Clocks measure time, scales measure weight, and money measures worth. The more money that someone is willing to pay for a good or service, the higher that good or service is valued.
If a banana was a quarter last month, and now it costs a dollar, logic tells us that the banana is worth more now than it was then. This is usually caused by either a dwindling supply of bananas or a rising demand for them. If the worth of the banana goes down, it could likewise imply that either demand has diminished or supply has grown too rapidly. Let’s say the supply has grown too much, leading to a lower value for bananas. This same principle holds true for money itself; too much money in circulation means that its value decreases.
The first example, when the price of the banana changes due to supply and demand, is called ‘non-monetary’ inflation and illustrates a healthy market economy. This is characterized by consumers spending their money where and when they want. The second, when the price of the banana goes up because the money needed to purchase it has less value, is an example of ‘monetary’ inflation, and also an economy that is not functioning properly. This is when government and banking officials have artificially altered the value of money.
The oversupply of money is one of the major causes of inflation, which is why, during periods of inflation, prices rise. It is not because things are suddenly more valuable, it is because your money is worth less.
This is one of the primary reasons why the Roman Empire fell (in addition to marauding tribes and corrupt officials) after hundreds of years of success and prosperity. In order to finance his wars and lavish lifestyle, the Emperor Nero would melt down the silver coins in circulation and add copper to them, ultimately diluting their purity and devaluing the currency. When societies used hard physical currency, this devaluation could only go so far, as there is a finite amount of precious metals on this planet. Today, however, things are much different.
It was Sir Isaac Newton, the famed physicist, who first introduced the gold standard to Great Britain (and the world) in 1717. Before he was put in charge of the Royal Mint, coins were hoarded, clipped into smaller pieces, and debased with other metals. Newton not only set a fixed exchange ratio for gold and silver, but he also set standards for weight and density to dissuade fraud. He officially fixed the value of one British pound to gold at three pounds, seventeen shillings, and ten-and-a-half pence (£3.89). Alexander Hamilton followed this same strategy in the latter part of the century when the United States was first founding; pegging the value of the US dollar to a certain amount of gold (or silver).
The gold standard lasted for hundreds of years and brought unprecedented wealth, capital, and prosperity to both countries and eventually the world as other countries followed suit. This was because money had a specific and trusted value and worth. This trust led to the Industrial Revolution and all the wonderful innovations we have today. Sadly, the 20th century brought world war, and with it economic disaster.
Britain went off the gold standard in 1931, and the United States eventually followed in 1971 under President Richard Nixon. We are now all exchanging ‘fiat currency,’ which is money not backed by anything stable (it was usually gold, but also sometimes other commodities). This allows the government to determine the amount of money in circulation, and, in effect, determine the value of money. The free market is no longer in charge: now it is up to the bankers and politicians. And what do you think happens when you give people the ability to print free money? They spend hugely, as Nero once did, and as the Federal Reserve does now. The difference is that while Nero only had so much metal to melt, the Fed can print money indefinitely. The US government is currently in debt to the tune of around $29 trillion.
While we are feeling the effects of inflation due to the Covid pandemic disruptions and other current global affairs (war in Ukraine), the reality is that it has been happening right under our feet for decades. And, “if inflation hangs around long enough, and becomes severe enough, it becomes a truly vicious cycle. The economy deteriorates.” You can look at Zimbabwe and Argentina as examples.
The authors of this book believe that the only way to avoid total economic fallout is to return to the gold standard. The common argument against this case is that there is simply not enough gold to back up all the dollars. But “the gold standard is not about ‘supply’ but about maintaining stable currency value. You don’t need to have piles of this precious metal for a gold standard to work. Gold simply serves as the anchor of value…the gold price is the barometer that enables you to maintain a stable dollar value.”
While many economists debate the pros and cons of returning to a gold standard, one thing is for sure: we need to stop printing money before it becomes entirely worthless.