IT’S ALL ABOUT MONEY

While money can’t buy happiness, it certainly lets you choose your own form of misery. ~ Groucho Marx  

Money makes the world go around. Money or currency is commonly defined as a generally accepted commodity used as a medium for making commercial transactions, a store of value and a means of stating prices, values and costs. Humans have used money in their daily lives long before the advent of written history. Archeological objects related to coinage have been found dating back over 100,000 years.

Long before 1869 when George Washington first graced his visage on our $1 bill, numerous items have served as money, including cowrie shells (Africa, Asia, Oceania, Europe), red ochre (Australia), wampum (Native Americans), whale teeth (Fiji) and very large carved limestone disks (Yap Island in Micronesia).

Sea shells have been used as a US currency far more recently. During the Great Depression, some drugstores in California provided change to customers in clam shells when cash was in short supply. Cowrie shells and Yap Island’s giant stone disks are shown below as examples of very old money. Cowrie shells may have been pocket change, Yap’s disks certainly were not. 

 Yap’s stoned money 

A fortune in cowrie shells

Economists classify currency in 2 distinct ways. First, as commodity money (like gold and silver coins, candy bars and cigarettes in WWII prisoner-of-war camps and peanut M&Ms for US troops in Afghanistan) are items that have intrinsic value in some other use. Precious-metal coins were initially used as money in several places about the same time, around 600-500 BCE; in China’s Yellow River valley, in India’s Ganges River valley and by the king of Lydia in western Asia Minor (modern Turkey).

Second, as fiat or token money that is an item designated as money by an acknowledged, trusted authority that is otherwise intrinsically worthless (like the “paper” we use for US bills composed of 75% cotton, 25% linen). Paper money banknotes first arose in China during the 7th century.

According to the Federal Reserve, the most recent value of all the currency in the US money supply is $5.8 trillion, which is almost 21% of our current GDP. The most valuable US banknote now in circulation is the $100 bill, otherwise known as the Benjamin because Benjamin Franklin’s face is on it. Over the past 5 years, Benjamins have become the most widely-circulated banknote, representing 34.3% of all circulating currency, overtaking the George (aka, $1 George Washington banknote). Circulation of the Andrew (aka, $20 Andrew Jackson banknote) increased significantly during the 1980’s when ATMs became broadly popular. The Andrew’s circulation is in third place, right behind the George.

What is the largest US banknote ever circulated? The Salmon P. Chase $10,000 banknote, first printed in 1918. It was never used much except for banks, given that its value was greater than the net worth of the average American for most of its history.

Mr. Chase was one impressive person: he was a governor and then senator from Ohio, served as Secretary of the Treasury under Abraham Lincoln, and became the 6th chief justice of the Supreme Court in 1864. He remains one of the few people to serve in all 3 branches of the federal government.

The Chase $10,000 banknote was purged from US currency in 1969, along with other large banknotes like the William McKinley $500, Grover Cleveland $1000 and James Madison $5000 bills. After this culling, the Benjamin became and remains the largest US banknote. 

Perhaps the most interesting coin produced by the US Mint is the silver dollar. The true “Silver Dollar” production began in 1794 and ended in 1935 as this was the last year that 90% silver coins were made for circulation. In 1975-76 the Bicentennial Dollar (with President Eisenhower on the face) was produced, but with a 40% silver content. In 2021 the mint began production of Peace Dollar coins, also with a 40% silver content.

Speaking of money, what is the most profitable US export? I think it is the $100 Benjamin banknote. Because there are 11 foreign nations that use either fully or partially US currency as their domestic currency, including Ecuador, El Salvador, Zimbabwe, Panama and Micronesia. That’s in addition to the 5 official US territories that use our currency: Puerto Rico, Guam, America Samoa, U.S. Virgin Islands, and Northern Marina Islands. 

Citizens in these 11 nations and their governments buy US banknotes at their face value, if not close to it. The US Treasury's cost to produce one $100 Benjamin is $0.086, which is an implied ”return” of 1,163 times its face value. Production costs for the $1 George are $0.028, an implied “return” of 35.7 times its face value. That's considerable "profit." 

