Private Money

This is a brief history of private money in the U.S. by Bruce Champ of the Cleveland Fed. Here's the last section of the paper:

Private Money in the Internet Age With advances in information and communication technology ... it seemed certain that a new form of private money, “electronic money,” would arise... [T]he inadequacy of cash as a method for making payments in the growing world of electronic commerce seemed to lay the foundation for the emergence of electronic money.

But so far, we haven’t seen electronic forms of private money emerge as anticipated. Why not? Our historical review holds a clue. All of the different problems private money and scrip emerged to solve can be seen as  ... liquidity problems that the official, government-supplied money of the day did not meet. ...

Advances in technology and the growth of the Internet have simply not created a liquidity problem—or one that existing forms of money couldn’t evolve to meet. While purchases over the Internet have expanded at unbelievable rates in the last decade, the vast majority of Internet purchases have been made with credit cards. In spite of security concerns some consumers have about using credit cards online or the fact that some Internet customers, such as teenagers and low-income households, do not have access to credit cards, new methods of payment have developed that have ensured that existing forms of money continue to provide sufficient liquidity.

Brokered monetary value (BMV) payments are a prime example... BMV payments use a third party broker to facilitate the payment between a buyer and seller. The buyer authorizes the broker to transfer funds out of an account held with the broker to the seller of the product. The broker has all the private information regarding the parties involved, and buyers and sellers do not need to know this information to complete a transaction. It is inaccurate to call these payment innovations new forms of money. At this point, they are merely new ways to make payments. However, it is probably naïve to believe these means will not develop into new forms of money...

And here's the entire essay. It's interesting that Adam Smith believed that government intervention and regulation - a prohibition against the issue of small denomination currency - was needed to prevent banks from issuing too much currency and causing inflation:

Private Money in Our Past, Present, and Future, by Bruce Champ, FRB Cleveland: Who is allowed to issue money in the United States? The founding fathers made it clear that the power to create money would not be taken lightly. Their experiences with money and inflation during the Revolutionary War made them wary of paper money and conscious of the power wielded by those authorized to create it. They gave Congress the right to issue money and forbade the states from doing so. But the federal government isn’t the only entity that has, in practice, issued money. Private citizens and private companies have, too.

In the 1800s, for example, much of the country’s paper currency consisted of notes issued by private banks. Nowadays, commercial banks don’t print their own notes, but they create money just the same—in the form of checking accounts. People and companies other than banks have also occasionally seen the need to create their own forms of money.

Private money—money issued by individuals or companies—can be seen as an innovation that arises to fill a void left by the federally provided money of the day. Studying various examples of private money that have arisen throughout U.S. history has taught economists much about the qualities money must have to be useful. In this Commentary, we describe some of the needs private money has arisen to fill and some of the problems people have encountered when making or using private money. We consider the lessons our experiences with private money imply for our money today and in the future.

Who Needs Private Money?

The list of those who have issued private money in the United States is long. Besides state and national banks (that is, banks established by state or federal charter), transportation suppliers such as canal, turnpike, and railroad companies have issued money. Coal mining and lumber companies have issued money, often called scrip, to pay workers. Merchants, farmers, and community groups have created their own money, too. Each of these examples of private money arose to serve purposes that were not well served by government-provided money. These purposes include having a currency suited for making small purchases, having a medium of exchange in remote locations, and having a means of exchange during financial panics.

Problems with Small Denominations

In the 1800s the Treasury issued coins and occasionally a limited number of notes, but paper currency was also issued by state and national banks. Banks were prohibited from making small denominations by their regulating authority (the state legislature or the U.S. Congress), which made their notes hard to use for many purchases.

State banks originally could only issue notes in denominations of $1 or more. New York and Pennsylvania were the first of many states to increase the restriction to $5 or more. National bank notes could be issued only in denominations of $1 or more from 1863 to 1879, and after 1879, only in denominations $5 or more. By 1882, all smaller-denomination national bank notes had been taken out of circulation.

At the time, a denomination as little as $1 represented a large amount of money. In the 1830s, a newspaper cost a penny. In the 1880s, a laborer typically earned $5 per week. In 1890, a family paid about six cents for a pound of bacon. Trying to buy everyday items was awkward with state and national bank notes.

