Inflation Illustrated

Imagine we have two farmers: Farmer John and Farmer Pickles.  They both have a barns full of hay bales from their previous harvest.  They both take a bale each day to the market and trade if for a loaf of bread.  And this is the extent of their work for that season because they had a very hard summer.  Just one bale is taken into town each day by wheelbarrow which is traded for a loaf of bread.

 

You could say that these two farmers have stored wealth in their barn.  It's a somewhat good store of wealth because it's a lot of work for someone to steal.

 

Then one day an order from the president comes down.  They are ordered to sell all of their hay in exchange for currency.  To resist this order is to be labeled as unpatriotic.  But Farmer John doesn't follow the order.  Farmer Pickles does.

 

So Farmer Pickles takes all of his bales of hay to the market and sells them all for currency.  He then puts the currency into a bank account to draw interest.  He's happy with this arrangement because he got one penny for each bale.  And, it just so happens, that's how much a loaf of bread costs.  He doesn't see any problem.  And the currency is even harder to steal from than hay in a barn.

 

But Farmer John keeps his hay in his barn and continues to get his bread the same way he always has.  He is accused of being a hay hoarder and very unpatriotic.

 

After a year of this, Farmer Pickles realizes he has more money than he started out with because the bank is paying interest.

 

But during that time, the president spent a lot of money without raising taxes.  So the president had the currency made, which caused the value of the currency to fall.  Eventually, the currency was only worth half as much as it was before.  Farmer Pickles didn't get enough interest from the bank to offset the currency's falling value.

 

Now both farmers have to pay two pennies for a loaf of bread.  But Farmer John can also get two pennies for each bale of hay still in his barn.  Farmer Pickles is in a pickle.

 

All of this to say that here, the barn was a better place for the farmers to store wealth.  The value of the currency got manipulated by the powers that be.  But the actual value of the hay couldn't be manipulated.

Posted via email from McKenzie Meister