The answer is that the US dollar has lost 98.17% of its purchasing power and the pound sterling 99.42% of its purchasing power. Well done then, I suppose, for surpassing even the great tyrants of old who plagued the citizenry of both nations!
Gold was money for a large part of mankind’s history.
It was discovered by early man to be the most marketable of commodities. As such, the free interaction of people led to this commodity being adopted as the final thing for which all goods and services were traded. This discovery allowed man to lift himself from direct exchange, or barter, of his goods and services to indirect exchange. This indirect exchange allowed the universal application of the division and specialization of labour that has, in turn, given us all the material prosperity we have today. The discovery of money, then, must rank along with language as arguably the most important invention or discovery in the whole course of human history.
Note that, like language, money was not created by the State but by the private and spontaneous interaction of free individuals.
There are many stories in history of wicked monarchs who, to fund their various despotic regimes or lifestyles, would call in the coinage of the realm, extract a small percentage of gold — a “clip” — and then add an impurity before giving them back to the public; this is debasing of the monetary unit. This embezzlement was unlawful for the minter in the private sector and many people over the ages have been executed for stealing from money owners in this way but the monarch usually got away with it. One of the most notable examples in history was when Emperor Nero reduced the value of the denarius from being pure silver weighing 4 grams to 3.8 grams. His financial gain was enormous.
Another great example of history is our very own tyrant per excellence, Henry the VIII. He reduced the weight of sliver in the silver penny to 1/3rd of its purity from 0.925 to 0.250. By the reign of Elizabeth I, the Tudor financier Sir Thomas Gresham had to negotiate a loan from the Antwerp traders to provide more money for her nation. Sir Thomas came back and said
It may please your majesty to understand, that the first occasion of the fall of exchange did grow by the King majesty, your late father, in abasing his coin … which was the occasion that all your fine gold was conveyed out of this your realm.
What became know as Gresham’s law is that “Bad money drives out good under legal tender laws”. In Europe this is know as the Copernicus Law, as he was saying the same thing on the continent. The great medieval philosopher and theologian Nicole d’Oresme was the inspiration of Copernicus on this matter.
Economics of the Matter
A debasement always meant an inflation. Why? As there was more coinage in circulation chasing a similar amount of goods and services for sale, prices rose.
No less a figure than John Maynard Keynes in Economic Consequences of the Peace (1920), said:
By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some.
This is from a man whose current disciples are inflating the western world’s money supply to a point that can only lead to rampant inflation.
We should remember the names which we have used to label money historically. In the UK “sterling” and in the USA “dollar” each described a fixed weight of gold . Gold was the money unit, not sterling or dollar in itself.
Before World War I the pound sterling was worth $4.86856 and a dollar was worth 1/20th of an ounce of gold. For the sake of simplicity I will say that the pound sterling was defined as ¼ of an ounce of gold and the USA dollar 1/20th of an ounce.
So How Much is my Pound Sterling Worth Today?
One ounce of gold today is worth $1,093.40 and 1/20 oz therefore $54.67 but the dollar pre World War I was just a name in the USA for 1/20 of an ounce of gold: what would have cost $1 before World War I would cost $54.67 today. The dollar has lost its purchasing power. In fact it has lost 98.17% of its purchasing power in 100 years. One dollar today should buy something like a single person’s weekly food shop, not a single daily newspaper.
The fate of the pound sterling has been even worse than that of the dollar. One ounce of gold today is £692.26. So if a pound sterling pre World War I was just a name in the UK for 1/4 of an ounce of gold, it would imply that the pre World War I purchasing price was 1/4 of £692.26 or £173.06. In fact the pound sterling has lost 99.42% of its purchasing power in 100 years. One pound should buy something like a good week’s food shop for a familiy of four and not just one daily newspaper like it would today.
Our modern day Neros and Henry VIIIs are those we call our Prime Ministers and our Presidents. We are told they are all well meaning men and women. That may well be the case. They have however, since World War I, sat on the single greatest debasement of our wealth in human history.
They do this via the monetization of their nations’ debt. A politician in power might have promised to give X, Y or Z group of people £X, £Y and £Z in exchange for voting for them. If the tax revenue is not enough, then they simply, out of thin air, either create more money — old style monetizing the debt to pay off the debt obligation — or, with a computer key, they open up a new bank deposit for themselves to pay or buy back some of their debt. This is called “QE” or Quantitive easing and we discuss the errors associated with it here.
Last year the UK raised over £200 billion by one part of the government issuing debt and the other part buying it. So £200 billion of new money is now in circulation. Nero and Henry VIII would blush at the brashness of this debasement. This is done wholly at the expense of yours and my very own purchasing power.
The Cobden Centre exists to promote honest money and social progress. Honest money is money that cannot be debased by governments to pay off liabilities they have incurred over and above their tax revenue. I outlined a banking reform proposal which advocated 100% reserve money here. Staying within the existing paper money regime, one would need a bill to prevent the new issuance of either paper money or computer generated new bank deposits by the government. Ultimately, we must look at fully re rooting our paper money back into solid commodities that the government cannot destroy or create at will.
- Huerta de Soto, Money, Bank Credit and Economic Cycles
- Baxendale, A day of reckoning: how to end the banking crisis now
- What is wrong with banking, part 1: the legal nature of banking contracts
- Frank Whitson Fetter, Development of British Monetary Orthodoxy 1797 – 1875
- F. A. Hayek, Denationalisation of Money: The Argument Refined
- Gordon Kerr, How To Destroy the British Banking System and Bailing out the Banks – Glaring Evidence of Moral Hazard
- James Tyler, My Journey to Austrianism via the City, Money is not working and How to avoid future encounters with financial meltdown
- Irving Fisher, 100% Money, 1935
Interesting article, as always.
