One of my earliest memories as a child is being sick in bed and having my mother read to me The Wonderful Wizard of Oz by Frank Baum, a book most people know by its shortened title The Wizard of Oz. This September Rachelle and I had the privilege of attending the award winning West End theatre presentation of Wicked in London, England, a musical that serves as the prequel to The Wizard of Oz. Fellow Oklahoman and Broken Arrow friend Kristen Chenowith played Glinda the Good Witch of the South when Broadway brought Wicked to the stage in New York City in 2003. Most people are familiar with The Wizard of Oz through broadway or Hollywood's classic 1939 film version starring Judy Garland and not Baum's book. The differences between the the book, written in 1900, and the later film and broadway versions may at first seem minor, but as is the case in many attempts to bring written material to life through the visual arts, small changes impact the book's overall theme. For example, in order to showcase new improvements in Technicolor, movie producers changed Dorothy's silver shoes in the book version into ruby slippers for the 1939 film version. Unfortunately this small change caused the public to miss the economic allegories in Baum's book. Many today view the The Wizard of Oz as a cute morality play for children. Frank Baum, however, wrote The Wizard of Oz in the late 1890's as a powerful allegory of the economic problems faced by the United States. Frank Baum's The Wizard of Oz is to economics what John Bunyan's The Pilgrim's Progress is to Christianity. If you understand Baum's allegory, you will know why America and European countries are in their current economic crises and why we are headed toward a financial panic in America the likes of which our country has rarely seen. To understand the allegorical parts of The Wizard of Oz, you must have some historical background regarding the economic crisis in America during the 1880's and 1890's. You will not regret reading carefully this post, even if you don't like history or economics. Your retirement savings and your economic future are at risk.
In what is now called The Crime of 1873, the United States government took silver out of monetary circulation and went to gold as the standard for the American dollar. From the formation of the United States in 1776 until the year of the 'crime' of 1873, the United States had been on a bimetallic standard. In other words, for approximately one hundred years after America's founding as a country, an American citizen could go into a reserve bank, hand over any amount of paper currency (i.e. $10, $20, $100, $1,000, etc...) and be given either gold or silver in return. You would be given about 15 times more silver than gold in terms of weight (for silver traded to gold at a ratio of about 15 to 1), but you could choose the metal you wished to exchange for your dollars. But in the "Crime of 1873" the U.S. government decided to take silver out of monetary circulation. That meant you could no longer get silver for your dollars. The money supply shrank. Beginning in 1873 the only metal that could be exchanged for dollars in America was gold. Beginning in 1873 the government could only issue dollars and increase the money supply in proportion to the amount of gold it held in reserve. Silver was no longer a reserve metal for dollars, and for this reason, the money supply shrank, meaning the collective pool of money available for the exchange of goods in the American economy decreased. A decrease in the available money supply will always lead to deflation. Less money in circulation means lower prices.
Let me illustrate how a decreased money supply lowers prices. Let's say you are on the game Survivor and you and your fellow contestants have not eaten food for 20 days. On the 21st day you and the other 10 contestants are each are given just $20 to bid on 11 different dishes of sumptious food that have been prepared and brought to the camp. You are also allowed to bid on new bedding materials which will make your night's sleep more comfortable. You see what is available for purchase because it is all laid out in front of you. There's a steak and baked potato, there's a cheeseburger, a chicken salad sandwich as well as blankets, pillows, air mattresses, etc... You are limited as to what you can buy since you have a limited supply of money. Due to the small amount of money in circulation the price of everything goes down! However, if you and each of your fellow contestants had actually been given $100 each instead of $20 each, then the price of everything goes up! Why? Because the money supply has gone up, and when more money is in circulation, the price of goods for cheeseburgers and other commodities soars. Prices always eventually go up (i.e. inflation) in proportion to an increase in the money supply, and prices always eventually go down (i.e. deflation) in proportion to the decrease in the money supply.
