ARGENTINA AND PAPER
MONEY
By
Samuel L. Blumenfeld
January
21, 2002
NewsWithViews.com
What the people of Argentina
are going through is possible in any country that uses paper
“money” as the basis of its economic activity.
Today’s paper money has no backing and therefore is only worth
what the government or central bank says it is worth.
We call that kind of paper money “Legal Tender.”
In other words, the government invests its faith and credit in the
value stated on the paper note. Money
is supposed to be a medium of exchange and a storage of wealth and we
accept paper money because the government backs its stated value.
But such a system can only work if the people have trust and
confidence in their government and their government behaves responsibly.
If
we go back to the early days of economic activity, we find that barter was
the earliest form of exchange. A
person could exchange a cow for sausages.
In other words, one gave value for value.
The medium of exchange was awkward and cumbersome, and the two
individuals involved had to make value judgments about what they were
getting for their commodity.
But
then it was found that gold would be accepted by many sellers in lieu of a
perishable commodity as a medium of exchange, because of its scarcity and
convenience. Gold also
became an excellent storage for wealth.
You could hold gold without its spoiling for as long as you wanted,
and people would gladly exchange commodities for it.
But
then, as civilization progressed, keeping gold became inconvenient.
It could also be easily stolen.
So people began putting their gold for safekeeping in banks, and
the banks issued gold certificates or banknotes.
The banknotes were worth their weight in gold.
But then the banks used the gold deposits as security for
high-interest loans, which they made by issuing banknotes.
But when the loans were not repaid, and the owners of gold cashed
in their banknotes, the bank became insolvent, and their notes were no
longer honored.
This
was the case in early America, where the Farmer’s Almanack up to 1863
actually listed “Worthless and Uncurrent Bank Notes in New England.”
Thirteen banks in Boston alone were listed as having worthless bank
notes.
None
of today’s currencies have any backing at all except the faith and
credit of the government behind it. In
Argentina, the faith and credit of the government no longer exists.
And so its citizens hold paper money that is about to lose half its
value by government devaluation. The
Argentine peso cannot be said to be a storage of wealth.
Only those individuals who were smart enough to buy gold or U.S.
dollars will come out ahead of the game, because they didn’t trust their
government to maintain the value of Argentine currency.
So
it is the behavior of government that determines the value of our
currency. In the U.S. money
is issued by the Federal Reserve Bank, a private institution that
determines interest rates for the nation’s banks.
Gold is still a better storage of wealth than paper dollars, which
are subject to inflation. Ancient
Rome suffered from inflation when the emperor added other metals to the
gold coins, thus decreasing the value of the coin.
In America, where we used to have silver coins, we now have
metallic coins that we use like paper money.
You can buy a silver dollar from a coin dealer for much more than
our present dollar.
As
our modern capitalist economy grew, the need for investment cash grew with
it. Thus, gold had become an
impediment to economic development. By
liberating paper from gold and calling it legal tender, man had invented
the greatest fuel for economic development in history.
But paper money, like nuclear power, has its risks and is totally
dependent on responsible government for its value. Legal tender was invented to stimulate commercial enterprise.
But politicians has used it to redistribute the wealth, throwing
billions at such projects as the War on Poverty.
And the only reason why the United States has not gone the way of
Argentina is because we have a citizenry willing to pay the taxes to
support such wasteful spending.
Wherever
you have paper money without any gold or silver backing, you can get
runaway inflation. In the
United States we’ve had slow inflation that is almost unnoticeable. However, those of us old enough to remember when a hotdog
cost 5 cents can see the effects of inflation in the same hotdog costing
$1.95 at the mall food court.
Of
course, technological advance has cheapened lots of goods and services not
because of any government monetary policy, but because technology has
lowered the cost of production. For
example, despite inflation, long distance calls today are much cheaper
than they were in the 1930s. And
the price of chickens, once considered a luxury, has significantly
declined. Competition and technology account for this favorable
development.
What
keeps the American economy viable as opposed to Argentina is that in
America we have a huge number of individual entrepreneurs and inventors
who keep making things better and better.
Unfortunately, nothing comes out of Argentina except beef and
Tangos.
©
2002 Samuel L. Blumenfeld - All Rights Reserved
Samuel L. Blumenfeld
is the author of eight books on education, including “Is Public
Education Necessary?” and “The Whole Language/OBE Fraud,” published
by The Paradigm Company, 208-322-4440.
His reading instruction program, “Alpha-Phonics,” is available
by writing The Tutoring Company, P.O. Box 540111, Waltham,
MA 02454-0111. www.alpha-phonics.com
www.howtotutor.com
