Inflation was a net 0 up until 1914, when the US switched to a fiat money system. There was about 85% inflation between 1914 and 1929, yet the government maintained a fixed exchange rate between the dollar and gold.
This imbalance I'm pretty sure led to all the runs on the banks in the banking collapse, as people finally realized they could nearly double their money by converting it to gold. This collapse continued until the government suspended gold exchanges.
What I find peculiar is I never see this mentioned in explanations for the banking crisis.
So true. The reason the head of Coca-Cola, a successful major corporation would do something as apparently outrageous as to agree to sell syrup at a price guaranteed forever was that the history of the US currency from its creation to 1899, when he made this contract, was one of a rock-solid dollar. According to the Federal Reserve itself (http://www.minneapolisfed.org/community_education/teacher/ca...), prices for goods fell over the decades as the dollar stayed solid and the industrial revolution increased productivity every year. It was clear to any intelligent person that, while prices for specific things fluctuated with supply and demand, a constant, reliable dollar combined with increasing productivity (due to technological improvements) made overall prices something that would go down over the long run forever. Why not agree to sell at today's prices forever?
Then the Federal Reserve was created in 1913 to allow the Federal Government to play a more active role in the economy and all that "solid as the US dollar" stuff became a quaint historical relic. According to the Fed itself (link above), prices that had gradually come down from $50 (for a basket of goods sized to show the index value as dollars) in 1800 to $29 when the Fed was created, suddenly turned around and shot up to ABOVE $700 today (est. Nov. 2012 value).
In other words, since the Federal Government decided to take a more active role in "managing" the dollar instead of merely guaranteeing it, they have managed to destroy more than 95% of its value.
It wasn't the CEO of Coke who was incompetent at managing finances; it was that he couldn't imagine a day when the US Federal Government would become so utterly incompetent at managing finances.
Something you gold fetishists might like to keep in mind is that for the first century of the US (and arguably quite a bit longer), the country was benefitting from massive amounts of virtually free capital, if you discount the fairly minor cost of driving Native American tribes off the land. When the US government needed to raise money in earlier times, it just sold off vast tracts of land for cheap. Obviously, this strategy couldn't go on forever, and by the time the west coast was properly settled the country needed to switch to a more conventional form of public financing, ie a central bank.
Seriously, if you have an entire continent at your disposal, running an economy is easy. Likewise, after WW2 most of the the rest of the developed world was in a shambles, and the US was the only industrial economy that hadn't been bombed heavily. Unsurprisingly, a long period of great economic growth followed, in time with the Bretton Woods system but not necessarily because of it.
I'm very interested in monetary theory, but a lot of gold fans seem to attribute stability or growth to the use of gold rather than extremely favorable economic conditions. If you back and read the the Wealth of Nations, there's a very worthwhile (if long-winded) explanation by Smith of how hard currency can act as a limit upon economic growth, as well as being corruptible in its own right.
Australia has a tiny population relative to its landmass. While it's rich in extractive resources (mining, minerals) from which much of its present wealth derives, it lacks both water and fertile land for agricultural production.
This itself is interesting: because Australia is an island continent, with few or no internal volcanoes or rift zones, the land is, literally, ancient, with many nutrients vital for ag production missing (one estimate I saw was that seeding land with an infinitesimal amount of iron would greatly increase production). Much productivity is due to windblown dust from the Indian subcontinent and south-east Asia. Even where irrigation is possible, evaporation causes accumulation of salts which degrade ag values. The first settlements in Sydney very nearly starved due to difficulties in producing sufficient food.
I do not even how you can call paper dollar a currency.
You cannot use something as a currency if:
- it can be manufactured easily
- it can change value from one day to another
- it is not dense in physical space (i.e. you do not need to carry buckets of it to buy something).
The paper money clearly does not respect ANY of these principles nowadays. The FED can print (and does) as much as they want to buy back toxic assets (remember the Krugman clown advising after the Net bubble in 2001 that we should create a housing bubble to stimulate the economy ? That really worked well for everyone, did it not?). The US Dollar is constantly losing value versus Gold since its parity was dropped for good in the 70s, and now you have such a galoping inflation than looking at movies 30 years ago make you feel old: then the bad guys were asking for "a million dollars" as something highly valuable/desirable, while nowadays if you do not cross the billion mark it is not considered as much anymore (Austin Powers made this very good point in a clever way).
Why do you think China is buying all the Gold it can currently to replace its stinky dollars?
> I do not even how you can call paper dollar a currency. You cannot use something as a currency if [...]
Currency is based entirely on concensus. Anything (ivory, sheep, even bits of paper) could be currency; the only requirement is that there are people willing to use it as a basis for trade. In other words, it doesn't really matter if you don't believe in paper currency as long as everyone else does.
Well, currency is based on consensus, certainly, but that is not enough to create value. A paper has not value intrinsically speaking. Gold and other metals have always had value for various reasons (either because of their physical/chemical properties or because of their rarity). So, the day the Dollar loses its consensus, you are left with worthless paper and you might as well use them in the toilet. The day Gold, Silver and other lose all actual value is not in sight. Net, you are safer saving some of your assets in those.
It's meaningless to say that the value of a dollar has been destroyed, because a dollar does not have a value. It is merely a unit for denominating, measuring, and comparing value. Only actual assets have value, like gold, or real estate, or companies.
That the size of the unit has changed over time does not mean than any value has been destroyed. It's like saying that the creation of the centimeter destroyed the length of the inch.
Your premise that inflation ("DESTROYING THE VALUE OF THE DOLLAR!") is always bad is hardly accepted enough to just throw out there and assume that everyone will agree with you. How many libertarians are there in this country? Not a majority.
There was a world war going on in the period from 1914-1917, when inflation of the dollar was at it's highest ever [1]. It's possible that the effect could have been much worse if we were still on the gold standard, as total war tends to drive up the price of precious metals.
Fiat currency isn't a bad thing. You can't build the largest economic empire in history when your currency is tied to the price of shiny rocks.
It's the same reason that you never see the press mention congress's role in the subprime meltdown.
Politicians that are liked by the media say "Bankers! Wall Street!". That's what gets shown on the nightly news and repeated. Most voters don't care to dig further. Partly because the truth is more complicated. Partly because it causes cognitive dissonance to think contrarily to the narrative being told in the media. Mostly because looking into details would take people away from Monday Night Football, American Idol, and Dancing with the Stars.
As one who works "on Wall Street" (remotely) I can assure you that we caused the financial crash deliberately. I personally spent a lot of time working on it and I am now back at it again! You just wait 10 years for the next cycle!
> This imbalance I'm pretty sure led to all the runs on the banks in the banking collapse, as people finally realized they could nearly double their money by converting it to gold.
Indeed:
> under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.
That's not what I said. I suggested that trying to maintain a fixed gold standard while inflating the money is going to cause a collapse.
I should add that many countries have tried to do something similar - pegging their currency to another, and then inflating their own currency. It always leads to a collapse.
This imbalance I'm pretty sure led to all the runs on the banks in the banking collapse, as people finally realized they could nearly double their money by converting it to gold. This collapse continued until the government suspended gold exchanges.
What I find peculiar is I never see this mentioned in explanations for the banking crisis.