According to the Federal Reserve Bank of Chicago, almost 80% of $100 US banknotes and more than 60% of all US banknotes are used overseas, a sizeable increase from roughly 30% in 1980. Such an increase in exported US banknotes is not only impressive, but likely quite profitable for the US Treasury. The Treasury’s foreign customers for US currency may soon include Argentina. Argentina’s new President Javier Milei campaigned to officially “dollarize” his nation. That may or may not happen, but if it only unofficially does, it could involve supplying South America’s second largest economy with more US currency’s fine crew lead by Benjamins, Andrews and Georges.

Money is said to be legal tender when the government requires it to be used in settlement of fiscal transactions, including tax payments. For example, you cannot settle your owed taxes with the IRS by paying in candy bars or shells, or for that matter with coins.^[1] Only US dollars will do via check, online payment or debit/credit card.

Congress established the US dollar as the basic unit of currency in 1792. The first coins were created in 1793 at the Philadelphia Mint and presented to Martha Washington. The US government did not issue paper money until 1861, when it helped finance the Union’s Civil War efforts.

Before our 1776 Declaration of Independence, the majority of currency used to conduct commerce in the American colonies was commodity money. Wheat is one example of a commodity currency that was used nearly 400 years ago in Massachusetts.

Before 1700, many students at Harvard College paid their tuition with wheat because hard currency – the British pound or Spanish real – was challenging to come by in the early colonies. The Massachusetts Bay Colony prices for standard items were stated in terms of bushels of wheat and corn, not British pounds or pence. Using such agricultural produce as a commodity currency in early America was not surprising. Throughout the 1700s, at least 90% of the American labor force was farmers.

No wonder paying with wheat made sense and cents at that time. Samuel Willis, Harvard class of 1653, its 13th graduating class, paid his tuition with wheat.

Here’s a current-day perspective about what a wheat-based Harvard tuition could be. Using a recent price of wheat together with Harvard’s 2023-24 tuition ($54,269 not including room and board), a student would need to provide Harvard College with 8,269 bushels of wheat for full tuition. This heavy tuition load of wheat would require a 167 acre farm to grow it and 2 big railroad hopper cars to transport it to Harvard’s Student Accounts Office in Cambridge. Surprise!

Wheat farmers have not been at all pleased with the market prices they are facing. Over the past year the average price of US wheat has dropped nearly 24%, which is not at all good if you’re paying tuition with your own-grown wheat, but no big deal if you are not a wheat farmer whose daughter is going to Harvard. Nevertheless, having to pay for tuition with 8,269 bushels of wheat would be inconvenient, to say the least.

All things considered it is very fortunate that Harvard, along with every other college and the rest of our economy, grew out of our 17th century wheat-as-commodity money habit. Hitching our fiscal wagons to fiat money’s US dollars makes sense.

 

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[1] Despite income tax protestors’ efforts, the IRS has successfully refused to accept tax payments with coins. So keep your pennies in your piggy bank, don’t include them with your 1040 form. 

 

MODERN MONEY ILLUSION

Money is an abstraction, a political confection, a set of castles built on air. ~Sebastian Mallaby  

The aura of money has existed for a very, very long time. Ecclesiastes 10:19 asserts: Money answereth all things. During the course of human history many objects have been used as money to transact sales and pursue commerce including cocoa beans (in Mesoamerica) and cowrie shells (in Africa, India and China). Paleo-economists believe the first precious-metal coins were used as money in several places about the same time, around 600-500BC; in China’s Yellow River valley, in India’s Ganges River valley and by the king of Lydia in western Asia Minor (modern Turkey). In 1024, the Chinese government started issuing paper notes in standard denominations, which showed that banknotes (paper currency) could be a viable and facile form of money. The first European banknotes were issued in late 17th century Sweden.