The case for banning small-denomination bank notes goes all the way back to Adam Smith’s The Wealth of Nations, published in 1776. He argued such a ban could prevent inflation. Bank notes of his era were usually redeemable by the issuer into gold or silver coin. Smith believed that if banks were allowed to issue only large-denomination notes, the public would have a greater incentive to redeem them. Frequent redemption was expected to keep banks from overissuing notes. Because small-denomination notes, by contrast, might pass hand to hand for a long time before anyone saw the need to redeem them, it was thought that banks would print more notes than they could redeem with the gold and silver they kept on hand. Without a check on the amount they could issue, a bank might make too many notes, resulting in inflation.

Federal and state legislators of the 1800s must have agreed with Adam Smith. But people still needed a money they could use to make small purchases or to make change. While the Treasury issued silver coins in dollar, half-dollar, quarter, dime, and half-dime denominations, for much of the century, there weren’t enough coins to go around. From 1834 to 1873 silver had a price in the free market that exceeded the price the U.S. Mint could pay by law. For that reason, few full-bodied silver coins were minted, and existing silver coins disappeared from circulation. With small-denomination coins scarce, businesses often paid a premium for them in order to make change for their customers.

This situation provided a role for a privately created small-denomination currency, and private individuals and companies stepped in to supply it. They made both paper money and tokens. From 1820 to 1875, private transportation companies, merchants, and farmers issued a significant amount of small-denomination currency. This money was denominated in dollars or in goods or services rendered. In 1853 the Treasury introduced a new three-cent coin, the trime, to alleviate the small-denomination problem. The trime was special because it was worth more as a coin than the silver it contained was worth, which kept people from melting it down and selling the silver on the market (see Michael F. Bryan’s Economic Commentary, “The Trime”). So for a short period of time, the small-denomination problem was solved.

But then came the Civil War. Inflation associated with the war led to an increase in the prices of precious metals, causing metallic coins to disappear from circulation. Economic historian Neil Carothers observed that “The country found itself, in the midst of a war boom, virtually without a currency between the one-cent piece and the five-dollar note.” Once again, private enterprises stepped in and created small-denomination currency. The Treasury also issued fractional paper currency from 1862 to 1876. Fractional currency came in denominations of a dollar, half-dollar, quarter, dime, and half-dime. Private money did not go unnoticed by government officials and it came under frequent criticism. In 1862, Secretary of the Treasury Salmon P. Chase blamed the unauthorized issuance of currency for the disappearance of small-denomination coins:

…the depreciation of the currency, resulting, in great measure, from the unrestricted issues of non-specie paying banks and unauthorized associations and persons, causes the rapid disappearance from circulation of small coins.

---Congressional Globe, 36th Congress, Second Session. 3405 (1862)

Congress reacted to the private money situation by forbidding private citizens or companies from issuing paper currency in denominations of less than $1.

No private corporation, banking association, firm, or individual shall make, issue, circulate or pay any note, check, memorandum, token, or other obligation, for a less sum than one dollar, intended to circulate as money or to be received or used in lieu of lawful money of the United States.…

---Act of Congress, 12 Statutes at Large, 592, July 17, 1862

In order to avoid legal problems many private issuers of paper money began denominating their currency in services (for example, miles of railroad service) instead of in dollars. In 1864, Congress prohibited private coinage “intended for use as current money.” However, the courts have frequently upheld the private issuance of coins or paper money if it circulated locally or was redeemable in goods or services and not in dollars.

Problems in Remote Locations

In the last quarter of the nineteenth century, mining and lumber companies flourished. Often these companies were located in remote regions far from banks. The remote locations of these enterprises encouraged them to issue their own money, commonly called scrip. Scrip is often a localized currency, redeemable in the goods or services of the issuer. In the case of mining and lumber companies, scrip was typically redeemable in goods sold at the company store. Originally, scrip took the form of paper, but eventually durable metal tokens became widely used.

