Tuesday, July 15, 2008

Money, Part 1

In the introduction and first post to this blog, we established how smart and accomplished I am. I am so very proud. As you can see by the title of this post, it is going to be about money. Why? Well... it is because politics are boring and there was so much I did not get. There is still much I do not get. However, when the girls were in 10th grade and we were homeschooling them, we were in a small five family co-op where us moms got together and team taught our girls. We met all day once a week in one of our homes. The host home provided lunch. Each mom took a different subject and was responsible for teaching the class and assigning homework. One of the moms taught Economics and the book she chose actually made a big difference for me in understanding politics.

Now, I took Economics at the Community College. I read the Wall Street Journal. I even got a good grade in the class. However, I didn't really get it. I knew enough to get the answers right on tests... but, I wasn't really clear on how those right answers worked. Does that make sense? Not to me either.

Anyway, the book is called, Whatever Happened to Penny Candy? by Richard J. Maybury. I liked this book so much that I used it last year when I taught two History classes with 20 students each when we covered Haym Solomon. You don't know who Haym Solomon is? Well, he was a Polish Jew who was a prime financier of the Revolutionary War and an important figure in the beginning of this nation. And if you are wondering how I taught a class with SD... it wasn't easy and I used a professional microphone. (for those not familiar with SD go here).

My intentions in homeschooling my children were to educate them to the best of my ability. I am not all that smart and would often stress over the enormity of our decision. Initially, I would check books out of the library from the adult section to try to get smart so I could teach my kids. It was frustrating because I just couldn't get things on a level that I could then turn around and make my kids understand. I started hanging out in the Children's section. It was there that I was finally able to get things.

Now, before you start thinking that I am some awesome mom who goes the extra distance for her kids, I need to confess that I have my limits. As in Algebra. I just simply did not love my kids enough to re-learn that stuff (if you are a kid... as in Double Shot... you have to learn it anyway!). I started to. I even had my own notebook where I kept the lessons I did. I think I did 15 or so of them. One day Mr. Macchiato came home and I was near tears. I had done a problem and re-did it I don't know how many times. I did not know what I was doing wrong. I couldn't get the answer right. He took one look at it and told me I had the answer right and that the book was wrong. Whu?!?!?! That was enough for me. If I couldn't figure that out... I just didn't want to do it. You might be sitting there thinking that the fact that I actually had the correct answer should have spurred me on. Nope. I already told you I'm not that smart. All three kids had to take remedial math when they were put back in school. Sorry. (and so you know, I say that like Simon, one of the judges on American Idol).

So, here we are. I am starting a series on politics with money. Remember the famous line from the movie Jerry MacGuire, "Show me the money?" Well, I am going to have my own catch phrase, "Follow the money." In order to follow the money, you need to understand money.

I want you to go dig around in the bottom of your purse (in your pocket if you are a dude... or in your wife's purse... and please, for the love of Pete, not your mother's purse... unless she says it is okay and you are under 18... if you are 40 and living with your mom... get a job!). Pull out a penny, nickel, dime and quarter (most people don't have half dollars lying about in the bottom of their purse or in their pockets but if you have one, pull it out too. If you are 40 and living at home.... and your mom is over 70... she'll probably have a half dollar in her purse... and if the previous comment about getting a job offended you, I am sorry. You might just be a nice guy helping his mom out. In which case, you are all right!)... where was I? Oh, and pull out a dollar bill.

I want you to really look at this money. Look at the dates, what is written on them, and just get re-acquainted. Most of us haven't really looked at money since we were little kids. The penny and the nickel have smooth sides while the dime and quarter (and half dollar) all have groves. Take a minute and really look at the grooves. Do you see the copper layer there in the middle? The grooves are called reeding and the metal is nickel-zinc clad together with the copper. That is why they are called clad coins. Check out the dates. You will see that none of the clad coins are dated before to 1965. That is because prior to 1965 these coins were made of 90% silver. And guess what? None of these are really coins. They are tokens. Coins are made from precious metal like gold and silver. Hang onto that dollar bill. I will get to it later.

