Sunday, January 22, 2012

Never thought of this before

When people used the precious metals for money, as in ancient Rome, when savings started to accumulate in few hands there was an incentive to melt down the coin to make jewelry or ingots or whatever. And the more the money was debased, the greater the incentive, among the wealthy, to melt it down and retrieve the precious metals. This is not true of paper money.

Paper does not melt, and there is nothing precious to be retrieved by burning it. So today, when money starts to accumulate in few hands, it stays in the form of money. If you want gold you buy it, and then the seller gets the money. But the seller is not going to melt it down, either. So the money never goes away.

Therefore inflation, or debasing the money, must have an entirely different result for us than it did in ancient times.

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