I need you all to answer a question that has been bugging me to death. I’m currently reading The Creature from Jekyll Island by Griffin. I am currently reading up on inflation. According to Griffin, inflation occurs when the government subtracts from our purchasing power to give our paper money value. This is due in part to the fact that fiat currency does have an internal value. Here is my question: what does he mean by “purchasing power?” If paper money does not have any real value, where does the purchasing power come from?
This doesn’t make sense to me; maybe it’s because I have a banging headache. We lose purchasing power because our paper money [currency we use by default, due to legal tender laws] loses value, not gains. So, our dollars are worth less.
But paper money, in its own right, doesn’t have any tangible value to it. If that’s true, then the money needs to value from another source, right? God, this is confusing.
Money has purchasing power because it is accepted by producers or entrepreneurs in exchange for their goods. It’s purchasing power depends on the availability of goods that can be purchased with money. The more things there are that you can buy, the more purchasing power the money has.
Money is a commodity, just like oil or wheat. If you have an increase in supply the demand for it reduces. Oil or wheat are real wealth. They have intrinsic value - a usefulness. If you were stuck on a desert island with a barrel of oil or a bushel of wheat then you can eat it or use it for energy. Alone on a desert island with a bag of dollar bills and you have nothing of value. As for value, the difference in 10 barrels of oil and 1 barrel is 10 fold. It required 10 times the effort to produce 10 barrels and you inherently have 10 times the wealth from it. As for the creation of paper money, the difference in a 1 dollar bill and a 10 dollar bill is the ink it took to add the extra zero. In the banking system, it is the effort required to press the zero key. In a fiat money system, where the central bank has a monopoly and legal authority to counterfeit the money, it takes as much effort to create the 10 dollar bill as it does the 1 dollar. When the Fed creates money out of thin air the new money increases the supply and therefore dilutes the already existing supply of money. When the supply of money has been increased you have more money but the same number of physical goods that can be purchased with that money. Therefore, more money chases the same number of goods. When that happens you will need to spend more dollars to secure the same number of goods. Higher prices are called price inflation. Higher prices result because the previous purchasing power of the money has now been slightly diluted due to the addition of new money to the system without a commensurate increase in the number of goods that that money can buy.
Paper money, fiat money, is not the money chosen by participants in the market. The market, throughout history, has always chosen a commodity for money that is the most marketable and broadly accepted. That is: gold and silver. We don’t use gold & silver because we are forced by gov’t by their legal tender laws to use only the pieces of paper that the gov’ts central bank issues. The market did not reject the gold standard for money. The gov’t forbids its use and threatens the use of force otherwise by their legal tender laws. This is because gov’t wants monopoly rights over the creation of money. They come up with excuses and propaganda why they must do this. But, mainly, gov’t needs paper fiat money so they can counterfeit the money so they can confiscate the wealth from the economy in order to grow gov’t and/or funnel money to special interest groups and to centrally plan and control the economy.
I am currently reading up on inflation. According to Griffin, inflation occurs when the government subtracts from our purchasing power to give our paper money value.
does griffin say those words. that doesnt make sense to me.
many (or whoever posts and writes articles there) at mises sites said inflation was an increase in the money supply. with government ‘money’ mandated it is perhaps more of an increase in currency. also many (or someone using fake names) at mises sites claimed inflation is harmful…it increases prices (price inflation), hurts savers, etc. my belief is that they are lying in many cases.
i dont understand what you mean when you say the govt subtracts from our purchasing power to give paper money value. could the paper money as you call it have value even the govt added to OUR purchasing power??
unless there is some history i am unaware of many american colonials were using spanish (minted) coins even though they werent subjects to the spanish crown.
This is due in part to the fact that fiat currency does have an internal value.
this doesnt make much sense either. i guess money users…humans, ie.. may instictively value one form of money over another form. internal cellulose fibers??? can you provide the griffin words???
Here is my question: what does he mean by “purchasing power?” If paper money does not have any real value, where does the purchasing power come from?
i would see if griffin has an email address…maybe you could get internal verification.
Inflation is the increase in the supply of money (or currency). Mainstream economics don’t consider what causes prices to rise. They hide the cause. They now only call the effects “inflation”. Austrians refer to rising prices as “price inflation”, which is the effect of inflating the money supply.
caravelle,
Who’s lying? About what? That inflation and increasing prices does not hurt savers? Mind explaining how it doesn’t? Not only does it hurt savers but the biggest most damaging part about inflation is that it distorts the structure of production in the economy and causes a depletion and/or waste of real capital. The distortion causes projects to be started that will not have sufficient material wherewithal to complete. If inflation is continued then you will end up with a “crack up boom” where the purchasing power of the money rapidly declines in value. Some call it “hyper-inflation”. To prevent this, the central bank has to slow the rate of inflation to prevent rapid price inflation from happening, which causes interest rates to rise. When this happens the malinvestment and distortion in the structure of production is revealed. Then you need the economy to restructure to liquidate the malinvestment and all the unsustainable burden of debt. This is where the depression or “recession” comes from.
OK, let me see if I understand this. You’re saying that the reason my twenty dollars have the purchasing power of a twenty is because of the laws that the government has on the books that deem it 20?
No, you are using that Federal Reserve Note with the number 20 printed on it because gov’t says that it must be accepted for the repayment of all debts. As for the number or amount of goods that the 20 note can command depends on how productive the economy is and therefore how much stuff there is that you can buy with the money.
I certainly agree that What Has Govt Done to Our Money is the place to go. Get it free right on this site.