By issuing scrip, mining and lumber companies could economize on their use of national bank notes, Treasury certificates, and coins—the forms of money accepted outside the local area at that time. Since scrip could be used only at the company store, workers often sold scrip at a discount for money that could be used for purchases elsewhere. Scrip was issued extensively. According to Dodrill (1971), 20,000 coal company stores in the United States, Canada, and Mexico issued scrip during the early 1900s. Examples of scrip from this era now in private collections number into the thousands.

Although the use of scrip was criticized at the time, the courts typically ruled that coal and lumber companies were not violating the 1862 and 1864 acts by issuing it, since it was not intended to circulate as money.

Problems during Financial Crises

During the Great Depression in the early 1930s, bank runs, in which depositors would arrive in mass at a bank and attempt to convert their deposits into currency, were common. Banks often responded to runs by suspending payments temporarily; that is, they refused to allow customers to withdraw cash from their bank accounts. Bank runs became so severe that in March 1933, President Roosevelt declared a four-day “bank holiday,” closing banks across the nation (and in some places, the closure was extended to a week).

Suspension of payments invoked a natural response of people to hoard money (by this time also issued by the Federal Reserve). Currency hoarding, suspension of payments, and bank failures caused frequent shortages of cash that made it difficult for people to make payments. In response, school districts, merchants, local relief committees, and individuals issued private money in the form of scrip. State and city governments issued their own local money as well.

Firms, unable to make payrolls by conventional means, paid workers in scrip. Often this scrip became redeemable in official currency after banks once again allowed deposit withdrawals. A common form of money issued by individuals and local relief agencies was “stamp scrip,” which could be used to buy items in the local area. Municipalities issued a lot, too. A piece of stamp scrip would have a certain face value, say $1, but to exchange it for items worth that much, one had only to buy a one- or two-cent stamp from the issuer and affix it to the back of the scrip. Recipients of the scrip would buy and affix a new stamp and use it for a their own purchase, worth the face value again. Once the back was filled with stamps, the scrip could be redeemed for the face value in legal tender. The famous economist Irving Fisher studied stamp scrip in 1933 and recommended it as a way for municipalities to stimulate spending and as a substitute for official money.

Most of the scrip issued in the 1930s was used only in the locality where it was issued, although the Roosevelt administration considered issuing a national scrip. The success of a particular issuance of scrip depended heavily on its backing and the credibility of the issuer. Successful issuance of scrip by municipal and state governments typically depended on whether it could be used to pay taxes. The value of scrip issued by firms depended on whether the holder viewed the firm’s assets or productive capacity as sufficient to honor the scrip.

Problems with Private Money

Although private money has appeared throughout U.S. history and has often had beneficial effects, its use has also caused problems. Many private issues of money were unsuccessful because people did not believe the issuer would honor its original intentions to redeem it in dollars or goods or services. Such experiences teach us that the perceived backing of private money is intimately linked to its success or failure.

We also observe that many examples of private money and almost all scrip were highly localized, meaning that they did not circulate widely. Although this is not necessarily a problem, it does imply that private money could not be expected to supply the need for a national currency or deliver relief from a widespread currency problem. The localized nature of most scrip arises to a great extent from a problem of recognizability— people can’t be sure how much a note might be worth if they don’t know the issuer. Local citizens have greater awareness of the credibility of a local issuer than does someone who lives across the country.

Another lesson from history is that the use of a money will be limited by how easy it is to redeem. Money that is hard to redeem often will be discounted or not accepted at all. This was most evident during the first half of the nineteenth century when state banks issued notes. Because these notes had to be returned to the issuing bank to redeem them in gold or silver, they often traded at less than full value. Local scrip, which could only be redeemed at the company store, also did not always trade at face value beyond the store.

Private Money in the Internet Age

With advances in information and communication technology—not the least of which is the ability to embed a wafer-thin computer chip into the equivalent of a credit card—it seemed certain that a new form of private money, “electronic money,” would arise as an alternative to paper money and coins in everyday transactions. More importantly, the inadequacy of cash as a method for making payments in the growing world of electronic commerce seemed to lay the foundation for the emergence of electronic money.

