John Turpish for Georgia State House

Are you in the district?

Monetary Metals

Inflation is Bad

Most people probably don’t need to hear this anymore, but price inflation hurts people who buy things. You probably buy things. This is not limited, by the way, to high inflation – less inflation just hurts less.

Despite what you may have heard, inflation is not a constant fact of life – it can even reverse and have prices drop, which one might expect if the real economy is growing quickly. Some Keynesian types will tell you deflation is horrible, but before you take their word for it ask yourself how much of a nightmare it would be for you if prices went down and living became cheaper.

Monetary Inflation

Sometimes we end up talking past each other because we’re describing different things by the same word. Price inflation is prices rising. Monetary inflation is when there’s more money chasing the same goods.

The two are not unrelated, of course. If there’s more money floating around, then your “dollar” isn’t worth as much and can’t buy as much, all else being equal. Monetary inflation isn’t the only factor in determining prices, but it is an important one.

One could reasonably ask why it matters. If everyone who had dollars suddenly have twice as many, sure prices would double but also you’d have twice the money, and you know your employer has more money too and have higher prices so you can demand a raise – nothing would’ve changed much except all the numbers are doubled, right? But what happens if one person got all the new money, and others only got it when they spend/invest it? Well they’d get to spend their doubled money at the old prices. And the people who didn’t create the money but work directly with those who do? They’d get a little less of the benefit, but still get a benefit. and the prices would start rising before the money trickled its way around to you so you’d be facing the doubled prices before you had the doubled money.

How does “more money” come about? Well, that depends on the kind of money you’re using. In the case of the US Dollar, a theoretically independent, Congress-created institution (Federal Reserve Banks aka “The Fed”) declares that more dollars exist and lends out the new dollars to whomever – often then US Government but also member banks. Sometimes they use the new money to buy whatever assets (stocks, bonds, etc.) they think needs a price increase (“quantitative easing”).

This is why monetary inflation isn’t like a tax – it IS a tax. It’s a tax on holding dollars and/or things denominated in dollars (like a bond). Because of the secondary effect (benefit to those close to the Fed), it’s also wealth redistribution – away from almost everyone (more on this later) and toward the investor class.

Sound Money

What if you were the one making money – Your Bucks, let’s say – and you have nothing like an army or police. How would you convince people it has value, and you’re not going to pull the rug out and inflate their Your Bucks away? You could connect it in some way to something that has its own value for its own sake; something that is difficult to inflate.

There’s a number of things like this, but a physical commodity (interchangeable/not-unique good) that doesn’t spoil is often a good choice. Historically gold has been popular. How do you “print” more gold? Well, you have to run a gold mine, and that’s not easy. Some gold gets consumed in discarded electronics, lost jewelry etc., but really not a lot. The amount of gold in the world just doesn’t change very fast. This is the “soundness” we’re looking for.

Fiat Money

The term implies a fiat money has value because someone says it does. That really doesn’t make a lot of sense on its face, though. Sure, dollars generally have value because someone else believes it has value and so on. But it can’t be turtles all the way down – someone somewhere must have a good use for having dollars otherwise people would start questioning it and it would slowly come unraveled.

Well there are people who have a special need for dollars in particular. People who pay taxes or fines. You could try to live your whole life without using dollars, but then you’ll need to come up with dollars to pay your property tax or they’ll kick you out of your house. Or you may face a fine, and if you never come up with dollars to pay the fine sooner or later you’ll end up in jail. So, even if it’s not the case for you right now, for someone somewhere a pile of dollars looks like a “Get Out of Jail” card. And that definitely has value.

It’s about your money, but also the world

When monetary inflation is used to extract value from existing dollars, who exactly is on the losing end of that deal? Well, whoever depends on the value of the dollar. The biggest chunk of circulating dollars are in the hands of the American middle classes. But that’s not all of them.

You may have heard talk of the dollar being the world reserve currency. This means foreign governments are holding onto large quantities of dollars, even though they know the US will inflate and over time take that money back. Which starts to sound a bit like tribute.

Some countries, many of them poor and well within the reach of influence of the US military, do more than just hold in reserve. Some countries declare the US Dollar to be legal tender in their country, pushing their people to prop up the US Government. Or one step down from that – peg their currency to the dollar – providing one level of indirection.

There’s a reason why BRICs are considering switching to gold as a basis for international currency.

Even if you believe that everyone involved in deciding US foreign policy is an angel with nothing but the purest of motives, incentives matter. And of course their replacements in coming generations might not be. The more our foreign entanglements resemble those of a peaceful republic and less those of an empire, the more likely our future will be that of a peaceful republic.

So What’s the Plan

The plan is to give people a choice and try to make the playing field slightly more level. We can do this by having the state of Georgia declare that within its borders gold and/or silver count as money (i.e. same as cash) for accounting purposes, an can be used to pay taxes and/or debts that would be payable to Georgia.

“Why gold and silver specifically?” I guess/hope you’d ask. Why not rhodium, diamonds, Monero, crude oil, or…

There’s a surprisingly simple answer to that:

No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts

– U.S. Constitution: Article I, Section 10

That’s why gold and silver. So long as Georgia is a part of the U.S. it is incumbent upon us to follow the rules and uphold our part of the deal, even if not everyone in D.C. shows the text the same level of respect.

What would happen to the Dollar?

In short, not much. It would remain legal tender, also. And if most Georgians still prefer to transact in dollars, as I suspect they would, it wouldn’t do much to change the trajectory the dollar is on.

What it does do is give people like us and the businesses we patronize a choice. Competition is good for markets, including the market for money.

Leave a Reply

Your email address will not be published. Required fields are marked *