Is There a Real Magic Money bag?

     Last time we saw what would happen if someone with a
magic money bag pushed its use to the limit.  For a time he
could live very well as a parasite on productive people.  In the
end his magic money and everyone else's money would become
worthless.

     Is the story of the magic money bag merely a fairy tale? 
Santa Clause and the tooth fairy are myths.  Magic money bags
are real.  Even as you read this, special individuals all over the
world are pulling money from their magic bags and spending it.

     Zimbabwe had a magic money bag.  It pushed the bag to
its limit.  It pulled so much money out of its bag that it took
billions of Zimbabwe dollars to buy a loaf of bread.  Next, no
amount of those dollars was enough to buy a slice of bread.

     In 1923 Germany maxed out its magic money bag. 
German marks became so plentiful that they were worthless.  
These are only two of the many instances where governments
have maxed out their magic bags.  Once the magic is gone, all
that remains is bankruptcy.

     Many fairy tales begin "Long ago, far away, in another
land."   Unfortunately, this beginning doesn't apply to the tale of
the magic money bag.  The Continental Congress during the
Revolutionary War maxed out its money bag before the war was
over.  This gave rise to the expression "Not worth a
Continental."

     Did we learn from the experience of the Continental
Congress?  Apparently we didn't learn enough.  The US
government still has a magic money bag.   Since 1914 the
Federal Reserve (Fed) has custody of the magic bag.

     Has the Fed used the magic bag?  It certainly has.  Is the
Fed still using the magic bag today?  It is using the bag like
never before.  Has pulling money out of the magic bag had
consequences?  It surely has.

     A recent article estimated that today's dollar is worth
about eight 1914 cents. Others calculate that today's dollar is
worth less than a 1914 nickel.  These estimates appear to be
reasonable.  All of the decrease in the value of our dollars was
caused by the Fed using the magic money bag to create more
dollars.  The good news is that those who have magic money
bags will never run out of money.  The bad news is that the
money eventually becomes worthless.

     So what if our dollars are now worth only eight cents? 
We can still buy stuff.  We have survived almost 100 years with
the Fed and its magic money bag.  Why not try for another
hundred?  Whatever happens after that won't matter to any of us.

     During the first 59 years the Fed had compelling reason
to limit its use of the magic bag.  From the beginning (1914) the
Fed could print all of the dollars it wanted to.  It had a bigger
brake on its want to than it does now.

     Those printed dollars were backed by gold.  The
government promised to redeem then for gold.  When the Fed
printed more dollars than it had gold, it risked bankruptcy.  It
was gambling that the holders of  those dollars wouldn't all
demand gold.

     In 1933 Franklin Roosevelt reneged on that promise to
everyone in the US.  Foreign governments could sill demand
gold.  In 1971 the gold was flowing out so fast that the US
government faced running out of gold if it kept printing more
dollars.

     Did government quit pulling money out of the magic
bag?  Of course not.  Nixon slammed shut the gold window at
the Fed.  Even foreigners could no longer demand gold.  It isn't
coincidence that after Nixon slammed the gold window shut,
inflation roared.  It wasn't until the Reagan administration that
the Fed closed the magic bag far enough to bring down inflation.

     Our money will retain value in the future only if the Fed
exercises restraint in reaching into the magic bag.  Next time:
What should we expect from the Fed and its magic bag?

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Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284