No one has ever liked taxes. They've been around a long time. In the bible the tax collectors were despised by the people. Do you remember the story of Zaccheus? The little dude who had to climb up a tree to see Jesus? Yeah, he was a tax collector. That meant he had no friends.

When the Roman government discovered that people didn't like being taxed they began counterfeiting by shaving the edges off of coins and using the shavings to mint new coins. It was called clipping. The Roman people weren't dumb. It wasn't long before they noticed some coins were smaller than others. They either wouldn't accept them or they reduced the value... as in something that cost one coin they would require two clipped coins.

Hundreds of years later, people developed reeding by cutting notches into the coins. If the notches were missing the coin had been clipped. Since reeding made clipping obvious, a new way of counterfeiting was started. When coins went through the treasury they were melted down and a base-metal like copper was added in. This is called debasing the money. Have you ever heard of Gresham's Law? I hadn't. It is a law of economics and says bad money drives good money out of circulation. The Roman people knew their money was losing its silver. They started saving the high silver coins and only using the low silver coins. This happened here in the U.S. Before 1965 the clad coins contained 90% silver. After 1965, they only contained 40%. Today they contain zippo, nada... none. The American people started saving their old silver coins and only spent the debased, clad coins.

Now back to that dollar. What exactly is money? It is the most easily traded item. A real coin is a disk of gold or silver and has a hallmark stamped on it. The hallmark is the name of the mint that made the coin. The weight of the coin and the fineness of the metal is also stamped on it. The hallmark lets you know how good the coin is... not unlike trademarks today, such as Nike. During the Middle Ages there was a mint that made a one-ounce silver coin called a Joachimthaler (the Joachimthal mint in the Czech Republic). Over time it was shortened to thaler, then to daler, then to dollar. Dollar means one ounce of silver.

People worried about what to do with their gold and silver when they weren't using it. The money warehouse was invented and people would be given a receipt saying they had deposited a certain amount and that the owner of the warehouse had to pay the person that amount... like an IOU. The warehouses became banks and the IOU's banknotes.

Check out your dollar bill. Above Washington it says, "Federal Reserve Note." Up until the 1960's it said, "Silver Certificate," and could be exchanged for one ounce of silver. To the left of Washington it says, "This note is legal tender for all debts public and private." The government printed too many Silver Certificates to pay for what it was buying and didn't have the silver to back them up. Only Federal Reserve Notes are printed now and they are just paper printed in large quantities. The legal tender statement is what gives it value.

In 1270 A.D. a bad dude named Kublai Khan was in charge of a government ruling most of Asia. He wanted to buy a bunch of stuff but was afraid to raise taxes. He invented paper money. If he needed gold he would write the amount of gold on a slip of paper and sign his name to it. Only people wouldn't take it. So he passed a legal tender law saying they would be punished if they didn't accept it. Everyone was scared of him so they took his paper money. In the 1790's the French did the same thing and if you didn't accept the phony money, you got your head chopped off by the guillotine. During the Revolutionary War anyone who violated the legal tender law was charged with treason and thrown in jail. Today, if someone owes you money and you refuse to take the Federal Reserve Notes... their debt is cancelled and they don't have to pay you.

You might be wondering why this information is important. You might already know this stuff. I did not. I went to public school and dropped out of Community College and I had never heard any of this. Well, it is important in helping you understand inflation and recessions. It was for me anyway. You might be smarter.

In the next installment of The Uneducated Housewife's Guide to Politics for the Uninterested, we will take a look at inflation and recession.

8 comments:

Roland Hulme said...