But so far, we haven’t seen electronic forms of private money emerge as anticipated. Why not? Our historical review holds a clue. All of the different problems private money and scrip emerged to solve can be seen as problems with liquidity—liquidity problems that the official, government-supplied money of the day did not meet.

Liquid assets are those that are useful in making everyday transactions and that do not lose their value when they are used to make a transaction. When the smallest bank notes were worth $1 and a newspaper cost a penny, a $1 note was not liquid; it would not be accepted for most everyday transactions. Scrip that could only be spent at the company store without being discounted was not liquid. And people who couldn’t withdraw their money from their banks had an obvious problem with having sufficient liquidity.

Advances in technology and the growth of the Internet have simply not created a liquidity problem—or one that existing forms of money couldn’t evolve to meet. While purchases over the Internet have expanded at unbelievable rates in the last decade, the vast majority of Internet purchases have been made with credit cards. In spite of security concerns some consumers have about using credit cards online or the fact that some Internet customers, such as teenagers and low-income households, do not have access to credit cards, new methods of payment have developed that have ensured that existing forms of money continue to provide sufficient liquidity.

Brokered monetary value (BMV) payments are a prime example of these new methods. BMV payments use a third party broker to facilitate the payment between a buyer and seller. The buyer authorizes the broker to transfer funds out of an account held with the broker to the seller of the product. The broker has all the private information regarding the parties involved, and buyers and sellers do not need to know this information to complete a transaction. It is inaccurate to call these payment innovations new forms of money. At this point, they are merely new ways to make payments. However, it is probably naïve to believe these means will not develop into new forms of money. Undoubtedly, too, there will be new voids in the future that will require new forms of money. Perhaps these voids will be filled by innovations in money provided by the Federal Reserve. But the private sector might also jump in and fill them, too.

Recommend Readings

Neil Carothers. 1930. Fractional Money. London: John Wiley and Sons.

Gordon Dodrill. 1971. 20,000 Coal Company Stores in the United States, Mexico, and Canada. Pittsburgh: Duquesne Lithographing Company.

Roland P. Falkner. 1901. “The Private Issue of Token Coins,” Political Science Quarterly, vol. 16, pp. 303–27.

Richard H. Timberlake. 1987. “Private Production of Scrip-Money in the Isolated Community,” Journal of Money, Credit, and Banking, vol. 19, no. 4 (November), pp. 437–47.

Richard H. Timberlake. 1987. “The Significance of Unaccounted Currencies,” Journal of Economic History, vol. 41, no. 4 (December), pp. 853–66.

Comments

[Lafayette]

"Advances in technology and the growth of the Internet have simply not created a liquidity problem—or one that existing forms of money couldn’t evolve to meet. While purchases over the Internet have expanded at unbelievable rates in the last decade, the vast majority of Internet purchases have been made with credit cards."

This may be true of the American phenomenon (of the internet's impact upon retailing), but it is NOT European. (And, lest we forget, the EU has a size and economic dimension larger than the US.)

In Europe, retail purchasing employs a debit card, not a credit card. So, one spends what one has earned not what one can borrow. Yes, this does not mean the consumer credit financing does not exist in the EU and, yes, this has sparked some private bankruptcies - but not of major proportions.

I wonder, in this article, if the author is not driving at the fact that most retail is debt financed in the US. This, indeed, is worrisome, since Americans save a ridiculously small percentage of their income, preferring to put much of their discretionary income into "equity savings" (under the presumption that the return is larger). These are nonetheless risk instruments, unlike savings accounts.

From a macro-perspective there is no distinction between the two. Both remain disposable savings for purposes of expenditure. One must also consider the instrumentation of mortgaging, which also contributes to disposable income.

My point: US consumers have a far greater latitude in obtaining and employment of "disposable funds" for purposes of expenditure. And, as is obvious, all economies begin and end with consumer expenditure - its prime generator.

What is nonetheless worrisome is the sense that America is spending beyond its means ... which can continue for as long as other nations want to keep dollars as reserve currencies. That sword of Damoclese, however, will remain hanging over American economic activity for some time to come. Should it ever drop ...

