Saturday, March 12, 2005

Economics Lesson No. 1: What's a Dollar?

In spite of what economics professors will tell you, the most important lesson to learn about economics is what a dollar is, and what it's not.

I'll never forget sitting in the back of a small town Rotary Club meeting somewhere in the 1950s US of A. My father, economist Edward C. Harwood, was the invited speaker up at the podium, and my proud Mom and we kids often tagged along.

It started out as the usual boring lecture, when my ears perked up at this question:

"How many of you know what this is?" as he held up a dollar bill.

There was that typical wary silence as each listener struggled to figure out the hitch. Eventually, an emboldened hand went up.

"It's wealth?"

My Dad (you'll notice I always instinctively use a capital D) shook his head. Others offered, "It's something to buy things with." "It's what we get for our work." "It's a bank note."

I knew that I didn't have the answer he was fishing for either, so when it finally came, I was just as surprised as the next person.

"It's a piece of paper."

Of course, this made everyone chuckle. Not only did that seem silly, but they all had the impression that he was trying to pull a fast one and that there was going to be a good joke coming out of this - which in a sense there is, only the joke's on us all (or at least 99.99997% of us.)

He went on to say that, contrary to common thought and in spite of the fact that people will go to great lengths to procure dollars, often mistaking the green notes themselves for the wealth they represent, the truth is that a dollar is worth practically nothing in and of itself; it is merely a promise to pay. It has almost no intrinsic value, it's relative worth coming from its historical use as a symbolic tool of exchange.

In other words, without the value we humans place upon it, a dollar is worth nothing more than the few cents of paper, ink, printing machinery and labor cost it took to produce it. Any value that we instinctively perceive in it has in fact been superimposed upon it by all of us, a community of normal people who have blind faith in our government and banking system.

The next part of my Dad's lesson was devoted to explaining the real punch-line tragedy of it all, i.e. that this promise to pay is a promise that the government is supposed to be helping us all to keep. Unfortunately it has failed to do so over the decades, in fact quite the contrary; and most of us don't even realize it. The result has been the impoverishment of all holders of dollars, including you and me, to the tune of many trillions over the last century. To top it all off, this treason is still going on today, even at this very minute.

If you've followed all of this so far, then you and those Rotarians probably are better equipped to set fiscal policy than half of the economics professors in the world, including a couple of Nobel prizes! (Don't worry; I know you don't believe me. I'll try to show you why this is true, but you must be patient and keep reading, when and if you can.)


Anonymous dbill said...

Try this: A dollar bill is an IOU for the promise of someone's future labor. You received it in payment for your labor or effort and you can get 10 minutes worth of unskilled manual labor, or 20 seconds of a lawyer's time or an hour's worth of semiskilled effort from a worker in Asia. In order to cash in your IOU you may have to invoke the services of intermediaries, and they will take part of your IOU in payment for their services

2:55 PM  

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