Economics 101

A wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.” —Thomas Jefferson, 1801

The Statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single persons, but to no council, or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” —Adam Smith, 1723-1790

The best way to destroy the capitalist system is to debase the currency.” —Nikolai Lenin, 1870-1924

Property is the fruit of labor; property is desirable; is a positive good in the world. That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another, but let him work diligently to build one for himself, thus by example assuring that his own shall be safe from violence when built.” —Abraham Lincoln, 1809-1865

America is great because it is good. When America ceases to be good, America will cease to be great.” —Alexis de Tocqueville, 1805-1859

The great rule of conduct for us in regard to foreign nations, is, in extending our commercial relations, to have with them as little political connection as possible.” —George Washington, 1796

Lesson 1: Monopoly Money

Coins:
Grab some spare change and take a look at what you’ve have. Some coins have groves on the edges called reeding and some do not. The reeded coins are composed of copper covered on top and bottom with a nickel-zinc metal. These are called clad coins because the two metals are clad together to make the coin.

A coin is a disk composed of precious metal (i.e. gold or silver). Hmm… it doesn’t look like any of the coins you have are made of precious metal. What you have there is not a bunch of coins. In fact, what we walk around all day with jangling in our pockets are only called tokens. These clad tokens, before 1965, were composed of 900 fine silver (that means it is 90% silver and 10% base – another non-precious metal added for hardness). This all has to do with inflation and recession but more on that later.

Dollars:
Pull out a dollar bill. At the top of the bill it says, “Federal Reserve Note.” Long ago this would have said “Silver Certificate.” Now have a look to the top left of George Washington’s head. You’ll see it says “This note is legal tender for all debts, public and private.” Hmm… legal tender? As in what you start fires with? More on this later.

Lesson 2: Tanstaafl?

During the 1970’s and early 1980’s most western civilizations and even some eastern countries like Japan experienced a double-digit inflation. Double-digit means that each year prices are rising at the rate of ten percent or more.
For instance, durring a double-digit inflation, a magazine that cost you $1.00 lat year would cost you $1.10 or more this year.

Inflation this widespread and severe hasn’t happened in the U.S. since it’s founding (with the exception of the inflation of the Confederate dollar during the Civil War). However about 20 centuries ago the Roman empire had its own double-digit issues. The Roman government was just like all big governments. It had public works projects, like bridge building and roads. It had wars. And it also had welfare programs.Welfare is the practice of giving things to poor people. Governments today have the same thing for rich people… yup they do, it is called a subsidy (i.e. giving a rich person or big corporation land, money or buildings).

This was all well and good for the Roman government’s PR but they had one big problem. They ran into a law of economics. The slang for that law is tanstaafl (pronounced tans-t-awful). It’s an anachronim which stands for:

There
Ain’t
No
Such
Thing
As
A
Free
Lunch

Basically: nothing is free, you can’t get something of value for nothing. It has to be paid with time or money. This was a popular term in The Great Depression. The Roman government wanted all kinds of things for wars and welfare and the money had to come from somewhere; and it did. Just like our modern governments they had and addiction to spending. Any big government pays for things with the peoples money through taxes. And so it went more spending, more taxes, more spending, more taxes. No one like taxes, no one; Romans included. Soon the Roman government discovered that when taxes get to high, people get mad enough to revolt and overthrow the government – like what we did to the British during the American revolution. Viva Revolution! So they couldn’t raise taxes any more but they still wanted to buy things. What a conundrum.

Their answer? Counterfeiting. They couldn’t print money back then like what we do today. The Roman currency was a metal coin called the denarius. What they would do is when ever they would receive taxes they would take the coins and clip them. Clipping coins means they would shave off the edges. They would use the shavings off of each coin to make more coins. So now they had even more coins to spend.

The Romans weren’t stupid people. They eventually figured out that the coins weren’t weighing what they were supposed to be worth.They either refused the coin or increased the price. Our coins… excuse me, tokens today have been reeded to guard against clipping. When the fraud was found out the government had to switch to plan B.

Plan B was to take all taxes coins, melt them down and mix in a base metal like copper and remint the coins. Every year the coins were melted and mixed, this is called debasing the money and it went on for years. In 54 A.D. the denarius was 94% silver. By 218 A.D. it was down to 43% and fifty years later in 268 A.D. it was less than 1%! Our half-dollars in 1964 were 90% silver. Five years later it was down to 40%. Today? 0%.

The Romans figured this out eventually also. So when they would get a coin with a high percent of silver they would save it and spend the less valuable coins. Eventually only the crap coins circulated. What was happening there was Gresham’s Law: bad money drives good money out of circulation. Same thing happened in the U.S. The Roman government needed money, but couldn’t raise taxes for fear of a revolution, so they started counterfeiting.

Lesson 3: Inflation

So the denarius was devalued. The more coins in circulation the less worth. So what? This all ties into the law of Supply and Demand: when the supply of something goes up, the price per unit goes down. In other words there are so many pencils around that they are worth about 10 cents. If there was only one pencil I’d be worth a shit ton. This applies to money just as in anything else. If there aren’t a lot of dollars printed and in circulation the dollar is worth more and you can buy a lot with that dollar, print more money it is worth less and you need more dollars to purchase stuff. In 100 A.D. a bushel of wheat cost 3 denarii. By 334 A.D. it cost 2 freakn million! Hmm… I sense a pattern here.

What I’m talking about here is inflation. The Fed prints more money (or inflates the amount in circulation) and the dollar is worth less. And this is not just an American problem it’s world wide. The French, British, German etc all are inflating. So prices rise because it takes more currency to buy things because the currency is worth less. Extra money has been created by the wonderful people in government to fuel their massive spending problem. Now, prices rise and fall when there is no inflation but inflating currency causes almost all prices to rise, hence the worry. So, inflation causes high prices that’s shitty. Anything else? Oh yea but more on that later.

Lesson 4: Legal Tender?

So what is a dollar, eh? That fancy looking paper in your pocket? Nope sorry, along with your coins… damn, i mean tokens (sorry its hard to break the habit), your so called dollar is worthless. A one-ounce ingot bar of silver is a real dollar. “Well, it says one dollar on it. It must be one!”, you might say. Bullocks! If i put “One Basket Ball” on a slip of paper, would that make it a basketball? Of course it wouldn’t.

We all throw the word money around but what is it really? Well it is the most easily traded item. That’s it. Now, you could trade pencils, or basketballs, girl scouts, TV’s, marbles, anything. But not all are easily traded, corrode or degrade as little, or hold their value as much as precious metals. More later…


 
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