For Doc and Daniel:
From the morning e-mail ... Charles Mills, who calls himself the Confederate Lawyer, argues that modern monetary policy has weakened the ability of money to store value, and that bailouts could finish the dollar off:
By Charles G. Mills
Ordinary people do not need an economist to tell them what the word "money" means. Baroness Thatcher described it quite succinctly as a medium of exchange and a storer of value. To the ordinary person, money is what you can spend now and something that you can still spend after it has been in the bank for a while.
For almost a hundred years, governments have been gradually destroying the ability of money to store value. If we spend trillions of dollars bailing out every troubled industry in the United States, the destruction will be complete.
Gold and silver coins have been money for several thousand years. Modern economies have needed more money than could be provided by precious metals alone, even when the gold coins of slow economies circulated in faster ones, as did Spanish gold coins in Nineteenth-Century America. The additional money supply was provided by banks, either as paper bank notes representing a promise to pay gold or as credits and debits on the banks' records. In addition, the government circulated certificates backed completely by actual gold or silver in the government's hands, as well as notes promising to pay gold to act as a more convenient form of money than coins.
The banks responded to market forces in creating the money supply. The creation of the Federal Reserve System changed this relationship. Federal Reserve banks were given a monopoly on issuing paper money not backed by actual precious metals. This did not harm the people's money at first because every Federal Reserve note could be changed into some gold or silver certificates, and the government would change every $1 bill into real silver coins. The Federal Reserve System's first big mistake was not to make money more plentiful and thereby cause inflation; it was to make money scarcer and thereby cause a depression.
Franklin Roosevelt and the Congress during his administration took three major steps to deprive the people of their money. They made it illegal to use gold as money domestically, they decreased the gold value of the dollar, and they made contracts to protect creditors from decreases in the gold value of the dollar unenforceable. Federal Reserve notes could still be changed into what the government called "real money" -- that is, $1 silver certificates -- and foreign central banks could still redeem their Federal Reserve notes in gold.
Although we experienced huge inflation during the Truman presidency, the silver value of the dollar survived, and we still honored our money in gold when demanded by foreign governmental central banks. Under Eisenhower, this system was made fairly stable.
During the 1960s and 1970s there were more attacks on the people's money. Silver coins were replaced with base metal coins, $1 silver certificates were replaced with $1 Federal Reserve note, $5 United States notes disappeared, and Federal Reserve notes no longer had a promise to redeem them in "real money" printed on them. Finally, we stopped redeeming our money in gold, even for foreign central banks. In other words, we broke the last ties between our money and something of tangible value.
During the 1980s and 1990s, many scholars, even very conservative ones, argued that we did not have a problem -- as long as the national deficit did not grow so fast that it required the creation of too much new money, and the money supply did not grow significantly faster than the economy. This was a departure from two old beliefs: that over the several-year period of an economic cycle, budgets should be balanced, and that after a war the government should pay back the money it borrowed to finance the war.
Largely because of budget surpluses in the late 1990s, we stayed out of real trouble until quite recently. The problem with running continuous deficits so long as we do not do it too much and cause a dangerous increase in fiat money is that eventually we will have an emergency and have to create inflation to cope with it. This is the reason governments used to sell war bonds in time of war to patriotic citizens and buy them back in time of peace, so the entire war debt was not permanently added to the national debt.
One of the worst things that can happen to an economy is for its money to lose value so fast that it ends every day worth less than it was in the morning. When the national debt exceeds the gross domestic product for a year and the interest paid by the government begins to get out of control, governments usually must either fight their way out of bad inflation with painful belt tightening or face the kind of hyperinflation in which the value if the money drops every hour. Either way, the people come out of it with the value of their savings badly damaged.
It now seems likely that we are going to "rescue" or "bail out" various industries to the tune of a least a trillion dollars and maybe several trillion. We cannot squeeze too much more money out of the taxpayers without causing a painful slowdown in an already troubled economy. There does not seem to be any real will in Washington to make big budget cuts. The inevitable result is going to be an increase in the money supply well in excess of the established target, a truly harmful increase in the interest payments on the national debt, and a drop in the value of the dollar so dramatic that it will complete the destruction of the people's money.
Charles G. Mills is the Judge Advocate or general counsel for the New York State American Legion. See his biography and other columns at http://www.fgfbooks.com/Mills-Charles/Mills-bio.html