Blogs: Daniel M. RyanStarting off Sound
Have you ever wished you hadn’t had to unlearn fiat-money propaganda? That someone had stepped in and told you sound from unsound when you were a child? Do you think the kids of today should learn about sound money right from the get-go? A new book, Treasure Hunt in the Enchanted Forest: The Search for Good Money, does just that. It starts off with a bit of childish mischief that’s a fairly good encapsulation of real inflation. While playing Enchanted Forest Monopoly, Reese the Owlet decides to get the better of her brother Landon by slipping in some extra game money she borrowed from her friend. After catching her, and complaining to Grandpa Owl, Landon figures out how to retaliate: by charging twice as much rent for landing on his properties. The kids see the inflation process in a nutshell, right on the first two pages.
They also learn that inflating the money supply isn’t fair, because someone always gets to use the money first. Although it doesn’t touch on the bailouts, and doesn’t introduce the central bank, any child reading this book will find it easy to understand why the bailouts were so unfair. That’s quite the achievement for a subject thought to be too complex for anyone except a college student or educated adult. The lesson ends with a definition of Gresham’s Law that a ten-year-old can understand. “Bad money always drives out the good when the good is underpriced.” What better example than silver coins, which disappeared after no longer being made? Although the lesson is the central part of the book, it’s more than didactic. Its target audience is not precocious kids destined to become professors. Its authors are not hoping for a new crop of sound-money academics fifteen years down the road. The second half of the book describes a real-life treasure hunt, and teaches kids how they can take advantage of Gresham’s Law. Since it’s too late for silver except for the lucky occasional, the book focuses on the “humble nickel” and “lowly penny.” Fact is, pennies made before 1982 are 95% copper; the metal in them is worth more than double their face value. Nickels, which actually have only 25% nickel in them, are worth slightly more than their face value. This is the “treasure” that Reese, Landon and their friends search out. They learn that penny sorting makes for profit. As they find more and more, words spreads and they find themselves in the Enchanted Forest’s local paper. They also use their knowledge to help out charitable organizations. For the sake of the story, the gold standard is described as a metal standard. This way, gold ties in with the activity in the second part of the book. The kids reading about it are encouraged to try it themselves, and the way to do so is spelled out for them. They’re also encouraged to talk about it with their friends and find new ones through it. This activity may seem esoteric, but penny sorting has gotten to the point where it’s featured on a Nightline segment on November 4th. It’s making the “Enchanted Forest News” for real. Moreover, it’s a wholesome activity that teaches the connection between shrewdness, work and profit. Armed with practical knowledge, work brings a monetary reward. The lesson they’ll learn will help them understand where paychecks come from. The activity also ties in with another wholesome hobby: coin collecting. In my own penny-sorting, I’ve found wheat cents from as long ago as 1916. Hard-core penny sorters have found wheats from as early as 1909. Some have found Indian Head pennies from beforehand. Although not directly teaching kids about the gold standard, Treasure Hunt in the Enchanted Forest imparts the background knowledge needed to understand. After reading it, all the kids need is Daddy Owl, Mommy Owl, Uncle or Auntie Owl, or another Grandpa Owl, to explain how the gold standard works and why it’s good. Coin collecting drifts naturally into a discussion of the classical gold standard and why it was subverted by the gold-exchange standard. What better place to start than by differentiating a gold certificate from a contemporaneous Federal Reserve note? This book is a neat combination of homey and shrewd, charming and sly, and the lessons it imparts are wholesome and needed. Granted that it’s often exhilarating to learn about the metal standard as an adult, but doing so means unlearning the siren songs of fiat money that pervade high schools and universities. Treasure Hunt in the Enchanted Forest starts kids off on the right foot. Once the gold standard is restored, the next challenge is to keep it. Unless the rising generation learns what’s right about the gold standard, we won’t. Treasure Hunt in the Enchanted Forest goes a long way to reaching that goal. May there be many followers in its wake. You can find out more about the book from its Website: http://www.treasurehuntkidsbook.com . Part III: Gold and the Needs of Trade
The gold-convertibility standard, which worked reliably for a couple of centuries, had the flexibility for trade. Under it, a central bank or government guaranteed to exchange a certain amount of dollars for one ounce of gold. You could not only hand in a gold coin for a fixed amount of paper, but you could also hand in a fixed amount of paper for gold. As trade expanded, the government allowed the money supply to expand until gold mining caught up with it. The prosperity was slow but fairly steady. More importantly, a real gold standard brought freedom from anxiety. A young man who lucked into a modest inheritance could keep the money and rest assured that it would keep its value until it was time for him to retire. So could the lad who saved his pennies for the same goal. Neither had to turn to Wall Street to keep what they had. All they needed was deposit accounts in an honest bank, in days when many banks were honest. It was safe to save. Nowadays, it isn’t. The freedom from anxiety that a real gold standard brought is gone. In its place are worried investors who look at the stock-market averages going nowhere while their costs inexorably climb. There’s no resting easy for them. Sadly, their anxiety opens their ears to blandishments about the gold standard being too “rigid” for an expanding economy. But thankfully, more and more people are waking up to the fact that the experts have made serious mistakes. Those old blandishments are increasingly being seen through. Support for the gold standard has gone way beyond its former confinement to the ranks of alarmists and gold sellers. The Lehrman Institute has been in the forefront of making a real, practical gold standard a solid pillar of a sensible pro-growth supply-side solution for America’s woes. The gold standard is now close to mainstream in the Tea Party movement. Americans are waking up. That woman I mentioned in the first blog post in this series has two little daughters. When they become her age, they may well flip half-ounce gold coins– both dated 2032 – like they were skipping stones…while deciding whether or not to spend them on software upgrades for their robot butlers. Part II: Gold and the Needs of Trade
