Contents of my 12 October monetary presentation

Dick Clark

October 12, 2005

Money in the United States: History and Theory

I. Ludwig von Mises Institute (LvMI)

· A research and educational center for Classical Liberalism and the Austrian School of Economics, which is dedicated to defending:

· free markets

· private property

· sound money

· peaceful international relations

· Approval of an institute named in honor of her late husband was granted by Margit Mises in December 1981, with the institute being founded in Auburn, Alabama in October 1982.

· Ludwig von Mises was an Austrian economist who demonstrated that the various forms of government intervention are always destructive, including:

· welfare

· inflation

· taxation

· regulation

· war

· Periodicals: The Mises Institute publishes periodicals such as:

· The Free Market (monthly newsletter about political developments)

· The Mises Memo (newsletter about LvMI conferences and publications)

· The Mises Review (reviews of new books germane to Austrian economics and libertarian political philosophy)

· Quarterly Journal of Austrian Economics (peer-reviewed, scholarly journal focusing on Austrian Economics)

· Journal of Libertarian Studies (peer-reviewed, scholarly journal focusing on political theory)

· Books: LvMI publishes reprints and new translations of important economic and philosophical works, and also publishes many new works.

· Fellowships: Support is provided to students in the form of books, periodicals, internships, academic counseling, and financial assistance.

· Research Grants: LvMI provides material support to scholars engaged in in-depth research in the Austrian tradition, including translators of important works, and biographers of major figures in Austrian Economics.

· In-house Library: The library includes more than 30,000 volumes, including the personal collections and papers of several eminent scholars.

· Mises.org: The institute website features a multitude of resources, such as online books, daily articles, study guides, bibliographies, and working papers.

II. Current Conditions

· According to a story published 10 October 2005 on Bloomberg.com, the price of gold in US dollars has risen 8.1% in the past 6 weeks, and more than 9% so far this year.

· As of October 10, 2005, the price of an ounce of gold was $477.70.

· Gold has been appreciating against almost all major currencies this week, signaling world-wide inflation.

People are seeking gold as an inflation hedge and neutral currency.

III.Inflation

· Inflation is the devaluation of a unit of currency.

· It would take $1215 of today's currency to equal the purchasing power of $100 in 1932.

· Price index data can be useful in observing inflation, but is often not reliable as an absolute measure.

· Changes in the price of gold in dollars is a good indicator of inflation, but, as with all scarce commodities, gold's price fluctuates not only due to inflation but because of changes in supply and demand.

IV.Origin of Money

· Exchange occurs because of the benefits of the division of labor.

· To demonstate this, assume that a baker can make four loaves of bread per hour, but only one candle. Assume also that a candlemaker can, inversely, make only one loaf of bread per hour, but four candles per hour. Compare the results of being a “jack-of-all-trades” to those of specialization.

Without the division of labor:	Baker	Candlemaker	Total # of Items Produced
# of candles produced	1	4	5
# of bread loaves produced	4	1	5

With the division of labor:	Baker	Candlemaker	Total # of Items Produced
# of candles produced	0	8	8
# of bread loaves produced	8	0	8

· As specialization of the workforce progresses, barter becomes more complex and more difficult.

· Money is a commodity that becomes a medium of exchange. Such media facilitate exchange and aid in economic calculation.

· To be a good money, a commodity needs to be:

1. commonly regarded as valuable

2. durable

3. easily divisible

4. homogeneous

V. History of Money

· Gold and silver, like other commodities, are traded by weight.

· “Dollar,” “Franc,” “Mark,” and “Pound” were all originally the names of units of weight of gold or silver.

· Privately minted coins circulated in the United States as late as 1848.

· Government, under the pretense of preventing fraud and maintaining standards, began passing “legal tender” laws as early as 1819. The actual motive was to force people to accept money other than gold.

· Before 1933, a “dollar” was 1/20 oz. of gold by definition.

· 1933: FDR ends strict gold standard.

· 1934 – 1945: The dollar is redefined as 1/35 oz. of gold, but now redeemable only by foreign governments and central banks.

· 1945 – 1968: The “Bretton Woods” agreement results in the US government's further inflating the money supply. The US is more inflationary than either Japan or Western Europe during this period.

· Early 1950s – Summer 1971: Foreign governments begin heavily redeeming dollars for gold.

· US gold stock dwindles from $20 billion to $9 billion

· $35/oz. gold became difficult to honor towards the end of this period

· August 1971: President Nixon takes the US off of the gold standard and to a fiat currency for the first time in national history.

VI. Business Cycle

· The “Boom-Bust” cycle has been pondered by economists for more than a century.

· The business cycle proceeds as follows:

1. The Federal Reserve expands credit/money supply by lowering interest rates to its borrowers.

2. Businesses take advantage of the cheap credit to purchase capital goods (and the associated labor). The “easy money” causes miscalculation in the market, and misallocation of resources.

3. Prices for capital goods, labor, and (to a lesser extent) consumer goods, increase. This is the “Boom” part of the cycle.

4. As the money supply increases, more goods are imported.

5. Domestic prices increase and domestic producers become less competitive globally.

6. A trade deficit means that gold and other commodities flow out of the country. Eventually, the central bank must contract outstanding bank loans to stave-off monetary collapse. This is the “Bust” part of the cycle.

7. During the Bust, debts are repaid, domestic prices fall, and savings increase.

VII. Why Inflate?

· To “stimulate the economy” in the short term, thus giving the appearance that the government is “doing something,” usually about unemployment or decreased consumer spending.

· To increase federal spending without raising taxes (effectively a back-door tax increase).

VIII. Advice on Policy

· Economist Ludwig von Mises said, “The President, Congress, and the Supreme Court have clearly proved their inability of unwillingness to protect the common man, the voter, from being victimized by inflationary machinations. The function of securing a sound currency must pass into new hands, into those of the whole nation.”

· Representative Ron Paul (R-Texas) says, “An official coinage that reflects honest bullion weights is a powerful symbol of the gold standard that we support.”