Thursday, July 23, 2009

LBJ and Another Day of Infamy

Being involved in the appraisal field means I spend a significant amount of time scouring the Internet for economic data and forecasts. But as a slightly loose[1] subscriber to the “Austrian School” of economics, I’m also on the look-out for historical information that corroborates Austrian theory regarding business cycles and money.

This morning I stumbled upon this jewel from UC Santa Barbara’s American Presidency Project. It is the transcript of a speech given by President Lyndon B. Johnson at the signing of the Coinage Act of July 23, 1965 – another day that lives in infamy, though the great majority of Americans doesn’t know why.

The Coinage Act of ’65 effectively brought a halt to the striking of 90% silver coins. From that time forward the U.S. has minted alloy coins for the 10, 25, and 50 cent pieces. Currency debasement is older than the Roman Empire. States find it increasingly difficult to pay for “public goods” – i.e., pay off the politically-connected and thus remain in power – with a finite money stock. In the old days corrupt kings would call in gold and silver coins, shave off some (or all) of the content, replace the missing precious metal with alloy, and re-circulate a devalued currency.

The American way is to print money out of thin air. The agent for this State-sanctioned counterfeiting is the Federal Reserve. The problem was one of getting real money – a naturally arising commodity used for indirect exchange – taken out of favor. The public had to be conned. Thus spake LBJ,

Now, all of you know these changes are necessary for a very simple reason--silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.

The “rapidly growing need” included such wonderful projects as the “Great Society,” the Vietnam War, and endless corporate welfare programs. In a word, payola.

Johnson was at his brow-beating best (after all, the man started out as a public school teacher) when he preemptively chided the little remnant of the population that would wise up to the implications of the Coinage Act:

If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.
This is where IM chatters would type, “LOL,” or “ROFL,” or more profane acronyms denoting incredulity.

Lest there be any confusion (the then “Commander-in-chief’s” words notwithstanding), the purchasing power of silver coins has remained remarkably stable relative to goods and services since – you guessed it – 1965. A silver quarter struck before the Beatles recorded “Baby, You’re a Rich Man” is worth the same amount of cash presently required to buy a loaf of premium grain bread, or about $3.25.

In other words, there has been no inflation in the prices of goods and services in terms of silver (or gold); general price levels rise and buying power erodes due to currency devaluation, with local oscillations attributable to changes in supply and demand. A loaf of bread (or two loaves of cheap white bread) should cost a typical household no more than around 25 cents in real money.

My dad voted for Goldwater.

[1] I’ve touched upon this before. In the main, I believe Austrian theory offers a thoroughly convincing explanation of economic phenomena. I diverge from those in the camp who tend toward what Kevin Carson calls “vulgar libertarianism.” Without a lengthy explanation, “vulgar libertarian” refers to supporters of massive corporations like Wal-Mart. I agree with the “Libertarian Left” that in a truly free market, void of tax advantages and subsidies, such monstrous entities could not exist (for the record, I don’t agree with the Libertarian Left on certain social issues).

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