by Richard Martin
There is no need for governments or central banks to “manage” the money supply and the economy. Inflation is caused by governments taking over the money supply and politicizing it for various ends. THIS is the cause of increasing economic inequality and centralization. It stems originally from governments wanting to control money and the financial system to finance their wars by avoiding taxation.
Inflation is basically the seizure of wealth by stealth. If the official inflation rate — i.e., based on CPI — is 2% per annum, then the value of what your money buys is halved in 35 years. If it’s 5%, the value halves in about 15 years. You only need to apply the rule of 72. Since the start of the latest round of “quantitative easing,” newspeak for money printing, the money supply has grown at about a 20% clip. That makes your money lose half its buying power in about 3.5 years! And that’s only the official CPI inflation. In actuality, it’s much greater than that.
In the second half of the 19th century, the world was on a gold standard, where all currencies were fully redeemable in gold at a set rate. In other words, gold was the money, and national currencies were issued on fixed ratios to that. For instance, the USD was approximately 1/20 ounce of gold, by definition. That meant that all currencies were fully interconvertible at fixed exchange rates. And global trade, investment, and industrialization exploded. In 1914, the world economy was more globalized and open than at any time previous to that and since then. Even the most recent wave of globalization, which is now unravelling at breakneck pace, was arguably not as effective and efficient.
Contrary to popular belief, the 20th century has been not only the most deadly, but also the most economically contentious and disruptive to international trade, industrialization, and equality of opportunity. The worldwide stock of gold increases by an average of 2 % per year, as does global productivity, primarily due to investment in new technology and capital. In the latter part of the 19th century, most prices were stable or falling on a gentle grade. What would have happened if the world had stayed on the gold standard? We’d all be richer now.
Unfortunately, all of the belligerents in WW1 went off gold when the war started, the most important being the UK in 1914 and arguably never really went back on it, at least without assistance from the US. In 1934, Roosevelt issued an order for all US citizens holding gold to turn it in for USD at the 1:20 exchange rate, then changed it 1:35, immediately devaluing the dollars they had just received. Nice eh? This stayed the official rate until 1971 when Nixon officially closed the exchange window (only for sovereign dollar holders) because allies were trying to exchange their eurodollars for gold, as had been promised at Bretton Woods in 1944.
It’s been downhill ever since then. If you want to see the economic and social effects of this default, check out https://wtfhappenedin1971.com. If you want to explain Trump and “populism” (I have problems with the term, but that’s for another time), it’s all right there.
© Richard Martin
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