The State of Freedom
They do not use United States legal tender currency and coin like the rest of us, instead they use gold as money. They call their money gold dollars, and designate them so: G$. How very quaint. Monetary-Amish folk. Financial Luddites. Amazingly, wages and prices have not risen in Freedom during the past fifty years. People still grind out a week of work today as they did half a century ago, still for about G$100. Of course a loaf of bread costs G$.19 and a brand new car can be purchased for G$2,000. I recently spoke with a long-time Freedom resident, and the subject of the seventies came up. I couldn't believe how different our memories were of that decade. I remember the oil embargo, gas shortages and skyrocketing pump prices. I remember gas stations having to charge by the half-gallon because the pumps could not register gallon prices above 99.99¢. And beyond gas and oil, I remember inflation: Remember Ford's WIN buttons? Whip Inflation Now. We were at war with a mysterious, powerful, invisible and destructive enemy. My aquaintance from Freedom had no such recollections. I decided that I would have to investigate in order to understand how we could have such divergent histories even as we lived within the same country. Here is what I discovered: If we turn back the clock fifty years, we see that the gold money used by the good citizens of Freedom was identical in value to the money used by the rest of the United States citizens. If you had 1/35 of an ounce of gold, then by definition you had a dollar. They were one and the same. Equal. Identical (I know, but since we're pretending here, let's pretend that American citizens fifty years ago could actually legally possess gold and their currency was in fact redeemable in gold). Whether you lived in Freedom and used gold, or whether you lived anywhere else in the United States and used American currency, the price of a gallon of gasoline (the price of which is strongly correlated with the price of oil) was the same for everyone. But then something momentous happened: American currency became disconnected from gold. The residents of Freedom now had a monetary system that had nothing to do with the legal tender monetary system used by the rest of the country. Beginning in the seventies outside of Freedom, the rest of the country became accustomed (desensitized) to rising wages and rising prices that were the hallmarks of an elastic (inflationary) monetary system. Heaven knows what would happen to the economy if there wasn't enough legal tender in circulation. The Federal Reserve was therefore given the all-important task (monopoly power) of making sure there was enough to go around. Since Freedom's monetary system was not part of the Federal Reserve's concern, these unfortunate (fortunate) people were unable to benefit from the Fed's munificence. The following chart illustrates the long term record of the two different monetary systems with respect to the price of oil.
Back in 1970, everyone in the United States, the State of Freedom included, was paying about $3.30 for a barrel of oil. The oil shock in the seventies sent the US legal tender price rocketing to an annual average of over $37.00 in 1980, but amazingly (there's that word again), Freedom's annual average cost for oil in that year was G$2.17 (fully one-third lower). The highest and lowest annual average cost for a barrel of oil in Freedom during the seventies was G$3.70 and G$1.64, respectively. Perhaps more incredibly, the average annual cost of a barrel of oil today is upward of $60.00 a barrel (with current prices over $90 a barrel) but still holds at a bit over G$3.00 in Freedom. The annual average cost of a barrel of oil in Freedom has never exceeded G$4.00. Somehow, the state of Freedom has avoided the oil shocks that the rest of us have suffered through in this country. How is that possible? Let's see if we can answer that question by answering another: Why did oil prices rise precipitously in legal tender dollars in the seventies? The law of supply and demand provides the answer. Let's examine two possible cases:
So which of the above cases best describes what caused oil prices to rise dramatically throughout the seventies? A shortage of oil or a surplus of legal tender dollars? Well, there are two strong points for the case that claims that a surplus of dollars, not a shortage of oil, was the culprit. Point number one is that the price of oil in the State of Freedom did not increase, even though it had the same oil supply access as the rest of the country. If there was an oil shortage, then the price of oil in gold dollars would have risen in the same manner as it did in legal tender dollars. Point number two is the evidence shown in the chart below:
In the sixties and eighties, the m3 money supply roughly doubled in each of those decades, while it tripled in the seventies. This represents an m3 money supply increase rate in the seventies that was twice as rapid as in the preceeding and following decades. This rate must have greatly outpaced the growth of the economy, hence the observed seventies inflation. Remember, just like in the oil market case we looked at earlier, if there is an increase in the amount of dollars in the "U.S. economy" market relative to the goods available, then prices will rise. This is not due to shortages, but to the decrease in value of each dollar due to the increased supply of those dollars. Here we have arrived at the true definition of inflation. It must be viewed as a devaluation of the monetary unit, not an increase in value attributed to the goods purchased with said monetary unit. I'm sure it didn't escape your notice that the pretty yellow bars have been getting increasingly longer increasingly quicker in recent years. Could that mean that higher inflation is coming our way? What are the news folks saying? To what do they attribute rising prices? Why don't they ever mention increasing money supply? As an aside, the Fed has stopped publishing the m3 money supply data, as they feel it is not an important piece of information to track. Well, I guess they (and the news folks) know best. Now it may be argued that wages have risen in concert with the rising price of oil over the years, and so perhaps the Americans outside of the State of Freedom have not lost economic ground in this case after all. Well, let's look at the relevant data:
The above chart shows the inflation-adjusted (2006 legal tender dollars) average annual historical price of a barrel of oil over the past 50-plus years. We can calculate that the average price over this span of years is about $31.50 a barrel. Before the jump in price that began in the seventies, the average price was slightly less than $20.00 (when it was equal to Freedom's gold dollar), so we see that on average over the last 35-plus years, Americans outside of Freedom have paid some 60% more per barrel of oil than their counterparts within. And keep in mind that the CPI index used to calculate these inflation-adjusted prices excludes energy and food costs. When you consider, even as you read these words, the costs of energy and food are rising at a rate that far outpaces the items used to calculate the CPI index, and you consider that most families spend a considerable percentage of their income on food and energy, then you can see that calling the inflation-adjusted pricing based on the CPI index conservative is being quite charitable. But you know what? Even if every single person in the population is able to keep pace with inflation, inflation still robs them of their savings. Every dollar set aside as savings erodes into a fraction of its original value as time passes. It is nothing less than a theft of each and every person's property. So now let's return to the question posed earlier: How was the State of Freedom able to avoid the oil price shocks that the rest of the country suffered through? The simple answer is that they have a superior monetary system. Their money remains stable and holds its value. G$.19 set aside fifty years ago still buys a loaf of bread today in Freedom. The commodity known as gold, as it always has, provides an unmatched ability to store value over time and space. That is why gold has been elected to serve as money by the markets of the world for centuries. It is by far the best tool for the job. Oh well, enough daydreaming. If the State of Freedom doesn't exist, then why waste time thinking about it? tzo has absolutely no credentials whatsoever in any economic discipline and strongly recommends that no one believe anything he says without doing their own fact checking. Correspondence is welcome at tdzo@juno.com. ***
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Unknown to most Americans, there is a 51st state tucked away amid the Rocky Mountains. It is smallish but there nonetheless, if only in my imagination. Since its admission to the Union fifty years ago, the inhabitants of this State, which is named Freedom, have lived by excepting a rule by which the rest of us abide:
