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Legal Tender and the Value of Money

Legal tender used to be an assurance of stable value by a neutral third party 'Government'.  Outside of that money could be anything that holds its value. It could a measure of rice, something that may lose its value over time due to spoilage; Or it could be something that holds it intrinsic value a mineral like salt or gold or something biological such as sheep, goats or cattle.

A Check is a personal Paper Note that you can give someone for value which they can exchange for paper notes at the bank. These Paper Notes at the bank are certified by government as a means of exchange that holds value while the Personal Note is certified by you. Both notes today have no intrincic value other than the fact they are ink on paper. Fundamentally both are the same except one represents the fact that you have to work to create that value and the other represents the fact that government certifies its value as a means of legal tender. 

Legal tender used to be an assurance of stable value by a neutral third party 'Government'. As in our Archimedes Eureka Story the significance of his discovery was that he found a way to prevent the money exchangers from debasing the value of gold as  means of exchange  by adding base metals to it.  Likewise certified legal tender was your insurance by government that the means of exchange was not counterfeit or artificially created and thus would maintain its buying power in the market place.

Today since currency is no longer a certificate of exchange for gold or silver we can assume that 'all currency' in circulation represents 'all value' in society.

This begs the question what happens if the government doubles the amount of currency presently in circulation? It stands to reason that the currency will eventually devalue to 50% of its current value. If you double the amount of paper that represents all value you half its unit value.

Traditionally the rate of the devaluation of the money supply is known as inflation. And if you use the rule of 72 you can determine how fast your buying power decreases. Let say for example the rate of inflation is 6%, then by using the rule of 72 divide 6 into it and you get 12. Folks at a rate of 6% inflation the buying power of your money will depreciate by 50% in 12 years.

This suggests that Government by expanding the money supply as it has during the recent bailouts [Quantative Easing] has recklessly abandoned its citizens by not maintaining the value of their means of exchange. 

This is easily illustrated by the rising cost of gas. The value of the gallon of gas you put in your car has not changed but the value your money represents certainly has.

Typically there is a 6 month lag period before the full impact of a dramatic change in the money supply is felt by society - so hang on to your hat with all the recent bailouts happening we are just at the beginning of a slipperly slide as the full impact has not yet hit us.

The purpose of legal tender is to esure the money system maintains a constanct exchange of value. Without this insurance society can not make long range contracts as there is no assurance the currencies value will remain constant.

Today the US dollar buys less than 4% of what it did in 1913, the year the federal reserve system was introduced. The next piece hints as to why that is and suggests that we have a rude awakening before us.

Next GO TO - How money is created



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