US Dollar
What is a dollar most people would answer that it is something that looks like and they’ll show a picture of a $1 Federal Reserve Note we recognize this as a dollar after all it says one dollar on it here is another dollar it doesn’t look like the previous dollar however the United States government declares that it’s a dollar two here is another dollar this one looks similar to the previous dollar but not exactly the same now let’s look at one more dollar this one looks similar to the last two dollars but again it’s slightly different all four dollars even though they are all made out of different materials of differing values are declared by the US government to be a dollar and forms of us money the Minneapolis Federal Reserve Bank defines money as an item or commodity that is agreed to be accepted in trade so in this slide what is being traded are paper notes and coins but what exactly does it mean that they are dollars the US Code States United States money is expressed in dollars dimes or tenths cents or hundredths and mils or thousandths according to the US Code a dollar is what money is expressed in in other words it is a unit of money however if this is true then we must then ask what exactly is the money a dollar expresses this question is not so easily answered let’s take a deeper look at the United States dollar and try to determine what kind of money the dollar represents what we find out will give us a deeper understanding of our money and the monetary policy of the United States this dollar a piece of paper and printed with different colors of ink has a number of unique characteristics first obviously it is designated as one dollar second these notes are printed by the United States Treasury and authorized by the Secretary of the Treasury third what we call a dollar is designated as legal tender for all debts public and private this means that the dollar has to be accepted by everyone for all debts public and private unless of course it was contracted beforehand but the debt would be paid in something else such as with a credit card cheque or even bitcoins fourth it is a Federal Reserve Note this means that it is issued by the Federal Reserve Banks of the United States these are the regional banks of the Federal Reserve System the central banking system of the United States the fact that the dollar is a note means that it is really a liability of the Federal Reserve Banks and an obligation of the United States this means that a dollar note is a promise to pay or an IOU issued by the Federal Reserve Bank to the holder of the note the public the US government ultimately guarantees the repayment of the loan why does the US government guarantee the note because it’s a law the US Code states the said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal Reserve banks and for all taxes customs and other public dues they shall be redeemed in lawful money on demand at the Treasury Department of the United States in the city of Washington District of Columbia or at any Federal Reserve Bank notice that the code says they shall be redeemed in lawful money on demand now this raises a number of questions first if the dollar note shall be redeemed in lawful money on demand is the note itself lawful money second if we bring the dollar to a Federal Reserve Bank or the US Treasury what kind of lawful money would receive as redemption for the dollar let’s take a look at the Federal Reserve dollar in relation to other US money to see if we can answer these questions let’s say we were to take our $1 Federal Reserve Note to a Federal Reserve Bank or to the US Treasury for redemption what would we receive we would probably receive 100 pennies or perhaps 20 nickels or ten dimes or four quarters or maybe we could get one of these Sacagawea dollars these coins might be what the US code means when it speaks of lawful money but the u.s. code is not specific on the matter however let’s consider this US money for a minute if we exchange our paper dollar from one Sacagawea dollar we could say our paper dollar is equal to one Sacagawea dollar and one Sacagawea dollar is equal to one paper dollar or Federal Reserve note that seems simple enough but things get a little more complicated this Sacagawea $1.00 coin issued by the US Mint designated as one dollar contains 88 point five percent copper six percent zinc three point five percent manganese and two percent nickel all these elements are considered base metals if we took this dollar to the United States Treasury or Federal Reserve Bank they would unfortunately not redeem it for this dollar why not it’s a dollar isn’t it let’s compare the two dollars the Sacagawea dollar is composed of base metals the American Eagle Silver Dollar on the other hand contains about one ounce of fine silver silver is considered a precious metal now consider this if piece are costs one dollar we could buy one piece of pizza with one second away a dollar if we brought the one dollar American Silver Eagle to the pizza place we could also buy one slice of pizza the pizza man would probably be more than happy to comply why because if we were to bring our coin to a coin dealer he would offer us about 20 federal reserve dollar notes in return for it we could then purchase not one but 20 pieces of pizza the $1 Silver Eagle in reality has a twenty times greater purchasing power than a one dollar Federal Reserve Note and one Sacagawea dollar now since the $1 Silver Eagle has a different purchasing power than the one dollar Federal Reserve Note and the