Monday, December 22, 2008

Plenty of Money

When I was a student in primary school, I performed in a production of a play entitled “Plenty of Money”. It was a madcap musical production where a crazy old lady prints her own money to be able to give it to charities. As I listened to what Federal Reserve Chairman, Ben Bernanke has planned to get our economy going again; I was reminded of that crazy musical. We will just print more money!

In the old days, the gold standard, monetary system backed our paper notes with gold and those paper notes were freely convertible into fixed quantities of gold. That was a solid, rule-based system that protected citizens from hyperinflation and other abuses of monetary policy. In 1971, however, the representative gold system collapsed and nations of the world switched to the fiat money system in which paper notes are backed only by use of lawful force and debt payments are collected through taxes.

The Wall Street Journal reported the excitement that everyone but me was feeling about Bernanke’s announcement that the Fed’s would print more money. They said:

“Wall Street that day did handsprings. Even government securities prices raced higher, as if, somehow, Treasury bonds were not denominated in the currency with which the Fed had announced its intention to paper the face of the earth. Economic commentators praised the central bank's determination to fight deflation -- that is, to reinstate inflation. All hands, including President-elect Obama, seemed to agree that wholesale money-printing was the answer to the nation's prayers.”

I read that the root cause of hyperinflation is an unchecked increase in the money supply. So, the question is what is to protect us today from hyperinflation? Should we just print more money in order to keep our country’s businesses, including charitable organizations afloat?