Money is Worthless
During the inflation of the 1970's and the early years of the 1980's Robert Krulwich of NPR did an excellent job of reporting economic theory and its implications to intelligent people who had not had the good fortune - misfortune? - to be trained in economics. It occurs to Wonks Anonymous that the quality of reporting on his beloved profession has seriously declined over the past two decades. Wonks Anonymous does not want to speculate on the reasons for this. He would, however, like to make his contribution to filling the gap with a series of posts on simple economic concepts.
As we are now in the midst of double digit inflation Wonks Anonymous would like to start with the concept of money. Here there is just one basic idea to learn:
Money, in itself is almost entirely worthless. Yes, even gold has very little intrinsic value and very few uses. Imagine for a minute that Bill Gates is transported, with several enormous bundles of cash, to an economy that depends on barter, where the medium of exchange and standard of value is dairy products. In this economy Mr. Gates would have a very difficult time buying anything with his disks of metal or pieces of paper. If you just can't see this look in your local comic store or the kids section of the library for Bone, a very fine series of graphic novels by Jeff Smith.
Now try this one. What would happen if you could change dirt into gold? That one sounds good. What would happen if everyone could do the same? Not so good.
Think these through and you can see that money is valuable because you can use it to buy things that you really need. There is not that much money in the world and because of this it can be traded for all manner of really useful things and services.
Inflation happens when the amount of money in the world increases faster that the amount of goods and services. The average amount of money that you have to pay for things goes up. Prices go up fast for things that people value a lot and more slowly for things that people value less.
Sometimes people charge the same price but reduce the amount of the item sold - my beloved spouse points out that the weight of chewing gum packs has just dropped. Whatever happens, when the amount of money grows faster than the amount of goods you pay more for less.
There is a great deal of discussion of the role of the banking system and various national and international banking institutions in inflation. More on this later. But I must note right now that one of the most sustained episodes of inflation in history occurred without the benefit of national or international banks.
When Spain discovered the Americas a large number of adventurers found themselves able to "produce" gold with a stroke of their swords. Gold flowed into Spain, which lived very well for some time. Eventually, as the gold circulated throughout Europe, prices rose and Spain, once the richest country in Europe found itself back at the place it had started from.
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