The Results of InflationomicsTM
Originally, the U.S. dollar was defined as 371.25 grains of pure silver (plus an additional 44.75 grains of alloy for durability), or 24.75 grains of gold (plus 2.25 grains of alloy for durability). Notice that this is a 15 to 1 ratio of silver to gold. Traditionally, the ratio of silver to gold varied between 15 to 1 and 16 to 1, depending on the supply that was mined.
But in 1914, with the advent of the Federal Reserve Bank, paper currency was introduced as a money substitute, fully redeemable in gold or silver. And in 1934, after twenty years of printing more paper currency than there was gold in the Treasury, the U.S. paper dollar sank in value relative to gold. This necessitated the removal of gold coins and gold certificates from circulation and gold ownership was made illegal in the land of the free and the home of the brave. Foreign governments, however, could continue to redeem their U.S. dollars for gold.
Paper dollar printing continued through WWII, the Korean War, and into the beginning of the Vietnam War before silver too became uneconomical to use in the United States. And in 1964, coins made of 90% silver were replaced with sandwich coins made of nickel and copper. Of course, the printing has continued ever since then and 1981 was the last full year that pennies were made of copper. In time, even the metal that pennies, nickels and dimes are made of will be worth more than the dollars they proclaim to be part of. When that happens, those coins will cease to be minted and change will have to be made with paper dollars. But we’re getting ahead of ourselves…
In 1971, the final straw in the separation of money and paper currency was made by President Nixon when he announced that (we are all Keynesians now) the U.S. government would no longer back its currency with gold and foreign governments could no longer trade their paper dollars for gold. Thus, ended the backing of the paper currency with money, and the establishment of a purely fiat currency.
By breaking the tie between gold/silver and the U.S. paper dollar, the U.S. government, through its central bank (the Fed), was freed from the constraints that gold/silver provided. In other words, the U.S. government could issue its paper currency in unlimited quantities without the expense of mining, minting, and storing gold/silver. And as long as people accept that paper currency (which everyone has come to think of as dollars) in exchange for things of value, the U.S. government will continue to get away with exchanging paper with ever larger numbers on it for things of value.
At some point, of course, people will realize what the U.S. government (and every other government in the world) is doing and reject those un-backed paper dollars for what they are…worthless pieces of paper. At that point, the U.S. government will either have to back its paper currency with something of value, or use its military might to force its worthless pieces of paper down its citizens’ throats in return for things of value. My bet is that it will try the latter approach first, and when that fails, they will eventually try the former approach.
In the meantime, you may find it interesting to note that one U.S. dollar currently purchases roughly 16 grains of silver (or about 4% of its original value) and approximately .29 grains of gold, or about 1% of its original value. (Making today’s silver to gold ratio about 55 to 1.) Those are the results of 98 years of inflationomics.TM Pretty powerful idea, isn’t it?
Robert Jackson Smith