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Monday, October 24, 2005 |
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The Dollar's Long Dive Money is primarily a symbol of promise, and its worth is
always questionable By THOMAS G. DONLAN THE
IDEA THAT ONE PICTURE CAN BE WORTH even a small fraction of a thousand words is
alien to a writer's mind. But we were partially convinced recently when we
happened upon the chart below that takes up the space for several hundred
words normally found on this page. The
dollar has almost evaporated as a store of value. We see it here as the flip
side of inflation. In this view, prices don't rise, the dollar falls. Either
way, the lesson is the same: Put not your faith in princes, even during the
reigns of monetary royalists like Alan Greenspan. Paper money is first and
foremost paper. We
reiterate the caution in the chart's caption that the vertical scale is a log
scale: Equal distances along the vertical scale indicate equal percentage
changes, not equal units. On this scale, we see that the loss of purchasing
power is the same when a dollar erodes to 50 cents as when a 50-cent
"dollar" erodes to a 25-cent "dollar." Observe
the erratic course of the purchasing power of the dollar during the periods
when the currency was tied to gold. Not so consistently or thoroughly
devalued, it's true, but the dollar swung from strength to weakness, along with
the fortunes of the nation's gold miners. And the supply of gold, let us
remember, is tied only to the luck of miners. In no way can it respond to the
needs of a large economy. When the supply of gold could not grow as fast as
the economy, deflation was the result, need it or not. And when random
discoveries of new lodes brought new gold to the Treasury, inflation was the
result, want it or not. Nowadays,
the dollar price of gold has been swinging again, from a low of $255 an ounce
in 2001 to a recent $462 an ounce, a price rarely seen since the early 1980s. DOW JONES REPRINTS
Barron's has always stood for the ideal of a dollar "good as gold," but in reality, even gold is not good enough. Economists with theories as varied as those of John Maynard Keynes and Milton Friedman have concluded that gold alone does not maximize the utility of the dollar as a means of exchange and a store of value.
Friedman,
again simply put, despaired of central bankers and miners. Neither could ever
create the right amount of money at the right time to accommodate economic
growth, so he advised that the use of paper money, inflated by a firmly fixed
few percentage points a year, would come the closest to the moving target. These
theories have been taken up and distorted by American political leaders of
left and right. Their practical application may be seen in the near-vertical
line that depicts the cumulative effect of a little bit of inflation every
year since World War II, punctuated by a little more inflation occasionally.
It shows that the damage to the dollar's purchasing power in the post-war
period came not in the onslaught of historically high inflation during the
1970s, but in the continuous drip-drip of compounding some inflation every
year. That's
how a loaf of bread that sold for a quarter in the early 1950s gets to cost
$2.50. That's how a gentleman's haircut made its way to $20 from the boy's $2
trim. Looking
at the decline of the dollar is apt to make any old codger long for the money
of his youth. It's tempting to recall the example of Charles de Gaulle, who
lopped two zeros off the French franc to make it have a respectable exchange
rate with the currencies of the Anglo-Saxons. If America knocked a zero off
the dollar today, there would be a sentimental appeal to doing the week's
grocery shopping with a $20 bill -- offset by the frightening thought of
losing 90% of one's nominal savings. Of course, it would make little or no
difference economically, unless the U.S. also brought back gold and silver
coinage, halted in 1933 and 1965, respectively. Paper is paper, ink is ink,
electrons are electrons. The absolute size of the numbers makes little if any
difference. Money
is a symbol of a promise to provide something of real value to its holder.
Indirectly, your paycheck contains a promise that your employer will provide
all the things you want, up to a total value of X. It also should be a
promise by the government and banking system that X will not move. Holders
of gold have one advantage: they know there's no promise backing them up,
just the experience that gold holds its value in the marketplace. Considering
the value of the political and financial promises illustrated in the chart,
we ought to demand similar market security for our money.
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![[chart]](the_dollar_long_drive_files/image006.gif)
