Funny Money

This might get your attention. Scrounge around in your attic, basement, and closets in search of some old quarters. If you find any, congratulations. You can drive across town and sell them for more than eighteen dollars apiece (dimes over seven dollars).

Or, for an even more dramatic example, a one thousand dollar face of dimes, quarters, and half-dollars dated prior to 1965 (when coins last contained real silver) are now worth $75,000. That is the melt value of those coins, deemed “junk silver,” representing 715 ounces of silver (click here for current value Pre-1965 $1,000 Face Value).

Tell that to someone who crows about their big real estate score on that property they bought in the Sixties for $50,000. Had they simply put the same amount in rolls of silver coins at the time they would now be looking at $3.75 million, a 75x return for simply taking a sixty-year nap.

Of course, the inverse is also true i.e. that thousand dollars in paper money today would purchase fewer than ten ounces of that same silver (trading now around $107/oz), representing a greater than 98.5% decline. What happened to those now-missing 705 missing ounces from the original 715?

The same thing that happened to the loss of purchasing power – swallowed up in the inflation hole, just as most every fiat currency has over the centuries. The most egregious example, of course, was Germany’s hyperinflation of the 1920s in which (anecdotally) a wheelbarrow full of marks was left on the street only to be stolen without anyone touching those worthless marks. Does (hyper)inflation have your attention now?

We’re not quite at the hyper stage yet, but still. The founding fathers were well aware of the dangers and temptations of the unbridled issuance of fiat currency which is why they mandated in Article 1, Section 10 of the U.S. Constitution that only gold and silver coins would be legal tender. This was followed up by the Coinage Act of 1792 which made the intentional currency debasement a felony offense for threatening the integrity of the coinage. The original penalty for such high treason was death but that was later softened.

That’s too bad as we’ve watched the sorry trajectory of that so-called coinage integrity ever since (though from currency dilution rather than straight-out Coinage Act counterfeiting), from Nixon’s abandonment of the gold anchor in 1971, to Alan Greenspan’s mumbo-jumbo of the 1980s (is it too late to bring charges?), to the private interests known as the federal reserve ever since its founding in 1913 (MM 6/8/20 WTF: What The Fed). Just kidding, sort of, but who’s to answer for that 98.5% destruction of the dollar’s purchasing power (against “real money”) just since the debasement started in earnest?

While Congress must answer on the fiscal side for the out-of-control spending, the great enabler of all that is on the monetary side with the burgeoning growth in the money supply. Just track M2 against asset inflation and our national debt. Public servants now begin to look more like private masters. The tipping point seems to have occurred sometime around the time the gold standard was abandoned and those silver coins were neutered.

So, how does one protect oneself? Hard assets. That silver example, however, illustrates an important point i.e. the difference between nominal and real gains. That cited 75X, the nominal gain, represents an annual growth rate (since 1971) of about 7.5%. The real rate would be more like 2.5%, the difference reflecting the effects of inflation.

While such debasement may be readily measurable against real assets, the loss of purchasing power works the same way. It’s just not as obvious.

It’s the thief in the night.

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