In yet another sign of the times, a German company has introduced vending machines in airports and train stations that dispense gold in lieu of the traditional soda and snacks. Even more telling is that the vending machines have received quite a positive response. What do the Germans know that we don’t? Mainly the dangers of inflation and what can happen to a currency run amok.
It seems to be one of those cases where the lack of a history of failure has inured Americans to the dangers of pushing their currency too far. After all, one would think that the logical place to put such a machine would be right here in the good old US of A where the government is running close to a two trillion dollar yearly deficit and the central bank is directly monetizing a portion of this debt. This is the logical place to put a gold vending machine, but there are none to be found in the United States- well, at least, not yet. Chalk it up to cultural differences. The hyperinflation of the Weimar Republic happened in Germany, whereas the dollar has never had any similar episode. The closest we ever came was the inflation of the 1970s, and that seems to be but a distant memory.
Americans are a funny lot. They seem to pride themselves on how little they keep up with current events, let along their own history. Most Americans probably don’t even know that the ownership of gold bullion by private citizens was outlawed by Franklin D. Roosevelt in 1933 and only undone by Gerald Ford over forty years later. This might go a long way to explaining why Germans have such a greater affinity for gold than Americans do: an entire generation of Americans was brought up under the understanding that they could not own gold, so it was of little importance to them.
This vending machine represents an interesting experiment. By putting gold in small quantities in circulation, they are enabling it to function as a medium of exchange again. If you reach into your pocket to pay for something, you can now conceivably make the decision of whether to offer fiat paper money notes or a few grams of gold. They act as competing mediums of exchange for goods and services. Of course, it’s no mystery which one will chose to give to the merchant; Gresham’s Law dictates that in a free market that the “best” money available will become the medium of exchange. That is to say, if the vendors and customers were entirely free to chose what they would base their transactions, history has shown that they will chose the highest quality money available- precious metal coins of a known content and trusted value. However, when the law dictates that vendors must accept a given fiat currency in exchange of goods and services, then that money becomes the dominant medium of exchange.
After all, its not hard to part with printed paper notes that have no inherent value and when the choice has to be made between fiat money and gold, which would you rather part with? It’s an easy decision. The vendor’s ability to refuse the money and demand the higher quality money was what caused precious metals to become preferred to begin with. When the law removes the vendors ability to refuse fiat paper notes as payment, they become the preferred medium of exchange. The only circumstances under which this breaks down is in a black market. Since the market is for illegal goods anyway, the market participants do not have to be bound by any laws since they’re breaking the law in the first place. In most cases, black markets deal in the same currency as the society at large.
In societies weary of an inflated currency, however, people will instead gravitate towards alternative currencies such as “junk” gold or silver. Ironically, US Dollars were an often demanded currency in these situations, but those were times when the US Dollar seemed far more trustworthy than the going fiat currency of Ecuador or Venezuela. At times of economic crisis, US Dollars often WERE the black market good of choice to protect yourself from inflation.
It’s ironic that the US Dollar, which was once the currency people used to seek protection from rampant inflation and manipulation is now being looked at suspiciously. If history has taught us anything, its that success eventually breeds failure. A people become to sure of themselves and take on larger and more ambitious goals for their society (global domination seems a big one) until they ultimately fail and make room for a new culture. We are now living out that cycle. As my blog’s subtitle states, no inflationary empire lasts forever.