U.S. Currency Inflation--Is It Time to Knock a Zero Off the Dollar?

Monday, Jan 22, 2007

There have been many recent press reports about the base metal value of some small denomination U.S. coins now exceeding their face value. (For example 1.66 cents for a pre-1983 copper penny, and 6.65 cents for a U.S. nickel 5 cent piece. The latter may eventually have to be replaced with an aluminum token.) Fearing that they might disappear from circulation, the U.S. Treasury Department recently issued an edict banning the exportation or melting of pennies and nickels. This is a stopgap measure that ignores a much bigger issue: The U.S. currency has suffered from more than 70 years of fairly consistent currency inflation. We have been slowly robbed of our savings, through this inflation. In effect, inflation is a hidden form of taxation. When I was a kid, a candy bar cost a dime, a gallon of gas was 28 cents, and a trip to the movies cost $2 or $2.50, including popcorn and a soda pop. But nowadays, a candy bar costs 80 cents, a gallon of gas is $2.20, and a trip to the movies is more of a $10 o $12 proposition. .Rather than going to the extreme measure of eliminating pennies from circulation or issuing aluminum "nickels" , wouldn't it make more sense, and be more intellectually honest, to simply knock a zero off of our currency? This was done several times in the last century by countries like Brazil (three zeros, twice within four years), Turkey (six zeros), and Israel (three zeros). It was also done just last year in Zimbabwe (three zeros), but given the continued rate of inflation, who knows the fate of the Zimbabwean dollar?

Here is how it could work here in the U.S.: As of midnight on some pre-arranged night--preferably December 31st--the banks would re-value all accounts, dividing by ten. Hypothetically, say that Mr. Smith has $852 in his checking account, $3,180 in his savings account, and $78,500 in his Individual Retirement Account (IRA). The next morning his accounts would be adjusted to $85.20, $318, and $7,850, respectively. At the same time, everyone's wages would be divided by ten. Meanwhile everyone would be given one month to trade in their old paper currency, in exchange for a new issue, at a 10 for 1 ratio. (The old coinage would not be changed, resulting in a 10-for-1 windfall for every child with a piggy bank.) The end result: A penny would really mean something again. A candy bar would be back to around 8 cents, and gas would be back to 22 cents. This might sound like a lot of trouble to accomplish, but I can see that it would have several advantages: First, it would re-kindle the concept of savings, which seems to have been lost in recent years. Second, it would highlight the real value of both base metals precious metals. Third, it might subconsciously add to the prestige of the Dollar, since it would probably take four or five Euros to buy a U.S. Dollar. Fourth, It should also be a cue for folks to consider investing in inflation-proof tangibles like precious metals. Fifth, and most importantly, it would increase public awareness of the twin evils of inflation and fractional reserve banking. Then, hopefully, Congress would feel obliged to stop its deficit spending and to do something meaningful to control inflation.

The foregoing is not a serious proposition. Rather, it is more of an object lesson. I realize that the chances of the politicians in Washington, D.C. having the will to do something honest and forthright like this are probably nil. We've sent a bunch of spineless worms to Washington. By their inaction, they demonstrate that they are satisfied with the status quo--even if that means the robbery of the American citizenry, in slow motion. Chances are, in 30 or 40 years my grandchildren will probably pay $8 for a candy bar. And then perhaps there will be talk of lopping off two zeros from the once almighty U.S. dollar.


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