Less For Your Money ... Brought to You By The Federal Reserve

“The LORD abhors dishonest scales, but accurate weights are his delight.” Proverbs 1:1

Harry Potter author J.K. Rowling and her publisher, Bloomsbury have just announced that as a cost-cutting measure, future print and digital editions of the popular Harry Potter series will be printed with 2% of their letters and punctuation marks deleted annually. They have also revealed that the books that have been sold already have a special ink (or special programming in the case of digital editions) that will mimic the effects of the deletions going forward, so 2% of the characters will annually vanish from the pages of those editions as well. The announcement stated that readability problems with respect to the popular series should not emerge for several years at least.

In an unrelated story, Florida’s Agriculture Commissioner Adam Putnam has announced that he has issued an administrative rule allowing filling stations to reduce the volume of gasoline delivered by their pumps by 2% annually. Beginning immediately, each “gallon” of gasoline delivered will actually be 98% of a gallon. Refiners have agreed to contribute a portion of the savings they realize annually to Mr. Putnam’s re-election campaign.

Finally, earlier this year the Federal Reserve announced, through their open market committee, that their inflation target would remain 2%, a level that will result in a 33% devaluation of the dollar over the course of 20 years. In the nearer term, the dollar would lose nearly 10% of its value over the next four years. The committee stated that a 2% inflation target was most consistent with the Fed’s dual mandate of price stability and maximum employment.

Only one of the stories above is true, and unfortunately it’s the one with the greatest impact on you and me. As Charles Kadlec, a contributor to Forbes stated in an op-ed piece last February, “...the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.”

A dollar is not wealth. At least, the piece of paper or the electronic bits that make up a dollar stored in your bank are not wealth, unless you take into account the value that the piece of paper might have to you as a way to get a fire going, or as a place to write a short grocery list using a sharpie. Rather, the dollar is a measure of wealth that can conveniently be exchanged for something else of real or symbolic value. With the dollar, we can buy a candy bar or a share of stock representing a portion of a company.

Gold on the other hand is actual wealth. You can use it to adorn a woman. You can repair a damaged tooth with it. Or you can plate a contact with it and assure a good electrical connection that won’t corrode. It’s very dense, so you can carry a lot of value in a relatively small package. If you have a fire, it won’t burn up. Although economist John Maynard Keynes referred to it as a “barbarous relic,” no currency based on gold has ever experienced hyperinflation. All currencies based on the full faith and credit of their respective nations eventually do.

In the ancient world (and even into modern times) coins were actually made of precious metals. Dishonest people often shaved the edges of those coins to remove a small amount of the metal. Those people, when caught, were routinely put to death. Today the members of the board of the utterly unaccountable Federal Reserve do far worse, and the few observers whose objections are allowed to appear in the press must also endure accusations of being crackpot conspiracy theorists. Indeed, people like Bernard von Nothaus have been convicted of a “unique form of domestic terrorism” for merely minting and promoting coins made of pure silver and gold. How topsy turvy is that?! Nevertheless, the “crackpots” are now being taken seriously enough that a plank of the Republican platform for this year will be a study of returning to the gold standard.

Many people believe the gold standard to be utterly impracticable because of the global dearth of gold. Indeed, the U.S. is said to have stockpiles of only $415 billion or so in gold, which is far too little to back the amount of money currently in circulation. Immediate return to a gold standard would result in a drastic deflation, which would cause commerce to grind to a virtual halt. The government would be forced to pursue gold confiscation from citizens, just as FDR did in 1933. Bimetallism (the incorporation of silver into the standard) could greatly ease an orderly changeover, however. The late economist Milton Friedman, one of the founders of the Chicago school of economic thought, identified bimetallism as one of the key opportunities the country missed, in this case when it chose a gold-only standard in 1873.

The hard choices facing a country like ours that has left the gold classical standard, passed through a period of external (but not internal) gold convertibility and ultimately cast off the currency’s final mooring to gold in favor of fiat are very unenviable. And inevitably, policymakers evade those choices until too late. Monetization of a country’s debt has been compared to narcotics addiction, with dosages needing to be increased in size and frequency until ultimately the patient (the currency) dies. Note that when that happens, gold inevitably emerges as sound money, at least until the fiat cycle can begin anew.

The dollar has already lost 97% of its value since the inception of the Federal Reserve in 1913.  At this rate, opposition to the central bank is probably unnecessary. Instead of needing a hero like Andrew Jackson who will fight until he can make perhaps the ultimate expression of personal triumph: “I killed a bank!”, we merely need to wait for this bank to kill itself.