one dollar Sacagawea dollar are they all on the same dollar let’s consider another American coin this is a United States five dollar coin how much pizza could this coin buy logically we would assume that since one dollar bought one slice five dollars should buy five slices but that would not be the smart thing to do this five dollar coin is made of 1/10 ounce of fine gold we could take this coin to a coin dealer and probably receive around 135 Federal Reserve notes for it dollar for dollar it would buy 27 times more pizza than a one dollar Sacagawea coin and a one dollar Federal Reserve Note this means that in the free market not all dollars are created equal the term dollar evidently varies from coin to coin and from coins to notes this raises a series of important questions if the term dollar is an expression of money what exactly is the correlation between a dollar and the money it expresses what exactly is the money that the dollar signifies and can we know the value of a dollar or the value of the money it represents let’s take a look at history to see if we can discover what a dollar really is there are two places in the United States Constitution where the term dollar is mentioned both have important implications for our understanding of the dollar the first is found in article 1 section 9 Clause 1 the clause states the migration or importation of such persons as any of the states now existing shall think proper to admit shall not be prohibited by the Congress prior to the Year 1808 but a tax or Duty may be imposed on such importation not exceeding ten dollars for each person this clause has reference to the slave trade prior to 1808 if a slave was imported into the United States the Constitution authorized the federal government to place a tax on the importer not to exceed ten dollars constitutional scholars see this clause as a compromise between anti and pro-slavery factions in order to get the Constitution passed however in order for this clause to make sense the meaning of the ten dollars identified as the tax had to have a known fixed value this is why if the value of a dollar was not fixed future anti-slavery factions have been Congress could attempt to manipulate monetary policy in order to change the purchasing power of the dollar so as to make it more difficult to pay the fixed tax this would decrease the profitability of the slave trade and perhaps eliminate it altogether before 1808 if this were possible it is doubtful that pro-slavery states would have agreed to the clause and the ratification of the Constitution therefore the framers of the Constitution knew exactly what a dollar was and that its value was fixed the second place where a dollars are mentioned in the US Constitution is in the seventh amendment its states in suits at common law where the value in controversy shall exceed twenty dollars the right of trial by jury shall be preserved again if the value of a dollar was not fixed Congress could manipulate the dollar so as to eliminate common law jury trials altogether obviously those groups in favor of jury trials knew this and would not have voted for ratification on this basis if the value of a dollar was not fixed but could fluctuate according to government policy neither the seventh amendment nor article 1 section 9 Clause 1 would have any relevancy to the future nor would they have ever been included in the Constitution in their present form therefore at the time of the ratification of the Constitution $10 and $20 had known fixed values independent of what Congress said the value of a dollar was interestingly since the US Mint would not be established until 1792 there was as of yet no official u.s. coins so when the US Constitution referred to dollars what exactly was the fixed value and how was it determined let’s take a look a little further back in history in 1776 shortly after the signing of the Declaration of Independence the Continental Congress began to address the issue of a metal coinage system apparently in the 1770s there were multiple international coins of differing weights and fineness of silver circulating throughout the states on September 2nd a committee of Congress recommended that the Spanish Miller become the standard of measurement for other coins the committee wrote by declaring the precise weight and fineness of the Spanish milk dollar now becoming the money unit or common measure of other coins in these states and by explaining the principles and establishing the rules by which the set common measures shall be applied to other coins in order to determine their comparative value the constitutional committee recognized that the Spanish dollar had already been accepted by the individual states as the common standard for determining the value of all other coins thus it recommended that the United States government should do so as well the spanish mil dollar was a silver coin minted in the spanish empire worth eight reallys by 1776 because of its uniformity and standard and milling Spanish dollar had become an international currency and the dominant species coin circulating in America the word dollar was thought to have evolved from the German taller which was similar in size to the Spanish dollar the Spanish dollar had a weight of approximately 387 grains of fine silver it was also known as the piece of eight because it was often divided into eight parts or bits from the 16th to 19th centuries it was thought to be the most stable and least two based coin in the world prior to the ratification of the US Constitution