This Survivor illustration helps you understand The Crime of 1873. The government declared that silver could no longer be used as government money. Silver was taken out of circulation. It's like contestants on Survivor having a large portion of their money taken away before they can bid on goods. The government decreased the money supply and prices for goods across the nation fell as did the demand for those goods by the American public. For the next 25 years, from 1873 to 1898, the United States experienced an average yearly deflation of 1.5%. The people who were hurt the most by the government's decision were farmers from Kansas and the midwest. The prices people were willing to pay for the farmers' crops decreased. Even worse, because farmers were already in debt (as most farmers are), they were having to use the dollars from the shrinking money supply to pay off their old debts. Think back to Survivor illustration and imagine trying to buy food and bedding materials when you have to pay a past debt with the limited $20 you have in hand. It would be much easier to pay off your old debts if your supply of money is greater. Many farmers in the late 1800's were facing bankruptcy because their debts was high, prices were too low, and there was not enough money in circulation for them to survive economically.
There is an important economic principle that can be derived from the 1873 government decision to remove silver from circulation, a principle that will shed light on today's economic problems and the allegory behind The Wizard of Oz. The economic principle simply stated: When people or nations (governments) are in debt, the more money pumped into circulation (i.e. "inflation"), the easier it is to pay off those debts. The more massive the debt, the more critical the need for a massive increase in money supply. If deflation is occuring when there is indebtedness, then the debtor will struggle to pay old debts with scarcer, more valuable dollars. Debtors always need an ever increasing money supply.
Enter Frank Baum and The Wizard of Oz. Dorothy and her cast of characters represent farmers (the Scarecrow), industrial workers (the Tin Man), and fearful politicans (the Cowardly Lion), and they all need help. They follow the Yellow Brick Road (the gold standard) to the Emerald City (Washington D.C.). Oz is the abbreviation for the measurement of gold (i.e. "ounces" or oz.), and the Wizard behind the curtain represents the politicians pulling the strings to decrease the money supply by using only gold as a monetary standard and not silver, harming all the weary travelers. What Dorothy and her friends need is the addition of silver back into the money supply. The entire Oz narrative is the struggle between the common man and the powerful Washington elites over the supply of money. In the Emerald Palace Dorothy and her friends enter 7 passages and climb 3 flights of stairs ( 73 representing The Crime of 73). Silver is found throughout the Wizard of Oz as the answer to the problems at hand, including the Tin Man receiving "a new ax with a handle made of gold and a blade polished so that it glistens like burnished silver and a silver oilcan to oil himself," a statement by Baum which describes his belief that the industrial worker will be helped with the addition of silver to the monetary supply. And of course, Dorothy's passage back to her farm in Kansas is to click her "silver shoes" three times together, representing that the power to solve the farm girl's problems was there all the time (adding silver to the currency). There are so many more economic principles in The Wizard of Oz, and for further study I would recommend that you read The Fable of the Allegory: The Wizard of Oz in Economics.
Frank Baum, author of The Wizard of Oz, was an economic activist. He was considered a progressive, someone we might call 'liberal,' today. One of his political friends, William Jennings Bryan, was the Democratic nominee for President in the 1896 and 1900 Presidential elections. Bryan rocketed to fame at the 1896 Chicago Democratic National Convention where he delivered his famous Cross of Gold Speech. Bryan, who was a devout Christian and went on to infamy in the Scopes Trial, was also a liberal economist, and he closed his famous speech by declaring, "Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." Bryan and Baum eventually got their wish of a bimetal standard for the American dollar, for the U.S. government reversed course early in the 1900's and added silver back as part of the American currency. You probably remember paper bills with the words "Silver Certificate" etched on the top.
When the government increased the money supply in the early 1900's, the motive was to help the western farmers, just as Frank Baum and William Jennings Bryan requested. But for the last 100 years the government has continued to RADICALLY and RECKLESSLY increase the money supply in America. Why? Because the U.S. government began taking on massive debt of its own. With World War I and then World War II the U.S. government became a debtor nation. However, with the addition of massive social programs in the mid-to-late 20th century, U.S. government became swamped in debt. The U.S. government has become the Kansas farmer of the late 1800's. Our national debt has crossed the fifteen trillion dollars mark. How do you ever get enough cheap dollars to pay off that kind of debt while continuing to spend for an annual operating budget? Is it even possible? Do you add another precious metal as a standard to the American dollar? No. The United States government did something mind-boggling.
