Dr. Ron Paul had but one question for the Federal Reserve Chairman Ben Bernanke, “What is your definition of the dollar?” In typical Washington fashion, Bernanke’s answer circled the question. His response was “My definition of the dollar is what it can buy. Consumers don’t want to buy gold; they want to buy food, and gasoline, and clothes and all the other things that are in the consumer basket. It is the buying power of the dollar in terms of those goods and services that is what is important, and that’s what I call price stability.”

This was an odd question for the business as usual political environment in Washington DC. Logical thought patterns often produce questions that on the surface seem out of context. It is usually upon further reflection that the deeper meaning surfaces. To understand our current dilemma we must first understand what the definition of the dollar is.

The dollar, in my mind, is simply the Federal Reserve’s version of money. The Constitution does not mandate the use of the dollar; in fact the Constitution does not make any reference to the dollar at all. The Constitution empowers congress to coin money, regulate the value thereof, and of foreign Coin.
In this Constitutional context the question becomes what is money and how do you value it. My simple definition of money is an exchange medium for individual industry. The need for money is based on a person specializing in one trade or industry and then exchanging their production to another equally.

A simple example would be the roofer and the plumber. The roofer fixes the roof on the plumber’s house, but the roofer’s house doesn’t need plumbing work. How does the roofer exchange the value of his industry with the plumber? The plumber can write him an IOU for a specific value, or trade something of value that he owns, or he can fix the plumbing for someone else that has or does something the roofer needs. As you can see, this would quickly get very confusing.
This is the basic need for a community based monetary system. At the end of the day, to value the money of the monetary system of a community, one must place a value on ones time and production. This is the mark of sound money; it should be based on the skills and time of an individual and not on an item or group of items.

Now, Bernanke’s answer starts to make a little more sense. His idea is the value of the dollar should be regulated by a basket of finished products. To counter that view, it is Dr. Paul’s view that the value of the dollar should be regulated by a single commodity (gold).

Finished goods should in theory reflect the labor cost associated with their production. A single commodity will only reflect the labor required to extract, refine and transport that single commodity. In addition, a “basket” of finished goods should reflect a broader scope of labor fields.

One problem with using a basket of finished goods as the base “value” for the money in the United States is that more and more of the labor used in the production of the goods is done in other countries that base their labor prices on separate economies. This artificially suppresses the value in relation to the labor in the United States unless appropriate tariffs are placed on the goods.

The value of money in the United States must be based, at least primarily, on the current medium wage of laborers working in the United States. This is the only way that the value of our money will reflect the value of our individual industry. Wages go up, the money supply goes up. Wages go down, the money supply goes down.

This one item alone will not fix our economic system, but it is a start.

This entry was originally published March 8th, 2011 on my old blog.

Doug