One of the favourite arguments of people who prefer the monetary status quo is that the gold standard is too inflexible for the needs of trade. Like most arguments for status quos, this argument appeals to our fears. It’s not easy putting dollars in the bank account and food on the table. Many people have to fight hard for the dollars they earn. Missing a sale is bad enough: having the receipts fall because of a purportedly inflexible monetary standard is enough to make the hard-sweating tradesperson shy away from the gold standard. That’s precisely why opponents of the gold standard use that argument. It’s about as old as that $10 gold coin. Back in the days when the gold-exchange standard was pushed, “needs of trade” was one of the arguments advanced for it. A gold-exchange standard, so it was held, would lead to an “elastic currency” that would bend and stretch with the needs of trade. So much hope and belief was invested in it, the theoreticians couldn’t admit that the gold-exchange standard was a bad idea when the elastic broke in the 1930s. Instead, gold itself was blamed and they either defended the gold-exchange monstrosity or stood silent. When the choice was between admitting to a mistake and turning on gold, they – in many cases reluctantly – ended up turning on gold. Now that fiat currency has worked its magic for forty years, we see the same refusal to admit to a monetary mistake. The gold-exchange standard was supposed to eliminate recessions; it caused a Depression. The flawed Bretton Woods system was supposed to bring price stability to the world; it didn’t. Fiat money was supposed to bring long-term price stability with flexibility in combatting recessions, just as Keynesian demand management was supposed to cushion recessions while keeping the budget in balance over the business cycle. Instead, we have permanent inflation and seemingly permanent budget deficits. As for eliminating recessions…how’s that working out for you? A rational person would see the entire world was on fiat money in ’08, and conclude that gold was in no way at fault. Fiat money is the new and universal orthodoxy. The gold standard is now an alternative, one with a solid past but still heterodox. Fiat-money apologists don’t blame gold for the latest crisis: they’re not that shameless. But they can’t stop criticizing the gold standard; they need to. If they stopped, they would veer into asking themselves if they got the money thing wrong. Like their predecessors in the gold-exchange-standard days, they just can’t do that. Part I: Gold and the Needs of Trade
At a recent dinner, I brought along a gold coin that was minted almost a century ago. Dated 1912, it was the Canadian answer to the U.S. Eagle. Like the Eagle, it has a face value of ten dollars and contains a half ounce of gold. I passed it around, and someone I knew began flipping it almost as if it were a skipping stone. She didn’t act like she was flipping almost a thousand dollars’ worth of gold in her hands. Skip forward to 1967. In that year, the Royal Canadian Mint offered a specimen set of coins that commemorated Canada 100th anniversary. Since gold was never outlawed in Canada, and since it was a special year, the prestige sets contained a gold coin that was about the same size as that $10. Unlike the 1912 coin, the 1967 gold was not intended for general circulation – but it had a face value that permitted it to be used in trade. That face value was $20. Despite that period being dominated by the dangerous gold-exchange standard and the flawed Bretton Woods standard, the face value for almost the same amount of gold only doubled in the fifty-five year interim. Flash forward to today. If the Mint wanted to make a circulation coin of the same size for next year, it would have to slap on a face value of $1,000. $10 in 1912 turned into $20 in 1967, which has turned into $1000 for right now. The same amount of gold you could get for a ten-spot almost a hundred years ago, would take ten 100s now. That’s the difference that a pure fiat standard makes. The Fiat Money Hook
Federal Reserve Notes have lost more than 95% of their purchasing power over the lifetime of the Federal Reserve. It's quite clear that Federal Reserve monetary policy has had inflation as its centerpiece. Despite lip service being paid to price stability, the Fed always tilts towards inflation. If price stability were held to strictly, the central bank would view 2% inflation with the same alarm as it does 2% deflation. The same goes for 10%. Obviously, the Fed and other central banks are far more tolerant of inflation than deflation. The reason given is that deflation means another Great Depression, while high inflation means only economic difficulties. Inflation means pain, but deflation means serious injury. We tend to accept that rationale because the Great Depression was the last time that deflation appeared, with the exception of miniscule and ephemeral episodes. Since we don't want to run that risk, many shy away from supporting the gold standard. The false belief that the gold standard was the cause of the Great Depression – now debunked because of all-fiat Japan's Lost Decades – still holds sway. |
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Grandpa Owl then explains why a $20 Double Eagle coin now costs far more than sixty $20 bills. The child reader learns that fiat money goes down in value because it’s much easier to make than gold. Wise old Grandpa Owl then explains what makes sound money. Good money is demandable, portable, divisible, durable, valuable. Fiat money only matches up with three of these criteria. (So does Monopoly money!)