The United States government decided in the 1970's to move the American dollar OFF BOTH THE GOLD AND SILVER STANDARD. What was once an argument in Frank Baum's day over a bimetal standard (silver and gold reserve for the dollar) versus a monometal standard (a gold reserve only), became an argument and an ultimate decision by our government to remove the dollar completely from any gold, silver or precious metal reserve standard. Frank Baum, William Jennings Bryan and every other 19th century economists--both liberal and conservative--would have never dreamed the U.S. government could or would do such a thing. But it is exactly what our government has done. Try to go into any bank with a $100 bill today and ask to get paid in silver and/or gold for that $100 bill. It won't happen. It can't happen. There's not enough silver and gold in the world to back the number of U.S. dollars in circulation today. The government's decision to move the dollar off any precious metal standard had its genesis in a highly secretive meeting of bankers and politicans in 1910 as they met on an island off the coast of Georgia called Jekyll Island. You may read about the extraordinary results of the government's decision in a highly readable book entitled The Creature from Jekyll Island: A Look at the Creation of the Federal Reserve. What we now have in America is a system where the supply of money is controlled by the United States Federal Reserve and not by the amount of silver and gold we have in reserve to back those dollars. European countries also have this same kind of currency system. The supply of euros is dictated by European Central Banks, all controlled by European governments. There is no precious metal backing. If governments need an increase in the money supply, then governments simply create paper money. Remember that the people who benefit most with the high inflation caused by an increase in the money supply are those people (or governments) who are in debt. Those harmed by an increase in the money supply are the frugal and the savers. In other words, what Frank Baum wanted in 1900 for western farmers in debt, we now have in spades for western governments drowning in debt. Baum wished to add silver to gold as a metal reserve to increase the amount of dollars in circulation, but he never dreamed of a government currency WITHOUT A STANDARD. Now we have NO precious metal standard. The government cannot have the money supply bound by the amount of gold and silver we have in Fort Knox (if in fact any is still there), because the government needs MASSIVE AMOUNTS of dollars in circulation for the government to pay its massive debts.
The American dollar today is what is called a fiat currency. The government prints it. People trust it and use it. If the government wishes to increase the money supply, they do so by simply allowing the creation of more paper dollars, in a process called fractional reserve banking, where the 'reserves' are paper money deposits, not metals! The only thing that guarantees the fiat money has value is the trust of the people in the currency. What happens when people begin losing trust in government currency? It becomes worthless. This is beginning to take place in Europe as people flee the Euro. One day people will lose trust in the U.S. government and turn away from the government's fiat currency if our debt continues. When that happens, the U.S. will face bankruptcy like Italy, Greec and other European countries face it today. The worst possible case scenario is for a government to be forced to pay back their debts in another government's currency. When this happens the money supply of the debtor government shrinks because the debtor country's currency is considered worthless by the lender country. The indebted government is then forced to pay its debts using another country's stronger currency (think China). This is why people find protection in precious metals or a stronger government's currency when governments are swamped by debt. The massive expansion of the supply of money which has no metal standard behind it is recklessly endangering a country's freedom and future. To say what is happening in Europe and America today is ultimately highly inflationary is a gross understatement. Unless massive and painful spending cuts occur, there is coming a collapse of bankrupt governments and national economies. One day soon people will lose complete confidence in their indebted governments. There will either be riots because governments try to get their fiscal house in order and shut down social programs, or in the worst case, governments will collapse. As the Bible says, "The borrower is a servant to the lender" (Proverbs 22:7).
Our problem today is the very opposite of the one Dorothy faced in The Wizard of Oz. Dorothy needed an increase in the money supply. Deflation was ruining the economics of the Kansas farmer. The farmer couldn't get a good price for his crop, and he couldn't pay off his past debts with a shrinking money supply. But over the last forty years we have received as a nation far more than Dorothy (Frank Baum) ever wished. We have had a grotesque growth in the money supply because silver and gold have both been REMOVED as a reserve for the American dollar. With the Feds doing everything in their power to fight off DEFLATION in order to keep money cheap to pay off government debt, there is coming very soon a rate of inflation the likes of which America has never seen. Where are the economic John Bunyan's of our day? Where are the Frank Baum's of our day? Where are the people with enough sense to know that America is in need of being taught lessons that are much more profound than cute children's fables suitable for Broadway and the big screen?