When our country was founded, the recent experience of the framers of our Constitution gave them a healthy fear of unbacked paper currencies. The Coinage Act of 1792 sought to establish a sound monetary foundation for the young country based upon gold and silver coins. The Bill included provisions for private citizens to bring their own silver and gold bullion to a US Assay Office in order to be minted into coins, coins which could be used as legal tender. This provision allowed silver and gold to lubricate the workings of the marketplace by transforming these hard assets into readily recognized and portable stores of value. The coins became a handy device by which to capture and retain the value of a man's accumulated labors.
Jean Gentry, Chief Counsel for the US Mint, was kind enough to answer my related questions. Click on the thumbnail above to read a full size version of her reply. She recounts how subsequent actions of Congress effectively rendered the Coinage Act into a relic by 1878. In the years since, we have seen the rise of paper currency which, at first, was tied to gold and/or silver. Decoupling from hard assets was finalized by 1971. Since then we have used simple pieces of paper, IOU's called Federal Reserve Notes, as money.
Solomon was no slouch economist. He viewed the importance of standardized weights and measures as a matter of divine concern. A false balance is an abomination to the Lord, but a just weight is His delight (Prov. 11:1). Money, which is a measure of value, serves us ill when it becomes a sliding scale. An "inflating dollar" is simply another way to describe a balance that keeps changing, a weight that keeps losing its heft.
The guys who authored and approved the Coinage Act had a good idea, one that served our country well for decades, and one that could help us get out of the economic mess we are in. I am under no delusions that we can turn back 150 years of monetary drift in one swift turn. This will take time. But I think Ron Paul has outlined a viable plan for a healthy transition. Just give Americans a choice. Let them decide whether they would prefer to store their wealth in a stack of IOU's or in a stack of gold and silver coins. Here's what he is proposing:
All the huffing and puffing about how to rescue the economy leaves me
bemused. How is a problem created by the proliferation of credit
going to be solved by an increase in the proliferation of credit? Our future is better served when we become LESS dependent on credit, not MORE. Remove the hindrances to becoming a nation of savers. Who would not want to save money in the form of hard assets if it was exempted from capital gains taxes? Removing this "inflation penalty" against hard asset saving makes great sense. Let's move forward by going back to 1792!
I just started reading a book entitled "Crash Proof: How to Profit from the Coming Economic Collapse," written by Peter Schiff. Mr. Schiff was one of Congressman Paul's financial advisers during his primary bid for the Republican nomination, and he has some additional insights into the economic hole into which the United States has crept that I think bear repeating here.
I sincerely doubt that the United States government will take the kind of measure you suggest anytime soon because of something you mention in one of your earlier blogs: as the trade deficit and the national debt grow, the federal government has an incentive to devalue the debt by continuing to inflate the currency. Now, it has to conceal these measures(which it does by playing with the CPI and PPI) in order to continue to keep foreign countries lending to us and consumers buying on credit.
But, by endorsing a "sound money" plan, they would both limit their ability to erase debt through inflation, and tip their hand to foreign investment and consumers that we're, in fact, broke. Outside a kind of compulsion that vastly rivals political pressure, like a war or a -ahem- massive market correction -ahem-, they will not ever pursue such a course correction--even one as sound as the one you describe. Those two things are what keep the near-dead United States economy propped up, albeit only temporarily.
As psychologists sometimes say, "no one changes until the pain of change is less than the pain of remaining the same." Right now, there really isn't enough pain out there to motivate the United States to make a radical departure from its failed experiment with monetary and fiscal policy. One day, the world will wake up and realize that we don't manufacture anything anymore; will no longer permit us to export inflation to them by right of our dollar's status as the world-reserve currency; and will no longer lend us American deadbeats any money. That will cause a lot of pain. Will it be enough? You tell me.
Posted by: AC | October 21, 2008 at 03:21 PM
AC,
I am under no delusions that my suggestion will be taken seriously. (You are correct in your assessment of why.) But I find it a great illustration of what "serious measures" would actually look like. The steady stream of proposals that are just "more of the same" suggests we're not really that desperate, despite all the sound and fury to the contrary.
Posted by: Jim Fleming | October 21, 2008 at 09:54 PM