A Store of Value
“Trust me…”
[Third in a series. The beginning is here]
Last time we determined that a major value of money was as a “medium of exchange” that relieved parties from the trials of barter. There is a second, equally important, attribute money can contribute to society: a store of value. This kind of money is a parking place for times when one is waiting to use money for the purchase of real goods and services at a later time. In this sense money CAN BE like many other long-lived physical assets, such as real estate, plant and equipment or anything else with a useful life longer than one accounting cycle.
A history lesson
Let’s go back most of a century to 1957 when the dollar bills in your pocket looked like this:
Look familiar? It is not like what you have in your pocket today. Find the name at the very top, middle, “SILVER CERTIFICATE.” Take a dollar bill out of your pocket and look on the same side at the same place. It says “Federal Reserve Note.” The difference is IMPORTANT. From the image above, find the sentence which starts just below the name and ends at the bottom of the document. That sentence reads “THIS CERTIFIES THAT THERE IS ON DEPOSIT IN THE TREASURY OF THE UNITED STATES OF AMERICA ONE DOLLAR IN SILVER PAYABLE TO THE BEARER ON DEMAND.” The English translation of this is that if you have one of these critters you may walk into the US Treasury and demand the US government give you silver in return for surrendering this piece of paper.
Try doing that with the Federal Reserve Note in your pocket.
Parity
In 1957 you could buy a Troy ounce of Sterling Silver for 91 cents. In simple terms, back then a dollar bill and an ounce of silver were about equivalent. That was perhaps the last time the phrase “Sound as a dollar” had any meaning.
Today an ounce of silver will cost you just under 30 Federal Reserve Notes. Inverting that to reflect the value of the $1 Federal Reserve Note in your pocket today, it will buy you a little more than 3/100th of an ounce of silver, making that Federal Reserve Note in your pocket worth only pennies compared to the Silver Certificate of olden days. In fact, if you still own a 1957 Silver Certificate today it is worth between 2 and 24 Federal Reserve Notes, depending on its physical condition. If, instead of the Silver Certificate, you owned an ounce of silver you bought in 1957 for 91 cents, it is worth nearly 30 Federal Reserve Notes today, and we are back to where we started.
In a land far away
Here are stacks of Venezuelan 100 and 500 Bolivar notes. In 2018 inflation in Venezuela was 130,000%. This means that a commodity which could be bought with one Venezuelan Bolivar on January 1, 2018 cost 1,300 Bolivars on December 31, 2018, a one-year loss of purchasing power of 99.9231%
A side trip into Government Finance
If the government wants charcoal or bananas, and if it does not just outright confiscate them, it must buy them or anything else of actual value from those who manufacture or harvest them. To do that Government must levy taxes (which is still confiscation) so that government expenditures, G, equals taxes, T. This is known as the “pay as you go” method of financing government:
G = T
But sometimes, like during wars and recessions or just before elections, it is inconvenient for the government to increase taxes to meet the cost of all the promises it made just prior to the last election. Therefore, the government raises money in two other ways.
The first of these is, as for any of us, borrowing, B. The second, UNLIKE any of us, government can print money, M. This latter alternative was NOT as easy in 1957 because the paper money government issued then could only be issued after some human dug precious metal out of a large, deep, hole in the ground.
Hence, today we have
G = T + B + M
Where:
G = Government expenditures
T = Taxes imposed and collected
B = Money borrowed
M = Money printed
All governments, throughout all of time, having borrowed excessively and exhausted short-term solutions such as more borrowing or temporary austerity, have resorted to inflating the money supply to survive (for a while).
And thus it shall be for us.
[Next time: How YOU are manipulated by government using the tools of inflation]