How has our money unit (the ‘dollar’) changed in meaning over the years?
The history of our ‘dollar’ reveals why PRICES and VALUES are unstable and volatile today!
Today we have a currency unit called the ‘dollar’ which is our legal tender for all debts (public and private). This unit has evolved over the years since its founding in 1785. After the collapse of the Continental, which was our Nation’s first experiment with public money, two key Americans were instrumental in choosing our ‘money unit’ (also called currency unit) for our Nation. Thomas Jefferson was the key person who chose the name ‘dollar’ for our money unit. He was also instrumental in choosing the subsidiary coinage (half-dollar, quarter, dime, nickel, and penny) which we adopted in the Coinage Act of 1792. The other founding Father which helped with these issues was our first Secretary of Treasury, Alexander Hamilton.
Both of the above founders, along with select members of our Congress, chose the ‘names’ for our currency units as well as the definitions for the various units. Jefferson understood that a sound money unit was essential for our Country and for sound growth within our Capitalistic economy. Jefferson and Hamilton were both in support of the Coinage Act of 1792 which established our money units. Since the founding of our ‘dollar’ in 1792, the following changes have occurred. Each of these changes has created a new meaning for our ‘dollar’ and for our economy. Following is a brief overview of this evolution in the meaning of our ‘dollar’:
1. Dollar #1: the ’name’ dollar was chosen and approved by our Continental Congress in 1785. This ‘name’ had no definition (it was totally a fiat unit with no reality).
2. Dollar #2: the name ‘dollar’ was defined in 1792 as $1.00=371.25 grains of silver (this definition was derived from assaying the Spanish silver dollar in the Colonial marketplace). Indirectly, our ‘dollar’ was also viewed as 24.75 grains of gold. This was derived from the 15:1 ratio between silver and gold in the marketplace. Our ‘dollar’ now had a specific meaning as a commodity currency with silver/gold as its backing.
3. Dollar #3: a new meaning emerged in 1834 as the silver/gold ratio had changed to 16:1 in the marketplace. Congress then redefined our ‘dollar’ as 23.20 grains of gold (the definition in terms of silver was dropped).
4. Dollar #4: another new meaning emerged in 1934 during the FDR administration. Our ‘dollar’ was further changed to 13.71 grains of gold. This new definition created a value for 1 ounce of gold as $35.00. This definition remained as the official definition of our ‘dollar’ until Nixon closed the gold window on August 15, 1971.
5. Dollar #5: a new calculation was derived in 1973 for our ‘dollar’ at 12.63 grains of gold. This new definition was meaningless as no convertibility was allowed in the marketplace. This new calculation was made to reflect the higher price of $38/ounce for gold in the marketplace.
6. Dollar #6: another new calculation emerged in 1974 as the price of gold reached a new level in the marketplace ($43/ounce). This new calculation for our ‘dollar’ was 11.37 grains of gold. This definition was also meaningless as no convertibility was allowed in the marketplace. Shortly after this event, gold in the marketplace reached $850/ounce (1980) as fear emerged that our ‘dollar’ was worthless. Once again, the meaning of our ‘dollar’ changed!
7. Dollar #7: with the abandonment of any backing or convertibility for our ‘dollar’, our Congress approved a new fiat ‘dollar’ for our Nation and the World in 1975. This ‘dollar’ led to the creation of our ‘index dollar’ (a number calculated as a weighted average of some six unique world currencies). This ‘index dollar’ has been viewed as a paper unit as most units were printed until the emergence of the computer. This ‘dollar’ has also been viewed as a fiat currency with no backing or intrinsic value. Some called this new currency regime which emerged in 1975 the ‘Floating Currency System’. Once again, the meaning of our ‘dollar’ changed!
8. Dollar #8: with the emergence of computer technology in the 1980′s and 1990′s, a new ‘dollar’ evolved. This new ‘dollar’ was the ‘digital dollar’ which became the talk of the marketplace after the CRASH of 2008. This ‘dollar’ allowed our Federal Reserve Bank to create new units (dollars) with the click of a computer mouse. Most of us have watched as our Fed Chairman has created $trillions (some say as much as $16 trillion) of new units (now digits in the computer screen) as our money. The QE policies of Ben Shalom Bernanke have become a major issue of conversation in the marketplace and among economic pundits. Ron Paul has popularized the policies of the Fed and their creation of units (called dollars)…’out of nothing’! Is this a viable process going forward? What meaning does this convey to the world?
The above evolution of our ‘dollar’ shows the changes in meaning that has occurred since our dollar was founded in 1785. We now have a VIRTUAL dollar as 95% of all money transactions are done via our new computer dollar. We witness this new dollar as we watch our computer screens from day-to-day. All our stock and money markets are now digital markets. Electronic money has emerged and this has changed the meaning of our dollar and the concept of money. The volatility, price fluctuations, flash crashes, and world exchange problems are directly related to our new digital money and the administration of this money unit.
The consequences of these changes has led to a new global marketplace where prices change from moment to moment. Stability in prices is now impossible as our Central Banks manipulate the markets with their QE and monetary policies via their HFT computers. Our new ‘dollar’ is now mostly VIRTUAL (95% of transactions are now electronic) and this means that most financial assets are also now mostly VIRTUAL assets. Even our Treasury securities are now traded as virtual instruments via Treasury Direct: www.treasurydirect.gov. Practically, all stocks and similar instruments for trading are now VIRTUAL concepts. We now live with a new virtual ‘dollar’ and mostly virtual financial instruments. Is this Capitalism?
Finally, is our current virtual ‘dollar’ actually Constitutional. Does a VIRTUAL dollar qualify as legal tender in a strict legal sense? Is our Congress aware of the above changes to our money units and the implications of this change? The implications of a money unit that is created by a centralized group of policymakers (our FOMC) and manipulated via HFT computers does change the fundamentals of Capitalism. Can a centralized body of policymakers really stabilize prices and create confidence with their QE and similar policies. The next few years should be instructive for all of us.
Anyway, we all need to understand what is now happening with our monetary system. Should a small group of elite bankers have the power and control over our entire ‘free market economic system’? Can the current debt and deficit situation be resolved with this type of system? My personal view is negative. The model that we now follow is not viable for the longer term. In fact, I don’t think this system can last for another decade. Our problem today is our ‘dollar’ and the administration of this unit. We now have a centralized group of elite bankers who essentially run our economy. Is this the type of Capitalism that Americans want for our future? The election of 2012 should bring all these factors to the attention of all Americans. What type of change to Americans really desire?
Our future is either the Obama type future based on the European model of government (collectivism) or a future model which puts the individual prior to the group (freedom). Freedom, in my view, must win this battle! Enjoy and give the above evolution of our ‘dollar’ some thought: http://kingdomecon.wordpress.com.