the United States also experimented with a paper currency as a medium of exchange this paper money known as fills of credit or Continental dollars was issued from 1775 to 1783 usually denominated in dollars and could be passed from person to person with payment due to the bearer there was usually no interest paid on them interestingly the bills are often payable in Spanish mil dollars a typical bill read the bearer is entitled to receive 55 spanish mil dollars or an equal sum in gold or silver according to a resolution of Congress this meant that Bills of credit were really a promise to pay in gold or silver with the Spanish dollar as the measurement of a dollar in order for the bill of credit to be defined it had to correspond to a real asset that had value by 1781 the Continental dollar eventually depreciated to zero value there were several reasons first neither the individual states nor the United States government accepted the paper dollars for taxes or government dues second Congress could not impose a tax to pay off the Redemption value third the states refused to supply specie to the federal government in order to redeem them fourth there were vastly too many printed fifth the British counterfeited the dollar as a means of economic warfare because of their negative experiences with a paper currency the framers of the Constitution deliberately restricted the individual states and Congress from issuing Bills of credit following the adoption of the Articles of Confederation on March 1st 1781 the United States earnestly began to seek a monetary system in his letter to Congress On January 15 1782 Robert Morris superintendent of the office of Finance commented that the various coins which have circulated in America have undergone different changes in their value so that there is hardly any which can be considered as a general standard unless it be Spanish dollars Morris here recognizes that there have been multiple coins circulating with changing values and suggests that the Spanish dollar be the standard to judge other coins On January 30th 1784 Thomas Jefferson in his plan on money echoed Morris’s view on the Spanish dollar but took it a step further the money unit of these states shall be equal in value to a Spanish mill dollar containing so much fine silver as the assay before directed shall show to be contained on an average in dollars of the several dates in circulation with us Jefferson was extremely clear the money unit of the United States should be equal to the Spanish dollar he suggested that various coins the assayed to determine an average of fine silver contained in the coins he made an important observation on the Spanish dollar later in 1784 when he stated taking it to our view all money transactions great and small I questioned if a common measure of more convenient size than the dollar could be proposed the unit or dollar is a known coin and the most familiar of all to the minds of people it has already adopted from south to north that’s identified our currency and therefore happily offers itself as a unit already introduced according to Thomas Jefferson no better money standard was available than the Spanish dollar interestingly he noted that the government did not have to mandate this the market had already adopted it on April 8th 1786 the Board of Treasury reported to Congress on the establishment of a mint and advised that the money unit or dollar will contain 375 greens and sixty-four hundredths of a grain of fine silver a dollar containing this number of grains of fine silver will be worth as much as the new Spanish dollars then in August 8th 1787 Congress made its determination on the dollar it resolved that the money unit of the United States being by the resolve of Congress of the six July’s 1785 $1 shall contain a fine silver 375 grains and 64 hundredths of a grain on the eve of the ratification of the US Constitution the Continental Congress was not confused on what money or a dollar was the dollar was a coin with a fixed weight and fineness of silver equal to the Spanish dollar of the time following the ratification of the Constitution the Secretary of the Treasury Alexander Hamilton was directed to report on the establishment of a mint in his January 28 1791 report Hamilton suggested that the unit in coins of the United States ought to correspond with 24 grains and 3/4 grains of pure gold and with 371 grains and 1/4 grain of fine silver each answering to $1.00 in the money of account while Hamilton suggested slightly reducing the amount of grains in a silver dollar he still understood that a dollar was defined as a specific medal of a specific weight and fineness he gave this important admonition in the report there is scarcely any point in the economy of national affairs of greater moment than the uniform preservation of the intrinsic value of the money unit on this the security and steady value of property essentially depend Hamilton seems to have understood that if the value of the money unit was uncertain than the security and value of all property was also uncertain on April 2nd 1792 President Washington signed the coinage act of 1792 it embodied the coinage principles espoused by the Continental Congress Jefferson Hamilton and the United States Constitution it mandated that the money of account of the United States shall be expressed in dollars or units and that the dollars are units each to be of the value of a Spanish milled dollar as the same is now current and to contain 371 grains and 4/16 parts of a grain of pure ore 