Our Money is Important!


"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Pg 105 Chapter 5 of Macroeconomics by N. Gregory Mankiw 9th edition. 


I have brought myself to write on the subject of money. Many think that our money is merely used for exchange or that it can't be affected by anything other than our economy. You often hear the phrase our money is backed by the United States government or our economy. However, I am here to be one in a million and to turn you into another one in a million. Someone who understands currency. A currency should not be backed by a nations economy. A currency should be valuable regardless of the country or in other words it should be more than just a piece of paper. 
 
To start the process, we need to understand how money originates? It has what economists call utility. First it is a medium of exchange, second it is a holder of value, and third it is a unit of accounting. We use currency to exchange in the economy instead of having to use barter which is inefficient. We use money because it holds value, stores the product of our labor, and can be used in the future. However, this is a natural quality of money and when the government is issuing paper money the value of money is volatile. The final utility is merely stating that money allows up to keep accounting practices in synch. It's easier to account things in numbers than in the number of chickens traded for bushels of wheat. 


Money originates over time and we can make this a very simple example. Imagine an economy that is isolated and located on an island. We could say that pearls are our currency and these pearls are hard to find. Meaning that when I gain a pearl of currency I know that my pearl will be worth something in the future. It is hard to dive for pearls meaning that others can't just find more pearls which would make my stock of pearls worth less. They call this increase in pearls the increase in the money supply. The finding of pearls is the equivalent of printing more money. The more money that is printed by the United States government means that your savings is becoming worth less. Or your current stock of pearls is becoming less valuable. Economists would say your purchasing power is decreasing. 


What happens to this natural money over time? It becomes backed by a government and then eventually the government separates the valuable asset from the currency. For our simplistic example the government would separate the the pearls from their new paper currency. This happened in the United States under Richard Nixon when he took us completely off the Gold Standard. What does this mean? It means that our currency has nothing backing it and any regime can manipulate it without short term consequences. What economists call the inflation tax. Instead of raising taxes to pay for government spending they simply print more money. 

 Austrian Business Cycle

Check out the theory that won a Nobel Prize and a theory we all should know. Thomas Woods is a a Harvard and Columbia graduate. F. A. Hayek won the Prize.
Second, we must understand our currency is subject to changes in the market, changes in the supply and demand of dollars. Meaning our currency is not backed by our government and more accurately described as being backed by our economy. If the money was backed solely by the United States government then the dollars floating around the world would be meaningless. The only reason they are of value is because the economy of the United States is stronger relative to other economies. 


Third, we must understand the ideas that the inflationists believe in. We have to understand our opponents in order to better our arguments. The Keynesian and Monetarist thinking economists believe the a small amount of inflation is good for the economy. The analogy is often described as oil that is greasing the economic engine.

The economists often assume prices to be sticky in the short run. Such as businesses don't enjoy firing people or not giving them wages. This assumption is fairly accurate but it mistakes that employers might change practices in order to meet equilibrium again in the market if their wasn't 2% inflation.

A 2016 economics textbook for Missouri State University states that inflation at 2% annually or 20% per decade is sufficient to grease the wheels of the economy. Most Americans are not even aware of this inflationary tax. They don't ask for the raise that maintains their standard of living. Inflation hurts the poorest members of society the most. By increasing prices and hurting the interest rates we all receive on savings.

What is the solution?

The solution is to legalize the Constitution which has legal tender laws that specify gold and silver as money. However, we don't need to do away with the Dollar and its importance. We instead can make it legal to make transactions in gold and silver in the United States. The competition between currencies will keep the dollar in a much better condition. Keeping wages stable for the poorest in society.