Observations By a Citizen: How Money Works Today
By Hal Rounds
Today, my wife and I bought a lunch at a Piccadilly restaurant. It wasn’t particularly special, but it cost us $40, more than I paid in 1964 for my first car. I gave $25 cash for it. Yes, it was only a 1947 Oldsmobile that wasn’t in good shape – but it ran, and that’s what I needed. It wasn’t a typical bargain – but you could find such deals from time to time. The price for a new one in 1947 was about $1600. Why does a routine lunch today cost so many “dollars?”
The process has a name we all know: “Inflation.” But how does it happen? All economic exchanges are basically forms of barter. In barter, a couple of people exchange one object for another, after agreeing on a quantity of one item that matches the valued number of the second. For example: during World War II, American prisoners of war in German POW camps would occasionally receive a cartons of cigarettes to distribute among themselves, and then either smoke or use as a “medium of exchange” to trade for other things that they wanted. Cigarettes were relatively scarce, and most guys smoked, so each pack of cigarettes was worth comparatively a lot when trading for routine objects. But, if a whole bunch of cigarettes came in, the value of each pack shrank. It would take more packs to “buy” a certain object. The “price” in cigarettes went higher the more cigarettes that were available, even though the actual value of what was being bought remained the same as before. Money works the same way. The “real” value of what is being bought hadn’t gone up, it was just the value of the cigarettes – or money – that had gone down. That is inflation.
During Roman times, one of the emperors was having financial problems. The medium of exchange those days was gold or silver coins. So, the emperor had the gold mixed with copper, to put more coins in circulation. But, each coin had less gold in it.
The Romans weren’t stupid, and soon demanded more coins to buy any particular object.
“Debasing” the coins is one way to start inflation. Using paper money is another way. The U.S. Dollar began as only gold and silver coins. But, in our “Civil War,” the Union was running out of gold, so Congress passed a law that let the government print paper money. And any seller had to accept the paper money as if it was actual gold.
Then, in 1913, the “Federal Reserve” (a private bank system that works with the government) was created. Congress and the Fed developed ways to “monetize” excess government spending. It starts when Congress makes a law to spend federal money – for instance, to grant money for local urban “redevelopment” projects. But there’s no spare money in the Treasury department to spend on these grants. Instead, Treasury issues bonds (basically paper – or digital – IOU’s} that promise the government will pay interest to the purchaser. Instead of selling the bonds to regular people who spend their earned dollars for each bond, however, Treasury “sells” the bonds to the Federal Reserve. The Reserve now has a new asset – the debt owed to them by the government. And this asset base lets the Fed make more loans, which eventually gets spent, requiring more dollar bills to be printed, going out into the general market. With more dollars in the market, but no increase in actual things to buy, each object for sale can demand a bit more dollars. Presto!, we have another little bit of inflation. Lately, this has become a frenzy.
Going back to 1964, we could buy a gallon of gas for a quarter and a dime – and get change. With today’s inflated money a gallon costs over $3.00 . . . But that 1964 silver quarter is today worth $4.05 (as of 11-10-23.) We can still get that gallon – by selling the silver for paper dollars – and get change! Today, a $35,000 car can be had for less than $2m200 face value of 1964 quarters. That old Oldsmobile would be $400, and our lunch would have come to about $3, silver. Don’t blame the stores and restaurants – it’s us. We keep electing politicians who buy our votes with more federal spending projects, and diluted dollars.
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