416 grains of standard silver interestingly the Act also allowed the public to bring gold and silver bullion to the mint to be coined free of expense obviously Congress did not assume a monopoly on the money supply the Act also established the penalty of death for the crime of debasing the coinage inflation was severely dealt with from these observations we can draw the following conclusions first at the time of the adoption of the Constitution the framers and the Continental Congress recognized that the Spanish dollar was the money standard second governments did not authorize the Spanish dollar as money they simply recognized what the market had used for decades third the market determined the value of a dollar according to its silver content fourth the US government determined that the u.s. dollar coin would correspond to a similar weight and fineness of the Spanish silver dollar fifth the coinage act of 1792 defines the dollar as the value of a Spanish milled dollar as the same as is now current sixth this is the dollar referred to in the US Constitution seventh the dollar designated in the Constitution existed before the coinage act of 1792 and before the Constitution was ratified the general belief that a dollar correspond to a fixed amount of silver would remain until Congress enacted the legal tender acts during the Civil War up until 1862 gold silver and copper coins were the only money issued by the federal government there was no paper currency issued this was in keeping with article 1 section 8 Clause 5 of the US Constitution which states the Congress shall have power to coin money regulate the value thereof and of foreign coin however with the onset of the Civil War the Union found itself desperately short of the necessary funds needed to continue the conflict one response was to pass the first legal tender bill On February 25th 1862 Abraham Lincoln signed the bill into law this Act allowed the federal government to issue one hundred and fifty million dollars in irredeemable United States notes because of their green color they were also known as greenbacks these notes were backed only by the credit of the United States government in essence they were a fiat currency unpacked by gold or silver bullion the notes were also mandated as a legal tender for all debts public and private within the United States this meant that the notes by law had to be accepted by everyone within the country as payment for deaths the passage of this act allowed the United States government for the first time since the adoption of the Constitution to institute a paper money supply and also to designate as a dollar something that did not contain 371 grains and 4/16 parts of a grain of fine silver during the congressional debate over the bill Owen Lovejoy representative from Ohio offered an insightful perspective on the United States money he stated it is not in the power of Congress to accomplish an impossibility in making something out of nothing the piece of paper you stamp as five dollars is not five dollars and it will never be unless it is convertible into a five dollar gold and to profess it is is simply a delusion and fallacy in Lovejoy’s opinion in order for a dollar to be a dollar it had to be convertible into a precious metal he believed Congress’s attempt to call an irredeemable piece of paper a dollar was simply delusional since the Constitution assumed a dollar to be equal to the Spanish dollar and the coinage act of 1792 referred to the dollar as the same silver weight as a Spanish dollar the greenback did not meet the legal definition of a dollar a total of 450 million dollars of greenbacks are eventually printed with a total of 415 million dollars issued on July 11th 1864 greenbacks in terms of the value of gold fell to a low point of only 35 cents worth of gold in the free market a $1 US note did not equal a $1 u.s. gold coin other effects were predictable by 1865 prices had increased about 80 percent while real wages declined about 20 percent after the Civil War there were several Supreme Court challenges to the legal tender acts however in 1871 in the case of Knox versus Lee the Supreme Court ruled that a paper currency not backed by gold or silver was constitutional following the civil war gold coins continue to be issued by the federal government however silver coinage was suspended in 1873 the resumed in 1878 On January 15th 1875 Congress passed the specie payment resumption Act this act authorized the secretary of the Treasury to redeem outstanding greenbacks or u.s. notes in gold specie on demand on or after January 1st 1879 this seems to have restored confidence in US notes and by 1878 they were once again trading at par with gold a $1 US note was again equal to $1.00 in specie on May 31st 1878 the total amount of US notes was fixed at 346 million six hundred eighty-one thousand sixteen dollars this in essence permanently ended the power of the Treasury to directly create new Fiat paper money these notes are still legal tender in the United States however in 1994 legislation was passed to decrease the amount in circulation beginning in 1878 the United States government in response to political forces calling for an increase in the money supply began issuing silver certificates these certificates could be exchanged for silver coins on demand these silver dollars contain 370 1.25 grains of fine silver the constitutional definition of a dollar the federal government also issued gold certificates from 1865 to 1934 however this type of paper money was not