Friday, November 18, 2011

M-O-N-E-Y (Part 2)

Yesterday, I posted a link to a little video about the history of money.  From that video, readers should have learned that the US was founded, and our Constitution written with the idea that specific amounts of precious metals--silver and gold--would constitute money and be used to buy things.  Congress (and only Congress) was to have the power to coin money.  The Treasury was set up to be the depository of those precious metals.  The idea was that silver and gold are relatively scarce, and of finite supply, and therefore have an intrisic value.  This concept was very old.  Gold especially, and silver to a lesser extent had been used for money since ancient times. 

In the US, we observed some form of tie to the value of precious metals up until 1971, when President Richard Nixon abolished the Gold Standard, which tied the value of currencies to gold in stores held by the Treasury.   At the time of abolishment of the Gold Standard,  a system of exchange rates called the Bretton Woods System had fixed the price of gold at $35 per ounce.  All other currencies at the time were valued with reference to the Bretton Woods System,  and Nixon's abolishment of the Standard represented the first time in history that currency had absolutely no tie to a real commodity, like gold.  This was the beginning of what is called "fiat money,"  or money that is intrinsically useless, without value, that is only used as a method of exchange.   And it's issued not by Congress, but by the Federal Reserve, which is under supposed oversight by it's Board of Governors, which is under supposed oversight by Congress.  But it's not owned by the Government:  it's owned by its "member banks," that is, all national banks and some state banks.  So, in essence, the US monetary system is owned by banks.

Now, let's start an example of what this means and why it matters, using the single biggest thing most people buy--a home.  In 1970, I was a kid, living with my folks in a modest brick ranch home in a suburb of Denver, Colorado.  Let's pretend that my parents' home was  the "median home" at that time.  I think it probably was pretty close to it.  According to census records, the median home in the U.S. in 1970 cost $17,000.   

A home is a tangible commodity.  It is what it is.  It has a certain size, a certain number of rooms, a certain quality of construction, etc., that is constant.  So, it should stay fairly close to a constant value, so long as it is maintained in good condition, and realizing that, as fashions and people's standards of what they want in a home change the value may also change a little--maybe 10--15%--downward.   So, for example, since people started to demand larger rooms and more bathrooms after the 1970s, the same house should have stayed the same or lost a little value, if it were maintained in good condition.

But last year the "median home" cost $177,900.    So, in the forty years between the removal of the gold standard and 2010, the median home increased in price by almost 10.5 times.   And gold? Well, gold went from $35 an ounce in 1970 to around $1200 an ounce in 2010, an increase of  more than 34 times!

At the same time, median household income grew only from $8,730 to $49,445, an increase of about 5.7 times.  So between 1970 and 2010, it came to take $10.50 to buy the same amount of home it used to take 1 dollar to buy.  And it came to take $34.00 to buy the same amount of gold that one dollar used to buy.   And yet, people got paid only $5.70 for each dollar of their old wages. 

Houston, we have a problem. 

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