Funny - I went to university and did joint honors in history. I taught history on the summer program at the American University of Paris... Studied French for five or six years... But it wasn't until I was OUT of school and living on my own that I really got motivated to LEARN and I did much the same as you. Went to the library. bought books. Studied on my own. I was motivated by wanting to speak French when I was living there. You were motivated to know the stuff which you were teaching your kids (which not even some teachers bother to do.)

Very admirable!

When I came to America, I read 'US History for Dummies' so I could get a good overview of the subject. Sometimes, books for kids are the best way to get an introduction to the subject.

Great post! Money's a funny thing. I've worked in pounds, pence, francs, centimes... When the Euro came in, that was weird. 20% inflation across the board!

A 'pound' used to be worth a 'pound' of the gold in the British vaults (until Gordon Brown sold it all slyly for below market value.) Now it's worth $2. Go figure!

noble pig said...

Wow that was really interesting. Loved it...I had forgotten about all the clipped coins.

Learning is lifelong...it wasn;t until I got my second Bachelor's degree that I really loved the process.

Two Dogs said...

Yeah, where we going with this, ma'am? Are you learning this right now as we go along? And what is motivating you to do this?

Sorry, philosophy is my favorite subject. And it's a dying field.

One Salient Oversight said...

Money's usefulness and value is in its ability to be exchanged for goods and services. Without a method of exchange, a market falls back into bartering.

Gold and other precious metals were once used as money. As the world became more economically unified, currencies were backed by stores of these precious metals.

There were, however, problems with this - one being that the value of money was tied to the supply of these precious metals, such as gold. This meant that nations could never be fully in control of their currencies, and that mining companies were defacto central bankers. If a mining company discovered lots of gold and flooded the market with the product, world currencies would be affected.

This is why Bretton-woods was abandoned and the gold standard abolished and why countries now issue fiat currency. Despite the fact that such currencies had nothing "backing" them, they were nonetheless valuable because nothing else could be used as a method of exchange between goods and services (at the level required to run an economy).

The problem today is not that money is issued by fiat, the problem is that - especially in the case of the USA - Central Banks (such as the Federal Reserve) have not been judicious in controlling broad price changes.

At present, interest rates in the US are below inflation levels. 10 year bonds are at 3.93% while inflation is at 5.0%, which means that real interest rates in the US are negative.

The Eurozone, by way of comparison, has a 10 year bond rate of 4.38% and an inflation rate of 4.00%, which means that real interest rates are positive (though not by much).

My country, Australia, has bond rates of 6.32% and inflation of 4.2%, which means that real interest rates are much higher than both the US and the Eurozone. As a result, the Australian dollar has a very high value these days.

Central Banks control the value of currency by their use of monetary policy (such as raising interest rates). When central banks remove money from the money supply this way, they both decrease inflation and increase the value of money.

The Federal Reserve under Bernanke has made some very serious errors by lowering interest rates during an inflationary period.

I sympathise with people like Ron Paul and others who are upset that the US dollar has dropped in value so much over the years as a fiat currency - however I would point out that this process is not because the gold standard was removed, but because central banks have simply been careless in their money creation.

In short, the solution is not to go back onto the gold standard, but to increase interest rates.

Coffee Bean said...

Two Dogs,

I am trying to learn more about the FED and really understand how it works. I'm also trying to get a better grasp on the big picture as well as the local picture. I am hoping to present both sides of things because I want my children to think about it for themselves... and I am desperately trying to do it in such a way that they don't just check out on me. Which they probably will anyway... you know how kids are!

One Salient Oversight said...

CB,

One of the best places to start understanding the Fed is to wrestle with and understand Fractional Reserve Banking.

It took me a while, but I eventually began to understand it.

Two Dogs said...

OSO< Jimmy Carter was not good for our country and he istituted policies exactly like you are advocating. Intentions mean nothing, accomplishments do.

The amount of money in the system is irrelevent if everyone is unemeployed. Want to kill a bunch of folks and make everyone unemployed? Do exactly what you are advocating and you creata an economic environment like the one in Zimbabwe.

Palma said...

Good words.