generally intended for circulation to the public interestingly United States government issued currency was not the predominant currency circulating in the United States after the Civil War the u.s. national banking acts of 1863 and 1864 established the groundwork for a network of federally chartered gnash banks under this law banks could apply for a national charter as long as they can meet the necessary minimum capital requirement once accepted the banks are required to purchase interest-bearing US government bonds and the amount of one-third of its paid in capital the Act then allowed banks to issue banknotes up to 90 percent of the amount of government bonds if purchased though the US government printed the notes they bore the name of the issuing bank and the signatures of the bank’s officers the national bank notes were considered legal tender and could be used to pay all federal taxes except customs duties technically the notes could be redeemed at the issuing bank for silver or gold if the bank cannot redeem the notes the federal government could sell the insolvent banks bonds and pay off the bearer of the note on March 3rd 1865 the federal government imposed a tax of 10% on the notes of state banks to take effect on July 1st 1866 this tax eventually forced all non-federal currency out of circulation these notes would remain in circulation until the 1930s in 1914 after the formation of the Federal Reserve System the Federal Reserve banks began issuing Federal Reserve notes these notes were redeemable in gold on demand at the US Treasury or in gold or lawful money at any Federal Reserve Bank it was clear that these notes were interchangeable with specie in 1914 a one dollar Federal Reserve Note equalled one dollar in specie however on March 9 1933 Congress passed the emergency Banking Act of 1933 it stated the Secretary of the Treasury in his discretion may require any or all individuals partnerships associations and corporations to pay and deliver to the treasurer of the United States any are all gold coin gold bullion and gold certificates owned by such individuals partnerships associations and corporations upon receipt of such gold coin called bullion or gold certificates the secretary of the treasury shall pay therefore an equivalent amount of any other form of coin or currency coins or issued under the laws of the United States this law removed the gold obligation and authorized the Treasury to satisfy Redemption demands with other forms of coins or current legal notes of equal face value subsequently on April 5th 1933 President Roosevelt issued executive order 6102 this otter criminalized the public possession of gold coins thus ending the circulation of gold specie money by 1934 most circulating currency notes are beginning to be consolidated into Federal Reserve notes after 1934 the notes carried the inscription this note is redeemable in lawful money at the United States Treasury or at any Federal Reserve Bank cents silver coins were in circulation the notes could be redeemed in silver starting with series 1963 the words will pay to the bearer on demand no longer appear and each Federal Reserve Note simply states a particular denomination in dollars with series 1963 the promise of redemption also vanished from the face of each note On June 24th 1968 the US Treasuries stopped redeeming silver certificates in silver bullion by 1970 silver was removed from the production of coins on August 15 1971 President Nixon directed Treasury secretary Connally to suspend with certain exceptions the convertibility of the dollar into gold or other reserve assets ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold thus on their face Federal Reserve notes became in the description of John extre a former member of the Board of Governors of the Federal Reserve System paper I owe you nothing currency as we have seen the currency we use today the Federal Reserve Note may be designated a dollar but it is not what a dollar has historically been defined as nor is it what the Constitution assumed a dollar to be essentially Federal Reserve notes are a fiat currency redeemable for nothing they are basically in the words of economist guido Holtzman legal tender paper slips the implications of this are significant a dollar that contains 370 1.25 grains of fine silver cannot be reduced in value below the market exchange value of silver for other commodities however a dollar that contains no fixed amount of any particular substance per dollar can theoretically be reduced in value infinitely therefore since the Federal Reserve Bank under the authority of the federal government can print an unlimited amount of fiat dollars ex nihilo it can if desired inflate the money supply and thus reduce the purchasing power of the dollar former Federal Reserve Chairman Ben Bernanke has stated as much light gold US dollars have value only to the extent they are strictly limited in supply but the US government has a technology called a printing press or today it’s electronic equivalent that allows it to produce as many US dollars as it wishes at essentially no cost by increasing the number of US dollars in circulation the US government can also reduce the value of a dollar in terms of goods and services which is equivalent to raising the prices in dollars of those goods and services we conclude that under a paper money system a determined government can always generate higher spending and hence positive inflation in response to government engineered inflation economist Murray Rothbard wrote this