Currencies for Dummies - show to those who claim Ron Paul's Gold standard is crazySubmitted by mindwalker55 on Fri, 07/06/2012 - 08:02
Let's do a side by side comparison of a metals based currency and a fiat currency. Let's look at two currencies that have been running in parallel for the last 62 years.
Back in 1950 a young man named Abel found he had four quarters in his pocket after having paid all his bills and rent. Realizing his next paycheck would cover groceries, he decided to save his money for a rainy day. He got out an envelope, labeled it Rainy Day Fund, put the four quarters into the envelope and placed the envelope under his mattress.
Abel mentioned his decision to Bob who just happened to have an extra dollar as well. Bob's dollar was a federal reserve note, paper fiat money. Bob took his dollar, stuffed the dollar in an envelope, labeled it Rainy Day Fund and placed it under his mattress.
Now the thing to note is that Abel's four quarters from back in 1950 are by their very nature "on the silver standard". Their value has been pegged to a certain amount of silver since they contain 0.17875 ounces of silver each.
Last week the economy came raining down on our two men and they were forced to use their Rainy Day Fund to put gas in their tanks.
Bob took his dollar bill down to his local gas station and was able to purchase less than a third of a gallon. That isn't going to get him very far. You should of heard his remorse when he realized that back in 1950 when he had put that dollar away he could have purchased four gallons of gas with it.
Abel fared a little better. He took his four quarters and since they have an intrinsic value based on the metal they represent, he was able to sell his four quarters for around $19 fiat money and then put more than 5.5 gallons of gas in his car. You should have heard Abel gloat about how he could only have purchased four gallons with that dollar back in 1950.
Unless it be over looked, the silver standard currency did experience that horrible phenomena that the Federal Reserve is working so diligently to help us to avoid, that beast that will destroy us all. Poor, poor Abel. Because his silver standard currency wasn't protected by the Federal Reserve, he was a victim and didn't even realize it. He suffered through deflation. The price of gas experienced deflationary forces when tracked against a fixed currency. He got stuck with more gas than he would have gotten if he had spent his money right away.
Lucky Bob, his economy didn't suffer any deflation. In fact it had a nicely controlled, healthy rate of inflation. His economy grew. I'm sure Bob appreciates that. What if the Federal Reserve wasn't siphoning off a portion of the dollar's value each year to prevent deflationary threats? Can you imagine how much worse off Bob would be?
Of course if all our currency had remained on the silver standard everyone would be paying 18-19 cents per gallon right now, maybe less.
Why less? The cost of items naturally deflate when the cost to produce them drops, look at computers, phones and calculators. The cost to produce items drop when new technologies and new production methods are developed, usually as a result of research and/or capital investments. Research and capital investments cost money which usually comes from profits or private investments (other people's savings). When the Fed bleeds the profits out of the economy in the form of printing more money, research and capitol investments suffer; slowing the production improvements, slowing the deflation.