What Is the Price of Money?

 Prices of most everything have been going up since long before my time.  I remember $0.12 loaves of bread and quarts of milk.  Some bread cost $0.20 or a bit more.  Nickel ice cream cones and candy bars were the standard.  Big candy bars and double dip ice cream cost a whole dime.
 
Does a multi dollar loaf of bread today cost more than a $0.20 one 60 years ago?  Is certainly costs more money.  Money isn't the real measure of either cost or value.  Money is merely a tool we use to make trading easier.

 The cost of something is the human effort used to make it.  Its value is determined by it usefulness to the person using it.  It requires less time to make a loaf of bread today than it did 60 years ago.  The real cost of bread today is less than it was when bread sold for little more than a dime.  The usefulness of bread hasn't changed much over the past 60 years.

 Labor also costs much more today.  I remember working for less than a dollar an hour.  In my first job as an engineer my pay was a bit less than $3.00 per hour.  Most college graduates started for less.  I lived very well on $3.00 per hour.

 When the real cost of making just about everything is less than it used to be, Why do we pay so much more?  The simple answer is, money is cheaper.  It is common practice to state prices in dollars.  It is unusual to hear someone say “A dollar costs a loaf to bread.”

 In a barter economy two people might exchange a dozen eggs for a loaf of bread.  The eggs cost a loaf of bread.  The bread costs a dozen eggs.  Likewise, if the price of a loaf of bread is one dollar, the price of one dollar is the loaf of bread.

 The price of bread hasn't gone up.  The price of money has gone down.  Sixty years ago a loaf of bread would buy the grocer $0.15 or so.  Today dollars are so cheap the grocer can buy two, three or more dollars with a single loaf of bread.

 Why are dollars now so cheap?  Money is useful only for buying things.  The supply of money has increased far faster than the supply of things to buy with the money.  The only use for that surplus money is to bid up the prices.  Otherwise, the surplus money has to remain unspent.  It is most unlikely that people with money will refuse to spend it merely because spending it requires them to bid up the prices.

 Where does all the new money come from?  Probably most are aware that  government can print all the money it wants to.  That is only one tenth of the story.  Once that money is deposited in a bank, that bank can create $9.00 of credit money for every dollar deposited.   That is the “magic” of 10 percent, fractional reserve banking.

 It is beyond available space to explain how banks get away with loaning out the same dollar nine times.   The government controlled banking system does make it possible, for a while at least.

 Whether the money supply is such that bread cost $0.20, $2.00 or even $200.00 doesn't matter.  What matters is changes in the money supply.  Changes in the money supply change prices and disrupt the economy in many ways.

 Money created out of thin air by banks can quickly evaporate back into thin air causing great economic disruption and triggering recessions.  As long a we have the Federal Reserve and fractional reserve banks creating money out of thin air, we will never have a stable economy.  Try as it might government is incapable of preventing fluctuations in the money supply from reeking economic havoc.

 Our ever increasing money supply causes far more serious problems than having to adjust to ever increasing prices.

aldmccallum@gmail.com
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Copyright 2013
Albert D. McCallum