I don’t doubt that governments, historically and recently, have irresponsibly manipulated the money supply to the advantage of themselves and their cronies.
I expect we’re in a gold bubble at the moment, which distorts the figures somewhat, but not enough to affect your point. At the height of the last bubble, in January 1980, gold hit $850/oz ($42.5 per 1/20oz) meaning that by then the dollar had lost 97.65% of its value. I gather that by August 1999, the price of gold had fallen to around $250/oz ($12.5 per 1/20oz), so the dollar at that point had lost 92% of its pre-WWI value. Still quite staggering.
What do you think would be the ideal change in the money supply over time?
a) it should remain constant
b) it should grow at the rate at which gold is produced (discovered, mined, and refined)
c) it should grow at some other rate, in line with increased real wealth in the economy
The right amount of money today is just what it is today. Sounds like a politician’s answer right?
Here is a thought experiment.
Let us assume we are a stand alone country. If there were 60 million of money units, I will call them MU, one for each person in this country or 600 million MU’s, the existing goods and services will be sold, assuming we all bought our pounds worth or ten pounds worth of goods for either £60m or £600m.
Note we would all have the same goods and services each time. The money unit would give a higher price if we all had 10 MU’s chasing the goods and services than if we all had 1 MU each. Either way we get the same goods and services which after all is what we are using the medium of money for, to exchange indirectly goods and services that I may produce for another that someone else produces that I cannot barter in exchange for.
So you can conclude that the optimal amount of money is actually any amount.
If there was say £1.7 trillion of money in the UK and this was enough to transact all the goods and services and suddenly there was £1.9 trillion, then you can see that there has been a 10% plus devaluation in our purchasing power. So this new amount, if given to everyone equally would actually see a uniform price rise and that is it, it would be of no economic merit. The problem is that when the money is injected into the economy, imaging if you were one of the lucky first to get the money, you could go out and spend when the price is low before other people have the new money and you can get real goods and services exchanged for money without having to produce anything yourself (just like the counterfeiter) . This is called quantitive easing. This causes wealth to be transferred from the last recipients of the new money, those on fixed income to the first recipients, the bankers who funnel the money though the system and place the bond sales and purchases and people on the government payroll. This is negative wealth redistribution.
Also, when this new money enters into the system we get a massive distortion in investment when businessmen are flusher with cash; they invest in their next most important projects as they think there will be customers with this new purchasing power. Think of the dot.com boom as a classic example. When the party stops and people realise there has been no real wealth created, the bust happens.
So if the optimal amount is what it is today, we should never print anymore. When businesses become more efficient, which is the ongoing aim of capitalism; they will have more goods and services to sell with the same MU’s in circulation. This will mean things will be cheaper i.e. your purchasing power has gone up. This is a benign price deflation and should be welcomed as you have more money to spend on other things. Think of the price of computers and you get the picture.
If money is backed by a commodity such as gold, then I believe the gold stock goes up at about 2% per annum around the world. This may be more acceptable to run a small inflation and know that the government can never destroy your money as they can with paper money.
Psychologically people in recent times, have only got used to rising prices i.e. inflation, so it may be worth while moving to a commodity backed solution like gold or a Freidman like 2% new money inflation rate a year shrinking to nothing until people adjusted in their minds.
I hope this is helpful.
Thanks very much for the response.
I’ve read Rothbard’s argument on this (“it doesn’t matter what the supply of money is” ), and this makes perfect sense for a point in time. I also agree that price deflation through technological progress is something to be celebrated rather than feared. Where I struggle is when there are large changes in population, goods, and services over time.
Imagine a tribe of 10 people, with 10 cows, and 10 gold lumps, all divided equally. The tribe, after a long and difficult voyage, arrives at an island that has no gold, but does have fertile land. The tribe grows to 91 people and 90 cows. Suppose one original lump were hoarded, while the others were repeatedly divided among the growing population, so that the hoarder, who led an autarkic life, had 10 1/10th lumps (decilumps), while the other 90 had a single decilump each. The price for a cow would now be 1 decilump rather than 1 lump, and the hoarder cashing in would be able to buy 10 cows rather than 1 (subsequent to this transaction, inflation would mean that a decilump no longer buys a cow).
Is it fair that the hoarder’s gold should appreciate in this way? Would it not be better if the gold lump supply had increased exactly in line with the population of cows and people, so that the hoarded lump buys 1 cow, just as before (no more, no less). The practical question of how to achieve this purchasing-power-preserving expansion of the money supply seems separate from the question of whether the preservation of purchasing power is desirable in principle.
My example is, of course, highly simplistic and stylised, and there may be reasons why such a situation will never arise in practice. Alternatively, we may argue that it doesn’t matter that the hoarder profits by hoarding.
I fully agree that the way the money supply is inflated at present (whether by the printing press or Fractional Reserve Banking) is severely unjust, as well as disruptive to long term economic growth.
That said, I do have some lingering concerns about gold as money. I fear that if there had not been a switch to fiat money (evil as it is), the massive upswing in population since WWI  would have caused a corresponding increase in demand for gold, and diversion of resources from productive industries to mining. Rothbard’s answer about non-monetary uses for gold doesn’t seem fully satisfying.
It’s clear that I have much more reading to do, so I should probably get to it! Thanks again for your response.
Sorry for the late response.
If someone keeps their powder dry by removing their purchasing power by saving or hording, there forgo consumption now for consumption in the future right?
They are speculating that this economic act will get them more goods and services in the long term right?
What could possibly be wrong with this? This is the reward for not taking part in the current consumption.
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