But what about money here in the United States (US)? Glad you asked. In the 17th and much of the 18th centuries each of the original 13 American colonies issued their own banknotes (paper money). Thus, Pennsylvania and Rhode Island each had their own distinct currencies. Understandably, this was a hindrance to trade between the colonies, probably promoting a fair amount of barter exchange. Foreign coins, including the Spanish dollar, were also widely used as currency in the US until 1857. After a previous and unsuccessful attempt to create a useful, single currency for the new country, the US Continental Congress authorized the issuance of the US dollar in July 1785, backed by gold and silver.

US Federal banknotes were issued as the currency of our nation in 1863 to finance the Civil War. We finally discarded the Gold Standard in August 1971; meaning the government no longer officially backed its banknotes with gold bullion stored at Fort Knox and the New York Federal Reserve Bank. Somehow, we’ve survived much to the surprise of the gold “bugs.” After 1971, the only “promise” the government offers for your $20 Hamilton bill is another $20 bill.

Naturally, not everyone was happy about this lack of precious metal “backing.” Remember William Jennings Bryan’s “Cross of Gold” speech? It’s what’s lurking somewhere behind Martin Amis’ quote: Money is a fiction, an addiction and a tacit conspiracy. So it goes…

In January 2020, the US economy has $1.75 trillion circulating as Federal Reserve banknotes and about $245 million in coins. Interestingly, the $100 bill – with the almost-smiling Ben Franklin on its front side – is the most common bill now in circulation, just ahead of George Washington’s $1 bill. There were 13.4 billion $100 bills circulating at the end of 2018, representing over 75% of the total value of our currency.

As much as 80% of all our Ben Franklins is being used outside the US, making them one of our largest, and unreported, exports. Economically-ruptured Venezuela is the latest nation to become more “dollarized,” given that its peso is next-to-worthless. In fact, Ecuador and Zimbabwe officially use US dollars (especially $100 bills) as their currency. Other countries, including Panama, Cambodia, and the Bahamas, use the US dollar alongside their own currencies. Ben Franklin has taken many foreign excursions.

Now there’s a panoply of alternative “currencies” beyond cash, including credit cards (the pioneering Diners Club card was first used in 1950), debit cards and various electronic forms, including the (in)famous Bitcoin, as well as Apple Pay. According to the Federal Reserve Bank of San Francisco, US consumers use credit and debit cards for 34% of their purchases, electronic payments for 34%, checks for 20% and cash for only 9% of (mostly low-value) purchases.

Because money is such an elemental part of any economy, economists have spent lots of time thinking about it over the years and examining how the amount of it and its use affects economic conditions. Concepts such as the “velocity of money” and “money illusion” have sprouted from lofty ivory towers. We’ve come a long way from just using cowrie shells and precious-metal coins.

Money illusion was first discussed over 90 years ago by Yale professor Irving Fisher who observed that most people believe the illusion that the face value of their money (say the $20 value of Hamilton’s bill; the bill’s “nominal value” in econ-speak) represents its actual purchasing power. That’s not necessarily true. Such people aren’t aware that money’s purchasing power depends on general price level changes, the $20 bill’s “real value.” If overall prices rise due to inflationary forces, the $20 bill’s actual purchasing power is reduced; it doesn’t buy as much as it used to. Thus, this money illusion is present if there’s underlying broad pressure affecting many goods’ prices, but not (yet) changing people’s income/wage levels.

After 1990 the US average annual inflation rate has been very low, 1.6% per year, despite the vociferous, misguided fears of many conservatives. That’s in stark contrast to 1974 and 1980 when the OPEC-induced oil price shocks pushed our annual inflation rate to 11.0% and 13.5%, respectively. Those were the days. Not.

I believe there is a newer version of Prof. Fisher’s money illusion. It has arrived along-side several progressive Democrats’ plans for dramatically changing the scope and operations of the federal government.