Cliff Notes: The govt decides you cannot use anything else for money but what they print. This gives it some value, because everyone wants to buy and sell things. Also, other countries cannot buy American things unless they pay for it in US dollars. So if people in Japan want to buy American stuff, they will buy US dollars, then use them to buy US products.
When the govt prints more money, it means they have given themselves a free gift. Because they use this new money to buy whatever they want. Since the govt always buys in huge quantities, it means there is less to go round for everyone else. Less land, less raw materials, less workers, less cars, less everything.
We all know what that means. When there is less of something to go round, the price of it goes up.
Bottom line: More money printed means govt gets lots of stuf free, and everyone else pays more for it. So that The purchasing power of the dollar has gone down. What you could once buy for a dime you now have to pay 25 cents for, and so forth.
But it gets worse. When the govt gets a reputation for doing this over and over, people get smart. They charge TODAY the price they think they will get after the next round of printing. Guess what? The govt sees that it will have to print more than it used to to get the same thing. So prices go up more than expected, so people say “Guess I’ll have to hike up my prices even more right now.” Vicious spiral time.
Why numbers? the dollar is the unit of account. Once upon a time before 1933, when FDR confiscated all the gold from Americans, when you held a US dollar it meant that you held a ticket or piece of paper that was redeemable for 0.048oz of gold from the US treasury. Just like there’s 60 seconds in a minute or 4 quarts in a gallon there was $20.67 dollars in an ounce of gold. Gold was money. Dollars were just the paper ticket claim to the gold. If you had $41.34 dollars then you actually owned a claim to two ounces of gold, or twice as much. Twice the amount of physical stuff - something that could not be created out of thin air. Something that took significant capital investment in heavy equipment and labor to mine and smelt in order to produce.
The dollar today is currency. It is the medium of exchange. You trade your labor with your employer while producing goods & services (or something of value) to earn the ability or right to secure goods from the economy immediately or later in the future. You obtain medium of exchange (dollars) on pay day and may decide to trade some of it for consumer goods immediately. The numbers represents the amount of currency you have. If you have twice the amount of currency then you can secure twice the amount of goods. You may choose to trade some of your medium of exchange for some of those goods you produced at your job. You may spend all your medium of exchange on all of the products of your labor at your job. If your employer doesn’t turn a profit and if you exchange all your currency for all the goods you produced, you end up consuming everything you produced. If your employer turns a profit, then after you spend all your currency on your products, your employer will still have some product left over. This is the income he earns. He may choose to save it or consume it as well.
Here’s food for thought. Your labor produces stuff at your job. You trade your labor for medium of exchange. You have earned the right to use that medium of exchange to go into the economy and secure goods that have been produced by people’s labor. Now, suppose, there is a counterfeiter that controls the issue of medium of exchange. This counterfeiter creates some of the medium of exchange out of thin air and gives it to his friends so they can also exchange it for goods in the economy. They have produced nothing of value or wealth to give them the right to trade that currency to secure goods. Yet, they go and trade it for goods that you, a producer, are entitled to secure. If your employer has profits, surplus goods, then there will be enough products for both yourself and the counterfeit currency spenders to secure. If there isn’t, then if you both want to buy the same fixed number of goods then you will both bid up the price of the item and the one who values the item more than their currency will get it. What happens to the profitable employer who now has no products left over? He has currency, not real savings. His real savings are all consumed by yourself and the counterfeiters. He only holds medium of exchange. What if there are no other materials to buy with it? He thought his currency was worth something of value. If the counterfeit money spenders borrowed the new money, the holder of medium of exchange has to wait for the debtor to produce and forgo consumption (pay back their debt) for there to be something of value for the holder of currency to buy.
OK, so here’s my other question: if the number of goods increases, what does that mean for inflation? Does the inflation slow down, or is the supply of money that is being printed so big, that the increase of goods cannot match the amount of money being printed.
Men who can create money out of nothing can do so only by monopoly right granted to them and enforced by the threat of violence of government.
Here’s how I see it. Money exists to facilitate trade. It’s a tool of exchange - exchange that doesn’t occur unless there are goods produced by people who produce them. People who want to obtain goods from one another must do so by trade and exchange value for value. When you accept money in exchange for your effort, you do so in order to exchange it for the product of effort of others. The exchange of value for value. Therefore, money (in an honest system) is a piece of paper which is a claim on the labor of others who produce.
Honest people obtain (earn) money based on their abilities and productivity. Honest people know they can’t consume more than they produce. If gold is money, capital and labor must be invested to produce gold. Recipients of that gold receive a token representing the labor and productivity that created it. The gold money was not created out of thin air. The gold money commodity is therefore a scarce resource because of the effort involved to produce it. Men who obtain it to trade for other items have to either expend labor and investment to produce money (gold) or else be more efficient at producing something else of value to obtain money. If they are not good gold miners then they will be better off producing other commodities or products to exchange for money.
If money can be created out of nothing (thin air) then it is no longer a scarce resource. Dishonest people can therefore obtain it without expending their labor and investment. People who create money out of nothing and exchange it for honest labor & products produced by others do so by monopoly right granted to them by gov’t. They use this counterfeit money to exchange zero production or labor for products made by the effort/labor of honest producers. If gov’t spends the counterfeit money then it is expropriation. Legal tender laws and monopoly rights on the creation of fiat money enables dishonest men to trade something they obtained with minimal labor (paper money, with value because of force of gov’t) for something of greater value from productive honest people.