Federal Reserve | timiacono.com - Part 4

There’s a fascinating romp through the history of U.S. coinage in Coins that Go Clunk at The American that held even a few surprises for someone like me, who is pretty familiar with the whole American progression from sound money to a pure fiat currency.

Author Alex Pollock gets to the first surprise in his first sentence in the little known (and ironic) Golden anniversary of the move away from silver coins that has led to the one dollar silver coin below being worth about twenty times that amount at coin shops (it’s still only worth a dollar at a bank where, as I understand it, they must accept it as legal tender).

The year 2014 is a little noticed 50th anniversary: the anniversary of the disappearance of U.S. silver coins from circulation in 1964. In that year, the American people decided that silver was probably going to be a better store of value than paper dollars, regardless of the pronouncements of the central bankers and politicians of the time. The people were right. At silver’s year-end 1960 price of 91 cents an ounce, the 0.77 ounces of silver in a silver dollar had been worth about 70 cents. But by late 1963, it was worth a dollar. Today, with silver at approximately $20 an ounce, the silver in a silver dollar is worth more than $15. (Silver has been as high as $49 an ounce.)

Up to the 1960s, American dimes and quarters (as well as half-dollars and silver dollars in those days) rang when you dropped them on a table. Now they go clunk. This change from coins made of silver, it might be said, is of little practical importance. Yet it symbolizes a profound shift in the behavior of the U.S. government with respect to money, a precursor to the immensely destructive Great Inflation of the 1970s.

Long before the 1960s, all the gold coins and bullion of American citizens had been confiscated by their government under its diktat of 1933. At the same time, the same government defaulted on the bonds it had promised to pay in gold. It took the extreme, indeed despotic, step of making any possession of gold coins or bullion by American citizens illegal and a punishable, criminal offense! It became harder for Americans to protect themselves against money printing. This law, which today is hard to believe was real, lasted four decades, until 1974.

Silver certificates, the collapse of Bretton Woods, and a host of other topics are covered in a report that is well worth reading in its entirety, even if you think you know the whole story.

Another thing I didn’t know was that the 1965 coinage act was the first fundamental change in U.S. coinage since 1792 – during George Washington’s first term as the first president.

The tumbling trade-weighted dollar is one of the surprise stories of the year so far as many analysts thought the greenback would fare better than its freely traded rivals due to an improving U.S. economy and a central bank that was reining in its money printing effort while prepping financial markets for higher interest rates.

But that’s not what has happened as detailed in this story at CNBC.

After years of tough love from policy makers and central bank officials, the eurozone may finally be on the road to recovery despite perpetual warnings of deflation (either that, or bond bubbles in places like Spain and Greece are contagious). The euro is now near $1.40 for the first time since it looked like the U.S. government was going to implode in 2011.

Also (and this took me by surprise when I looked it up), thanks in large part to a blossoming housing bubble, the British pound is threatening $1.70 for the first time since 2008!

It’s not clear what any of this means, but it sure has taken a lot of people by surprise.

Yellen on Capitol Hill

Financial markets appear to like what Federal Reserve Chair Janet Yellen has said so far in her appearance before the congressional Joint Economic Committee up on Capitol Hill.

A short time ago she was asked about this Wall Street Journal op-ed by Fed historian Allan Meltzer How the Fed Fuels the Coming Inflation and, while responding, she objected  to the term “goosing” when referring to the effect monetary policy has had on the stock market.

The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money—and in a reckless fashion—for years.

The relationship between Fed money printing and growing inequality in the U.S. was also brought up in this interchange and Ms. Yellen didn’t acquit herself particularly well, offering up the usual “trickle down” theory of boosting the economy without calling it such.

Senator Bernie Sanders (I-VT) just asked her whether we’ve transformed into an oligarchy of some kind with Fed policy only making this situation worse and she similarly didn’t have anything very useful to say. Yellen just admitted that Fed forecasts are just “guesses”, a word she stumbled over twice before finally getting it out, and she clearly seems to be most comfortable talking about such things as the intricacies of the labor force participation rate rather than much weightier questions about the effect of central bank policy.

I haven’t watched one of these in some time (and not one of Yellen’s prior appearances) – it’s all quite fascinating and, for once, lawmakers are asking some interesting questions.

For some reason, Wall Street seems to just love what she’s saying.

What Exactly is Money?

Here’s a new infographic from the folks at Buddy Loans that looks at the evolution of money and why we assign value to those little slips of paper we carry around in our wallets and, more importantly today, those digital bank account entries.


Click to Enlarge

The history of money and the role of commodities such as gold are detailed in the much larger version of this graphic and, at the end it is concluded that all money is based on the perception of value, even commodity money.

One interesting comment about the transition to pure fiat money comes via the following:

As economies grew, gold couldn’t be mined fast enough to meet the world’s demand for currency. The world shifted to a less scarce commodity – IMAGINATION.

While it is true that history is replete with complaints of “a shortage of specie”, that’s not necessarily a bad thing. One of the main benefits of commodity based money is that its supply increases only as fast as you can dig the stuff out of the ground which, for gold, coincidentally was about the same pace as population growth.

It seems that much of the increased demand for money in recent decades has arisen due to the pleasurable effects of asset price inflation and Wall Street seems to like that quite a bit.

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