On December 5, 1931 the Citizen’s
Bank of Tenino, Washington, failed and created a shortage
of money. Merchants were unable to get change without traveling
about thirty miles over inadequate roads. A meeting of the
Chamber of Commerce resulted in the local newspaper printing
up the first issue of wooden money in the United States. Other
places mostly in the Pacific Northwest issued wooden money
after that. Each wooden nickel had an expiration date and
even a final redemption time. Eventually, real nickels became
available and wooden nickels were relegated to the souvenir
bin.
Today because of soaring metal prices, it costs the government
1.23 cents to make a penny. Since 1982 the penny is actually
mostly zinc wrapped in copper. Also, it costs the government
a nickel to make a dime and less than a dime to make a quarter.
Those coins are mostly made of copper as is the Susan B. Anthony
dollar. So, today these coins are worth more in paper money
than the metal in the coins. That’s inflation, and it
is caused by the government printing presses. Prior to 1971,
we were on a modified gold standard (the Fed was limited in
the number of paper dollars they could create). This allowed
foreign governments to turn in their surplus dollars for gold.
France (our friend?) took full advantage of this to the point
of almost wiping out the gold reserves at the US Embassy in
Paris. President Nixon was forced to close the gold window.
Our link to gold was virtually severed, and since then the
Fed has been able to print money in unlimited quantities,
and they have. We mentioned in a previous letter that the
Fed has stopped publishing M4 and M3 numbers, and M2 is about
to follow. Thus we can only guess at the current rate of growth
in the money supply.
As we have stated ad nauseam, it is an increase in money
supply relative to demand that determines inflation. Interest
rates have little to do with it. Paul Volcher, then Chairman
of the Federal Reserve, realized this in the early 1980s when
he advised President Reagan to ignore interest rates (the
prime rate topped at 22.5%) and just tighten the money supply.
Market forces will then take care of interest rates. An interest
rate of 5.25% or 5.5% or even 6% will not choke off the current
economic boom we are undergoing. Today’s rates are pretty
much the historical norm. We think the Fed is more concerned
with deflation and are running the printing presses to prevent
that. Deflation is occurring in consumer products being imported
from Asian countries. This is also being aided by American
corporations that are becoming more efficient and competitive.
The real inflation in the US is from areas that we cannot
outsource and the Fed is aggravating that very inflation with
their easy money policies. Remember, inflation is caused by
too much money chasing too few goods. Being a millionaire
today is not as impressive as it was back in 1970.
Paper money has no intrinsic value. The French were burning
paper money during the French Revolution. Confederate money
was worthless after the Civil War, and as recently as 1989,
East Germans were burning their paper money as the Berlin
Wall collapsed. According to the Bureau of Labor Statistics
inflation calculator, gold at $850 an ounce in 1980 (its high)
would be worth $2,100 today. The most important function of
a central bank is to maintain a stable value for a nations
currency.
Well, another birthday has passed and now the United States
is 230 years old – at least from the date of the Declaration
of Independence. The war against England and our actual independence
did not occur until 1783, and it took some help from our friends
in France to accomplish it – imagine that. Well, we
returned the favor in the 1940s. In spite of all the problems
that the media continues to document for us, we are still
the greatest nation on Earth. We have the most freedom, most
stable political system (don’t laugh) and the highest
standard of living on the planet. So Happy Birthday America
and many more!
Random thought for July 2006:
“Democracy is the worst form of government in the world
– except for all the rest.”
- Winston Churchill
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