The Dollar At Risk

THE DOLLAR AT RISK
By Peter H. Lester, Sr.

One of my favorite quotes concerning money is from Adam Smith. Written in 1776 in his book Wealth of Nations, the statement is as true today as it was then:

“Money is not the invention of the State. It is the product of man’s division of labor and exchange economy.”

To understand what he meant – it is easier if we imagine the value of money to Robinson Crusoe. For him, his immediate needs are food, shelter and water. He has no need to accumulate wealth. He has no one to trade with as there is no one else on the island. In short, he has needs - but one of those needs is NOT to buy and sell anything. He is the sole supplier and purchaser.

Societies create money as a medium of exchange. For money to be effective in accomplishing this, there must first be a need. This need is created when citizens in a society begin to specialize – do what they are most talented at doing. When this begins to happen, initially, bartering is sufficient. At this stage, a farmer can trade a bushel of corn for some fish. The fisherman can take the corn, and trade it to the herder for some milk from his cows. But as societies become more complex and more specialized, bartering is inefficient.

It is at this point that societies find a need to create money. For the money to function properly, it must: be a medium of exchange, be a store of value, be divisible, portable and recognizable.

Problems arise when governmental authorities assume control over the money supply and certainly become exacerbated when the money supply is mismanaged. At various times in history, currencies have been poorly managed to the point that the currencies are no longer accepted by the populace. You see, the populace gets it, but the government does not.

Eventually, Gresham's Law takes over (look this one up). The populace will reject the currency. The farmer realizes that by accepting the currency for his produce – he is assuming risk. In the farmer's mind, there is enough risk in planting seed, hoping for rain and a timely, fruitful harvest. He does not wish to take additional risk embedded in a poorly managed currency.

When currencies are mismanaged, one of three things happens:
1) the country reverts to bartering (black market)
2) the citizens begin to accept and hoard other more stable mediums of exchange (other currencies)
3) the citizens turn to commodity-based currencies (gold, silver, gems) – items which in and of themselves are recognized as valuable (they have intrinsic value and do not rely on faith).

For decades, the dollar has been the preferred currency the world over. We did not mandate this. Rather, citizens of other countries have preferred the currency over and above their own. This has frustrated other governments, who would prefer their citizens accept their printed paper. However, up until now, few currencies have been as stable, recognizable, and reliable as the dollar. This may be about to change.

We have discussed on several occasions in class that the current course our government is taking with respect to the US dollar is potentially damaging to the currency and its ability to function as a medium of exchange. It is my hope the Federal Reserve and Treasury will return to a policy that is more fiscally responsible in the near future before more damage is done in diluting the value of the dollar.