Is that Dollar really a Dollar?

How much money do you have in your wallet right now? $20? $100? Maybe you just got back Vegas and you’ve got a few hundred? The mean net worth in the US is well over $100,000,000 so there has to be a lot of money in a vault or something, right?

Before I deliver the punchline, let’s think about this for a minute. Several thousand years ago, money didn’t exist. Barter was the only form of commerce. Money emerged in the forms of gold and silver because they were valuable, scarce, durable, easily divisible, and portable. Paper money emerged because people didn’t want to lug gold and silver around, so banks would issue receipts entitling the bearer to a given amount of gold or silver.

Paper money was “as good as gold.” The amount of money in circulation had to equal the amount of gold and silver in bank vaults — perpetual inflation was impossible without an increase in the issuance of receipts or newfound sources of gold and silver. When prices got too high people became suspicious of banks, and would redeem their gold to quell their fears. The banks that had issued too many receipts would be exposed and would collapse. Some people would unfortunately lose money, but afterwards prices came down and the stability of the system was restored. Credit issuance never spiraled out of control for long.

After the Panic of 1907 some people got fed up with periodic bank runs. Without getting into too much detail, the proposal to remedy the situation was the Federal Reserve. After Theodore Roosevelt entered the 1912 presidential election as an independent, assuring the Democrat Woodrow Wilson of victory, the Federal Reserve was pushed through and incepted in 1913. The combination of the Federal Reserve, fractional reserve banking, the financing of World War I, and FDR led to the practical dissolution of the gold standard — for transactions paper money had replaced gold as currency. Since FDR outlawed private ownership of gold markets we’ve had perpetual inflation, with the steady erosion in the value of the dollar. A dollar today is worth less than 5% of what it was worth in 1913. For many of you with whom I’ve spoken, none of this is new information.

So what does this have to do with cash? For hard money advocates like myself, it’s bad enough that the dollar is no longer a reliable store of value, as the quantity of dollars in circulation is an uncertainty going forward and subject to the whim of politicians. But this excerpt from a Washington Post article got me thinking even more, “The $100 bill represents more than 70 percent of the $776 billion in currency in circulation, two-thirds of which is held overseas.” $776bn in actual greenbacks in circulation. 2/3 held overseas. So there is $256bn in greenbacks residing in the US. There are 300 million Americans today. This means that if we were to give each American an equal amount of all paper dollars in circulation in the US, there would only be about $830 for each of us to go around.

In day to day “Mediocristan” as Taleb might put it, this is not a problem. We can pay for things with credit cards, debit cards, checks, PayPal, etc. But say the unthinkable happened and people rushed to banks to liquidate their checkings and savings accounts, as happened with Countrywide a week ago ( Countrywide Bank Run). There isn’t nearly enough cash to go around. So we’re off the gold standard and on the fiat dollar standard. But when you do the math you realize that if the average (mean) American is worth over $100,000 and yet there’s less than $830 to go around for each of them, you come to the inescapable that we’re not really on the paper dollar standard either. We think that we can sell our house, stocks, cars, and jewelry for cash at the end of the day, but in reality we can’t. Are we as Americans all a bunch of roadrunners who have gone off the cliff but are still spinning our legs, oblivious to the 1000 foot drop below because the force of gravity hasn’t been felt in decades? It troubles me, I must admit.

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