Planches à billets en folie

1. Introduction In this paper, we analyze the value of money. We consider both paper money and gold. We attempt to relate the supply of money (MS) and gold to their purchasing power (PP). We demonstrate the extent to which printing of money dilutes its value. As a store of value, the value of money is represented by its purchasing power. We compare the ability of paper money and gold to function as a long-term store of value. We conclude that gold is an excellent store of value, while paper money is not. We observe that excessive printing of paper money is the ultimate cause for the inability of paper money to function appropriately as a store of value. 2. Data Sources Historical monetary data is readily available on the internet. The official source is the Federal Reserve Board. Its monetary aggregate data can be found on its web site and is available free of charge. The Bureau of Labor Statistics (BLS) publishes the historical Consumer Price Index (CPI) data. Like the Fed, it also publishes the data on its web site and makes it freely available. For a proxy of the purchasing power of money, we use the inverse of the consumer price index. To illustrate, if the price index doubles, the purchasing power is halved; if the price index increases 10 times, then purchasing power of money falls 90%. 3. The Purchasing Power of the USD The following chart shows together the data taken from the above two sources. The chart visually shows the near-perfect inverse relationship between the amount of money in circulation and its purchasing power. It reflects the simple relationship that prices increase approximately proportionately to money supply. Stated differently, it reflects the basic tenet of monetarism that in the long-run, price inflation is a direct consequence of increase to monetary inflation. It also underlies the classical theory of "money neutrality"; whether one believes that money is "neutral" or not is a completely different story. Looking at the data, from January 1971 to December 2008, the U.S. money supply increased 16.8 times; this was accompanied by an 81.1% drop in purchasing power of the dollar, as implied by the governmentally-reported CPI. Thus, the data suggests that a 17-time increase in money supply has resulted in an approximately five-time fall in purchasing power. We do not attempt to explain this significant gap, but mention that the gap may...

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