to be a certain amount of it. Moreover, as the economy and population increase, a modest amount of additional money needs to be created each year. Worn out money needs to be replaced. In addition, the businesses that provide it and replace it are called banks. They may rely on another organization that mints or prints the money.
If You Could Print It Legally
What would you tend to do if you were the head of called The Virtual Overseer Group (TVOG) and could create money minting or printing on a grand scale? You might start to spend a lot. However, if you had to keep accounts and report to the public what you took in and what you spent, you would have to limit how much you spent directly yourself.
You would need other legal organizations to help out, which would release the remainder of that money into the economy. Let us call them banks. A program would be needed that involved some partial control of those banks, regulating how much of their reserves they could lend out. And since lending money would be their main way of making profits, they would tend to get as much money out to the public as possible. If they were permitted to lend out 4 times as much money as they had in reserve, their profits would be 4 times greater than if they could only lend out what they had in their reserves.
When is There Enough?
Now, if a loaf of bread cost $1 originally, before this creation of extra money and the new lending practices took place, how much would that bread cost later?
As the lent out money hits the economy, more spending by the ordinary public would result. Let's say they had always wanted more bread, and the demand for all kinds of other products increased. Including what it takes to make bread (flour, yeast, ovens, fuel, etc.), the price of a loaf would tend to start creeping up. The prices of everything would tend to rise.
There would at first just be the original quantity of bread, ovens, cars, houses, etc. But with more money chasing this limited supply, two things would be triggered: 1) the additional money would bid up the prices of everything, and 2) the producers of all those things would start producing more things. This would tend to level off the increased buying activity, as supply began to match the new higher demand. In the meantime, it would be easy to tell that a dollar could not buy a loaf of bread. In fact the general buying power of dollars is shrinking. This is called inflation.
You, the head of TVOG which controls the money system, might see that cutting off the extra supply of dollars would tend to create a crash. So to avoid that, you order up the minting of yet more extra money. After several decades, you might find that a certain rate of growth of the money supply would enable smooth growth. This might require living through several booms and busts. However, you would eventually see the wisdom of limited growth.
If You Borrow Some
If you also, as head of this financial empire, were required to fund large national programs, such as welfare for the poor, roads, armies, courts, police, etc., the need for revenue might not be so smooth, but rather increase by bounds, and occasionally subside. You might decide to borrow large amounts by selling bonds. Contributions from the public normally cover these expenses (these contributions are called taxes). However, some programs occasionally require more money, which you borrow. This would be preferable to minting more money, since unusual increases in the money supply would cause booms and busts. So large additional amounts are borrowed. They will need to be repaid in 10 or 30 years.
A careful observer would find that in 30 years the value of one dollar has shrunk, due to the constant increases in the money supply. When it comes time for you to repay the loans (buy back the bonds) you can now do it with cheaper dollars!
You made out like bandits. And the gain to you must have been a loss to someone.
Taxes
Now the contributions that the public make to you for normal public goods amount to 40% of their income. Other hidden costs add almost another 10% to this, in the form of local school taxes (which can make your retirement home unaffordable), tariffs (which raises the price of goods and makes them more scarce), taxes imposed on businesses that you buy from (which raises the prices of goods and sometimes puts a firm out of business). This amount is paid in taxes each year. On top of that, over a 30-year period, the money the public has shrinks from one dollar to twenty-five cents, this amounts to a loss to the public of 4.66% per year.
The public loses, due to your taking the annual contributions, plus the inflation, a total of almost 55%.
Do You Stop At That?
What if the public asks for more programs, projects and benefits from you? What if you decide you yourself are not being paid enough?
When do you stop increasing these costs to the public?
Maybe you stop at this point (or sooner) out of the kindness of your heart.
But if the public keeps asking for more benefits from your organization? Many groups of citizens come to you to increase their own share of the pie. Sometimes another group gets a cut. But the general trend is for everyone to get more and more benefits.
You probably keep increasing the "contributions" and inflation until the public runs out of incentives to earn more. Businesses stop expanding. Some even close shop. The public consciously cut back in consumption. Some even choose to earn less to drop into a lower "contribution" bracket.
What About Trust in Your Money?
If the public also lost faith in the value of the money, what would happen to the monetary system? The money of this society will be taken as legal tender for all debts public and private only as long as everyone accepts it as valuable. It has no intrinsic value, and cannot be exchanged at the banks for precious metals. It has the value it seems to have only because TVOG says so, or by fiat in Latin ("let it be").
There was a time when the total money supply was backed with gold and silver. Every paper dollar (and alloy coin) could be exchanged for an amount of gold or silver based on objective law. If you had been head of TVOG at the time when this system ended, you might have seen the rationale of ending it. The gold standard meant that the total money supply was constrained by the supply of gold (and silver). Significant deviations from given price levels were rare: inflation and deflation were minor problems. Paying back a loan after 30 years had to include interest, but otherwise the dollars paid back were worth pretty much the same as when the loan was taken out.
If you had been head of TVOG, you would probably want to end the gold standard because it would give you ability to cause inflation.
The well-known expert on the monetary system, Alan Greenspan spoke glowingly of the benefits of the gold standard:
"The increasingly numerous proponents of a GOLD STANDARD persuasively argue that budget deficits and large federal borrowings would be difficult to finance under such a standard. Heavy claims against paper dollars cause few technical problems, for the Treasury can legally borrow as many dollars as Congress authorizes.
"But with unlimited dollar conversion into gold, the ability to issue dollar claims would be severely limited. Obviously if you cannot finance federal deficits, you cannot create them. Either taxes would then have to be raised or expenditures lowered. The restrictions of gold convertibility would therefore profoundly alter the politics of fiscal policy that have prevailed for half a century."
From article in the Wall Street Journal on September 1, 1981 .
The problem Greenspan foresaw with restoring the gold standard was the cost and complexity. His proposed solution was to use Federal Reserve actions (interbank interest rates and money supply changes) to keep the dollar relatively stable in relation to the price of gold. As chairman of the Federal Reserve, Greenspan kept the dollar graph in close relationship to fluctuations of the price of gold until the winter of 1996-1997 when he made historic speeches on "irrational exuberance" and "the wealth effect" which shook the stock market. " the idea that unsustainable stock market gains would create an inflationary imbalance between supply and demand. A month later Greenspan raised the fed funds rate, even as gold began to fall." Donald Luskin in the January 31, 2003 article in the National Review.
In other words, Greenspan abandoned his weak version of the gold standard.
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2007 Peter Namtvedt, all rights reserved.
Published: Sunday, October 7, 2007
Last modified: Sunday, October 7, 2007
The views expressed in this
article are those of Peter Namtvedt only and do not represent
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Posted By: Walt Thiessen
Date: 2007-10-08 08:33:24
Hi Peter. Welcome to the Nolan Chart! Good article on hard money. Don't be surprised if Bob Miller comes by to review it sometime soon. He's been rampaging lately about the imminent collapse of the dollar.
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2007 Peter Namtvedt, all rights reserved.