A Nickel: The $1 Coin

jay Leno made a joke about the new $1 coin, saying the government already produced on, it is called the nickel.  Economists commonly state the dollar has lost 95% of its purchasing power since the institution of the Federal reserve system nearly 100 years ago.

Now this is not very compelling since few of us lived 100 years ago, and we think we are better off with cars and phones than with buggies and telegraphs.  We live a lot better, so who cares?

Also, at any given time, a man's good suit costs the same as the price of an ounce of gold.  80 years ago a suit and an ounce of gold were both $35.  Occasionally there is an exception to this rule, but pretty quickly the price swings back.  Sure today you can get a man's suit for $300, but it won't be very good. Right now $1300 is about right, and so is an ounce of gold.  Of course we are talking about a suit with excellent materials that will last 25 years or more.

But this is confusing... are we talking about gold which is relatively stable, or currency, which is not.  Gold certainly has not lost 95% of its value in the last century, it is still, well, good as gold.  The dollar has lost its value.

Here is what is supposed to happen in an economy: money is supposed to stay constant so the market can lower the cost and widen the access to material benefits and services, and innovators can introduce the new and better.  The poor gain access to what is good in a free market.

When the currency is manipulated, sure an ounce of gold will still buy a good suit, but far fewer people can get access to that level of goods and services.  Those who argue "we have it much better than 100 years ago" are ignoring the vast majority of those who in fact do NOT have it better than 100 years ago.

If the dollar had not lost 95% of its value, a suit would still be $35 and and ounce of gold would be so as well.  But everyone would be able to afford a good suit now and then, and a cure for cancer, which would be here by now, and countless other benefits and services.  Look at the relatively free market in cell phones and see what benefits come.

But once dollars are no longer a receipt representing gold in a vault, and coins are no longer silver and gold, then fiat "money" allows the powers that be to cause inflation by printing too much of the currency.  The result is most people lose out.  The genius of USA is to have enough safety valves so people like me do not complain about the system that robs everyone else of what is good and true and beautiful about life.  I got my suits, it's your choice to dress like a junkie.

This too is an example survivorship bias, since we do not have the witness of the people who were laid waste by war over declining yields and lack of innovation to alleviate shortages.  We do not have the witness of people who died from preventable disease, and so much else.

As purchasing power of a currency declines, we still have innovation, and some things do improve.  What is missed is what is not seen, what would would have had also.  We would have all of the goodies we yielded from innovation and efficiencies, but if the value had not declined we would have had capital for new investment.

Prices naturally drop, it takes government intervention to make prices rise.  It is no secret, in fact is is publicly stated, the job of the Fed is to introduce inflation.  Now they complicate matters by saying inflation brings stability, like war is peace and up is down, but let's not worry too much about internal contradictions when it is enough to say the Fed's job is to inflate.  Which they do.

If they did not, if the Fed did not exist, prices would naturally drop, in a free market.  A price of a suit would be the same as an ounce of gold, but instead of about a weeks wages, it would be an hours wage. With freedom, price dropping, division of labor, we would have so much more to choose from, and so much more access.

But in such a system the powers that be would have no power to maintain the status quo.  Love of money is the root of all evil.  Power comes from manipulating money, and that is the job of the Fed.

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