Saturday, February 9, 2013

Monetary Inflation: How it works

A long time ago, when gold was still the main currency of most western countries, if a man did not wish to carry a great deal of heavy metal about him he would go to the bankers and give it to them, and they would give him a receipt that was as good as gold, with which he could pay either for goods or anything else. However, bankers soon began to notice that when they gave  this receipt, the receipt became currency, people traded a paper that said it was payable for an ounce of gold, for things that were worth an ounce of gold. However, few people came out to collect the gold, rather, they paid with paper, and the paper slowly began to replace the money. However, paper was still worth the gold, it had to be. Gold, you understand, was a precious metal, paper was neither precious nor rare.
If, in a town, there are five dollars and three sticks of gum, the gum owners might place the price at one dollar. However, if the local market is suddenly flooded by five hundred new dollars, the price of the gum will most likely go up, possibly to one hundred dollars. That is why you cannot get a meal in a restaurant any more for fifty cents.
As long as all the paper had to be backed by gold, there was limit to how much could be printed, because there was limit to how much gold there was. However, as we moved away from the gold standard, more money could be printed, thus prices had to rise. It was monetary inflation, and it is still going on.
In the country of Germany, after World War I, because of the amount of war debt and post war debt Germany had incurred, the government had to print millions upon millions of new marks, (the German money unit) just to pay the debts. Thus the mark became so devalued that it was worth more as fire starter than to buy fire wood.
The German hyperinflation got so bad, that they began printing one hundred trillion mark notes.

Children making blocks out of stacks of marks.
In a country where the money is devalued, there will always be inflation. With the paper being nothing but paper, meaning nothing without the official stamp of approval from the government, it is much too tempting to continue to print on and on, to borrow on and on, devaluing your currency, and causing prices to skyrocket. Unfortunately this is what has happened in our country, and although we do not yet have runaway inflation at this time, such a thing as the German money crisis could be in our future if our current system is not checked.

Through His Strength We Will Conquer,
Andrew C. Abbott

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