Bernie Sanders and, to a lesser degree, Elizabeth Warren have expansive ideas about reprioritizing domestic policies to guarantee every man, woman and child their “basic economic rights” (BERs). Bernie has stated, “We must take up the unfinished business of the New Deal.” His unfinished BERs consist of:

Quality health care	As much education as needed to succeed	A good job paying a living wage with 12-weeks family leave
Affordable housing	Living in a clean environment	A secure retirement

The possible costs of providing Medicare for All, “free” college tuition, elimination of student loan debt, government-guaranteed jobs, increased Social Security payments, renewed environmental protection and other, unstinting progressive programs have been dutifully estimated. One guesstimate stated these programs could cost $42.5 trillion (T) over the first decade.

This titanic sum, $42.5T, would almost double the size of the federal government’s current expenditures. In the current fiscal year the government has budgeted $4.75T for all its expenditures, which represents about 21% of our GDP. Possibly doubling the size of the government over a fairly short period would be a very big deal that so far doesn’t seem to have garnered very much real (or nominal) discussion; it’s an illusory topic.

In a sense, because these costs are so profuse, and in the future, we seemingly don’t have to worry now. This thinking is consistent with the liberal Modern Money Theory which suggests that the government can pay for its expenditures and achieve full employment by issuing more money.

The above sum does not include undertaking the extensive Green New Deal (GND) programs announced last February by Rep. Ocasio-Cortez and Sen. Markley. If implemented, the GND endorses a “ten-year mobilization” that would include large-scale, national social programs like universal health care, food security and government-guaranteed jobs as the “new deal” portion of the GND. Its substantial Green initiatives portion would include creating net zero emissions energy production from both a thoroughly updated, totally non-fossil-fueled national electricity grid and an electrified national transportation network.

Ten-year cost estimates for the GND programs by Doug Holtz-Eakin, previously director of the Congressional Budget Office and very familiar with government fiscal programs and expenditures, are $52T to $93T. Mr. Holtz-Eakin believes the bulk of the estimated costs would be faced in implementing the GND’s new deal programs, although the Green initiatives would also have a very substantial price tag due to their inclusive scope and tight schedule.

The trillions of dollar sums for the progressives’ programs and the GND are unimaginably large, and thus subject to a more modern type of money illusion, principally because of these programs’ size, complexity and span.

If we arbitrarily assume there’s a 25% overlap between the GND’s new deal programs and Bernie’s BERs programs and use the mid-point of the mentioned GND cost estimates, the grand total of the combined efforts of the GND and BERs for ten-years would be $97,000,000,000,000 or ninety-seven trillion dollars. It’s nearly five times as big as our current GDP, the world’s largest.

To get a better visual sense of just how large $97T is, imagine Ben Franklin $100 bills that have been tightly stacked upright on their long side, so we can answer the question; gee, how long a heap of such Franklin $100s would equal $97 trillion? Not how large is $97T; how long is it? This stack would go around the world about 2¼ times at its circumference; a bit more than 56,400 miles of $100 bills. That’s a lot of money.

Our inability to sense just how large these numbers (and the programs’ expenditures/activities) could be is likely why we can’t fathom exactly what is being proposed. It’s a next-to-impossible illusion to imagine in much detail because it’s so big. Certainly, the Law of Unintended Consequences will be functioning throughout these efforts, as always.

This very progressive political vision would be very distinct from others that are now being promoted by different candidates. But should we as a nation try it? That’s what the true left-field progressives pretty much demand. When asked, how can we afford this? They evasively reply, how can we not afford it; continuing the illusion. Our collective answer is what this year’s primaries and election, in a mere 285 days, will hopefully help decide. The inaugural Democratic caucuses and primaries begin in a mere 12 days across farmy Iowa. 

Not to worry if you don’t get to Des Moines in time. After Iowa there are 56 more Dems primaries and/or caucuses, including the Northern Mariana Island caucuses, the Democrats Abroad primary and last but certainly not least, the US Virgin Island caucuses on June 6. No wonder we call it a party. I hope our money and programmatic illusions will be at least partially dispelled after mid-July’s convention. As Adam Smith aptly stated, all money is a matter of belief. So is politics.