but if government manages to establish paper tickets or bank credit as money as equivalent to gold grams or ounces then the government as dominant money supplier becomes free to create money cautiously and at will as a result this inflation of the money supply destroys the value of the dollar drives up prices cripples economic calculation and hobbles and seriously damages the workings of the market economy the natural tendency of government once in charge of money is to inflate and to destroy the value of the currency let’s consider these two graphs the first is the money supply of the United States between 1918 and 2003 we can see it has risen considerably the next is the purchasing power of the dollar since 1913 according to the US Bureau of Labor Statistics the dollar has lost 95 percent of its purchasing power since 1913 Bernanke was correct concerning the power of the government to cause inflation and Rothbard was correct in the direction it would ultimately take let’s consider the Federal Reserve dollar in relation to federal government fiscal policy holzman observes the most visible consequence of the paper money inflation of the past 30 years may be the explosion of public debt in the private sector a person’s ability to borrow is limited by his present assets and by his expected revenue in the public sector a government’s ability to borrow is limited by its present resources and its revenue from future taxation however with the presence of a central bank such as the Federal Reserve Bank the situation has changed since the bank is a quasi governmental status it has certain loyalties to the federal government the federal government can now rely on the bank the primary money producer in the country for unlimited credit the problem is that the federal government can obtain credit for an excess of its current assets and expected revenue from taxation often the federal government’s debt burden can grow faster than the production of money consider the following chart in 1960 the federal debt was less than two times the money supply in 2013 it grew to almost seven times the money supply in essence the inflation of the money supply has become a hidden tax on the public and since there is nothing to constrain depreciation of the dollar the government has a virtually unlimited power to tax without voter approval interestingly the only check on unlimited money printing by the central bank would be the possibility of a hyperinflationary scenario thus far no major currency has experienced this nor does it seem imminent in the near future economist FA Hyack concludes what is so dangerous and ought to be done away with is not government’s right to issue money but the exclusive right to do so and their power to force people to use it and to accept it at a particular price but there is no reason whatever why people should not be free to make contracts including ordinary purchases and sales in any kind of money they choose or why they should be obliged to sell against any particular money there could be no more effective check against the abuse of money by the government and if people were free to refuse any money they distrusted and to prefer money in which they had confidence.
Japenese Yen
Japan they count their money’s in yen and it is kind of different comparative how how people count in Canada or u.s. because in Japan they only count in yen whereas in Canada or us they have dollar and cents so basically this is how it works one cent is 1 yen in Japanese so if you are thinking of a dollar then it’s a hundred yen because it’s 100 cent of course there’s always current exchange rate so I’m just ignoring that part right now but that’s how you count the Japanese money and for example if you wanted to buy a coffee and maybe costed $4.00 I don’t know then it would be 400 yen in Japanese currency because it’s 400 cent in American and Canadian dollar now I’m going to show you the coins and bills that are used in Japan unlike the US dollar there are many coins and there are not many bills so the first one is 1 yen coin and that’s equivalent to 1 cent and next one is 5 yen and then 10 yen 50 yen 100 yen and 500 yen coin which is weird because in in Canada there’s five dollar but there was no bill for $5.00 so the Bell there’s a thousand bill which is equivalent to a thousand cent and that’s like $10 and two thousand bill five thousand bill and ten thousand bill so two thousand bill is very rare because it was created in the year 2000 and it was just only that year it was created and now they don’t make it anymore so that’s why it’s really rare you can still use it but it’s just really you don’t see that often in Japan either okay another thing is that there are a Japanese wait to say coins and bills 1 yen is etn dama and as I taught you in last lesson Ichi means one and n means yen and that means coin so that’s that and second one is Gauri and Emma and the third one is Zhu and Emma that’s ten cent I mean sorry ten yen the next one is goes you and Emma and another one next one is Hector and Emma and I don’t think I taught you but chocolate means hundred so that’s why and 500 yen is go Hector and Emma and notice I said go hacker it’s because it’s five and hundreds it’s that’s why it’s go shocked ooh and a thousand a thousand yen is saying that’s it and notice that it’s not dama it’s because it’s not coin and it’s bill so in that case we will say such so it’s 2,000 yen is me saying that’s a and 5,000 yen is go saying SATs ooh and 10,000 yen is et Mayan SATs and each demon means 10,000 .