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dmindock
Sneak
163 Posts
    
 | | 07/24/2006 10:43 PM |
| Thank you for the correction on the timeline as Harbinger was released in 9/2003. That would make a 50% rise in prices over 4 years so that would be 10.5% year over year.
It’s good to see that people actually care about the world they live in, most people, even bankers have no or little idea what currency actually is. Scary but true.
Inflation is defined as growth in the supply of money. This definition has been with us since before the time of Christ. When money is created it must go somewhere until it is destroyed in a bankruptcy or debt forgiveness.
Increasing the money supply increases the price of goods, too much money chasing too few goods. An increase in productivity reduced the cost of goods, too many goods chasing too few money. Before the Federal Reserve was invented in 1913 America went through a reduction in prices relative to money for over 100 hundred years.
How is it possible to print money, and even have a currency which hyperinflates like the Civil War Greenback and still have prices decline. This is because before 1913 banks created currency through the extension of credit. Individual banks all created their own currency. Each State had their own State banks called “Pet” banks and they all created their own money. All of these moneys competed with each other. By law each bank with the exception of Federal Banks must have gold in reserve in order to extend credit.
The competition between currencies combined with a gold requirement stymied the banks from printing money out of control. If a bank printed money through lending and didn’t have the gold reserves to back it up, then the bank could fall to a classic “Bank Run”.
The 19th Century was also a time of high gains in productivity lead to falling prices. Basically the money supply was constrained. This all changed in 1913 when all the banks where cartelized under the Federal Reserve System and only one currency could exist within the country. At this point the currency could be extended without regard to internal controls.
In the 1870’s a man by the name of Jay Cook, the richest man in America at the time gets a law passed that for every dollar of government debt in a bank can be used just like an once of gold. This has the effect of banks stockpiling government debt as a basis for extending credit. The ratio between gold and paper money is greatly diminished.
World War One starts in 1914 in response to the Bank of England extend its economic power by putting other countries onto a “Gold Standard”. This “Gold Standard” states that each country shall pay out gold upon demand and that their currency shall have a fixed rate of exchange with gold. However, the agreement is much more detailed and not much known today.
In the United States the “Gold Standard is set in place for the newly formed Federal Reserve and the US dollar is exchangeable for gold at $22 per troy once of gold. However there is a catch. Federal Reserve can only exchange 400 troy once bars for dollars. This means that in 1913 a person has to come up with $8,800 in order to get any gold out of the system. This is impossible for the people of the day and the only entities using the gold window at the Fed are large international trading companies in order to settle large accounts.
The other countries of the world make side agreements with each other not to take possession of the other countries gold. All countries start to inflate the money supply. Countries not under a “Gold Standard” are forced onto it via military force. Why would you need military force to convince a country to go on the “Gold Standard” you ask.
The answer is simple, since gold is not really exchanged between countries, England starts to inflate its currency, the British Pound Sterling, since they can create as much of it as they want they get another countries goods for an assumption of debt. However since England can produce as much money as it wants it just prints more money to service the debt. England is running a huge negative trade balance and its currency populates across the world.
Tension created by the “Gold Standard” leads to the events culminating in with the Start of World War One. Most people learn that Archduke Franz Ferdinand assassination causes the war. Yes it is the start, but assassinations happen all the time. The reasons behind World War One are never explained in any detail anymore.
During World War One all countries drop the “Gold Reserve” requirement and just print money to pay for the war. The war ends in 1918 and all countries go through a depression as debt which can not be supported in squeezed out of the economic system.
The US has its depression in 1921 and a socialist (that is a person who believes in communism type ideals) comes to power in the political ranks by the name of Herbert Hoover. After 1922 the Federal Reserve lowers the lending standard, money is printed via loans, these loans raise housing and equity prices from 1922 until 1929. However prices of goods and services remain somewhat stable.
It is at this time in the 1920’s that a Yale economics professor named Irving Fisher expanded an idea that inflation should only be defined as rising prices. Fisher ignores the effect on money creation on housing, the stock market, and other asset classes which are increasing at a very fast pace well above the level of money creation. These increases in equity and housing prices is a direct result of money in the debt market looping back on itself, creating more credit
As housing reaches a 600% increase in prices affordability is no longer obtainable. The money entering the economy through wages can no longer effetely enter the debt market to raise housing and equity prices any further. The result is the Stock Market Crash of 1929 and the Housing Market Crash which lasts until 1934. The housing market is the one that really affects the country. This is when everyone looses the farm, a farm they bought with credit.
In 1925 England goes back onto the “Gold Standard” at the old rate of exchange before the war. However there is now much more paper British Pound Sterling than before the war. England starts printing more money than ever.
An Englishman by the name of John Maynard Keynes, a socialism (that would be a type of communism) took the work of Irving Fisher and defined an economic policy in England in which England was to print its money without regard to any “Gold Standard”.
His magnum opus, the General Theory of Employment, Interest and Money challenged the economic paradigm when published in 1936. In this book Keynes put forward a theory based upon the notion of aggregate demand to explain variations in the overall level of economic activity, such as were observed in the Great Depression. The total income in a society is defined by the sum of consumption and investment; and in a state of unemployment and unused production capacity, one can only enhance employment and total income by first increasing expenditures for either consumption or investment.
The total amount of saving in a society is determined by the total income and thus, the economy could achieve an increase of total saving, even if the interest rates were lowered to increase the expenditures for investment. The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works. The book is often viewed as the foundation of modern macroeconomics.
Keynes theory conveniently ignores the effects of money creation on rising real estate and equity prices. His theory only works while a debt bubble is being created and money created in the debt market loops back into the debt market. If at any time entry into the debt market is blocked, this can be achieved by very high prices in real estate, then the currency immediately enters the real economy. This forces price’s upwards in an out of control process with culminates with rapidly increasing prices.
This is otherwise known as Hyperinflation.
Here is the life time question, and one they you guys should really come back with. Who benefits the most from this monetary system.
Let our Founding Fathers be our first guide on this journey like a quote from Thomas Jefferson who wrote.
"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."
So what has happened in the 300 years of a paper money in the United States?
The Real economy, those of us who work, produce goods and services, and then sell these goods and services made up almost the entire economy at the formation of the US.
Today, the financial economy, the manipulation of equities, bonds, currencies, and paper money is 50 times that of the real economy.
So who benefits from all of this inflation we have had since 1935, the financial sector of the US economy by far. Not the manufactures, not Wizards, not Hasbro, not the farms, not the factories.
The biggest, the only real winners are those invested in the financial economy. The rise of bankers has been astounding in the last 100 years. These are the people who control the banks by the way, not the flunky who works the window. Other member of the financial economy have also done well, like lawyers.
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