Economics Lesson in a $5 Bill (And The Road Ahead)

[Dateline: 22 October 2007]

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My son, Robert, recently told me he got an old $5 bill in his change at a store. It was dated 1950. What a great opportunity to teach my son a lesson about money....

I asked Robert to read aloud the little paragraph of small print on the upper left side.


Then I asked him to read what it says under Abe Lincoln.


Then I asked him if he had a new $5 bill. He did and he read what the new bill says.


And under Lincoln, the words, FIVE DOLLARS stand alone. It does not say WILL PAY TO THE BEARER ON DEMAND.

Then I explained the difference: The old bill was redeemable in LAWFUL money. It was not, in itself, LAWFUL money. It was, essentially, a receipt, or "note" for LAWFUL money. You could turn it in and get five dollars of LAWFUL money in exchange for the note.

That, of course, begs the question, “What is LAWFUL money?”

The answer is found in Article I Section 10 of the United States Constitution: “[No State shall ...] make any Thing but gold and silver Coin a Tender in Payment of Debts; ...”

Gold and silver coin are constitutional, LAWFUL, money.

Robert asked if he could take the note to a bank and get gold for it. I told him that’s the way it should be, and that’s the way it used to be, but not any longer.

From there I explained to Robert that the men who founded this nation, our agrarian-minded forefathers, were wise men. They knew the dangers of paper money. They understood that it was an invitation to inflation and, subsequently, economic disaster.

“What’s inflation, Dad?”

I told him that if the government puts a whole lot of paper money into circulation, the value of the so-called “dollars” becomes less. You can’t do that sort of thing when your money is gold and silver coin. After all, gold and silver doesn’t grow on trees, and paper does. There is a limited amount of gold & silver in the world. Then I gave him the classic example of a good quality man’s suit.

They say that an ounce of gold would buy a good quality man’s suit in the 1920s. The same is true today. The suit cost a $20 gold coin back then (approximately an ounce of gold). Today, a really fine suit will cost maybe $700, which happens to be what an ounce of gold is worth.

What changed? Certainly not the gold. The buying power of gold is, essentially, still the same. The “dollar” is what changed. The buying power of the dollar has declined. That’s inflation for you.

I explained to Robert that when paper money, also known as “fiat money,” is inflated, and the purchasing power of the money declines as a result, the government has stolen wealth from all the people who work hard and save their money. Robert can relate to this because he knows how hard he works to make the money he has earned, and he knows how hard it is to save.

Then I explained to him that inflation is especially hard on older people, like his grandfather, who live on a limited and fixed income.

That concluded our Economics lesson for the day.

Maybe in our next lesson I'll try to explain to him about how the FEDERAL reserve, which issues the fiat money, is not a government agency and, like its money, is completely contrary to what our founding fathers envisioned for this country.


I suspect that most people who are reading this understand that the current American dollar is becoming more worthless every passing day. Our industrial economy is on the brink of significant crisis.

I don’t follow the latest economic news like I once did. But I know that fiat money systems always fail. The day of reckoning always comes. And that is what I told my son. We will all feel its effect. Some more than others.

With all of that in mind, I’d like to tell you what a friend of mine told me today. He sits on the board of a local Credit Union. He just returned from a banker’s convention in Las Vegas (how appropriate). I asked him what the general consensus was. He said every speaker had a gloomy economic forecast. He told me we are headed for a “deep, dark recession for the next 4 to 10 years.” And “possible depression.”

I asked, “Did they really use the “D” word?”

“Oh, yes!” he replied, and added “I’m very concerned about the future.”

That, dear readers, is the inside story from the banking industry. The trouble is just starting.


Marci said...

Have you ever read the Uncle Eric books? He wrote one called "What Ever Happened to Penny Candy" that explains money and what happened to it. I love his whole series, although he is not a Christian and it is good to read the books with your sons to explain somethings he says. I have it, if you would like to borrow it.

By the way, we got our garlic planted. Yippee!!! We are still waiting to hear when your powder will be available this year.

Yeoman said...

Very interesting analysis on the Gold Standard.

I recall my parents lamenting the demise of the gold standard, feeling it was a mistake to abandon it, but then while in college I recall it being taught that it was necessary due to changes in the international economy. I frankly never really understood the analysis on that, and still don't.

Your comment about a suit costing the same, in the net weight of gold, years ago as now, is truly excellent. I think that nails it. Would that American money would be re-tied to the gold standard.

CHazzercise said...

I was reading a current post and clicked on this one at the bottom.... interesting to think back almost 7 years ago. That was around the time of the first rumblings of the real estate and finance troubles. Less than a year later would be the full blown financial crisis and TARP. Now we have $1200-$1300 oz of gold, $17trillion in national debt and still uncontrollable deficit spending. The war in Afganistan will enter its 13th year and still no plan to fully exit. The Federal Reserve has turned out to be a one trick pony and the next shake up appears to be what ever will come of tapering after 6 plus years of running the printing presses full speed.