Wikipedia: The Sword of Damocles ... is a frequently used allusion, epitomizing the imminent and ever-present peril faced by those in positions of power. More generally, it is used to denote a precarious situation and sense of foreboding thereof, especially one in which the onset of tragedy is restrained only by a delicate trigger or chance.

[Real Person from the Real World]

eBay bought and promotes PayPal. I believe there are other pay services, mostly to accomodate auctions, but some retailers to use PayPal. Some companies (Amazon) broker third party sales.... so In the world of "electronic commerce" - certainly something has already arisen..... There may be problems, but they do exist. So what is they guy talking about?

[Real Person from the Real World]

Btw, there are ads and books out there selling the idea of being a broker. First came the mortgage scams, now what muck will this dredge up?

[Lafayette]

"There may be problems, but they do exist. So what is they guy talking about?"

Good question. Look at what is said: "Nowadays, commercial banks don’t print their own notes, but they create money just the same—in the form of checking accounts."

What makes him think that opening a checking account "creates money". The guy needs a dictionary and should look up the word "create".

The checking account, a credit/debit card, paypal, etc., are all payment facilitators and they "create money" (meaning revenues) only for those who are running these services. They substitute paper money, they don't create it.

Creating money (as regards consumer expenditures) must come from debt. Or, it derives from personal income. It does not simply appear because someone has opened a checking account.

I hope the frost hasn't affected that money tree in my back yard. I'm expecting a crop of 500$ notes in the spring ... ; ^ )

[Lafayette]

"Advances in technology and the growth of the Internet have simply not created a liquidity problem"

Why should they have created a liquidity problem? Again, let's look at defintions.

Liquidity is the availability of liquid assets, meaning assets (like money) that are readily disposable.

Why should the growth of internet create a liquidity problem, if people have the means (i.e., disposable income or credit financing) to pay for thier acquistions.

How does technology expand liquidity? All a mystery.

[Bruce Wilder]

L:"It does not simply appear because someone has opened a checking account."

Actually, it does. The Bank creates money, with a checking account -- it doesn't just substitute checks for currency -- because the bank lends out the money deposited into the checking account. I deposit $1000 into my checking account, and the Bank lends out $900 to someone else: now there's $1900 in circulation, where before I made my deposit, there was only $1000. Get an economics textbook; it is all in there.

[Bruce Wilder]

It is a mystery to me how the author can go on and on and on about the historic need for small denominations giving rise to "private" money, and not recognize how the internet has created a potential, but still unsatisfied demand for micropayments.

The need for a micropayment system on the internet has generated a large literature, and several, as yet unrealized attempts to create a functioning system for making small payments.

Credit card systems have a significant floor, and the floor for debit card systems is not much lower. But, these floors are not much higher than the brick-and-mortar unit-price floor; lots of stores impose minimums for a credit card purchase, but the minimum is seldom much higher than a routine purchase would be.

It is easy to imagine information purchases (newspaper articles, music and video clips, data), which ought to cost much less than the typical store purchase -- unit purchases, which might well have a floor measured in pennies or even a fraction of a cent.

There's a latent demand for liquidity of a form, which would enable markets to function in such "goods".

[cm]

Lafayette: As I know the phrase, the "sword of Damocles" does not imply those threatened by it are in a position of power.

[cm]

Bruce Wilder: Your $1000 are not actually in circulation, you are just imagining that. OTOH they do "exist" in your account, as long as you don't touch them.

[Lafayette]

BW: "The Bank creates money, with a checking account -- it doesn't just substitute checks for currency -- because the bank lends out the money deposited into the checking account."

Thank you for explaining common knowledge.

Only if the checking account is the person's initial account, is there money creation. Otherwise I am simply transfering my money from where it was deposited before or invested elesewhere.

Which is why I linked money creation to the birth-rate. (Also, one would presume the new account was that of an employed person who deposited thier salary within it.)

"Get an economics textbook; it is all in there."

I've read the textbooks, thank you very much.

Now, YOU read between the lines ...

[Lafayette]

cm: "As I know the phrase, the "sword of Damocles" does not imply those threatened by it are in a position of power."

I employed it as a simple analogy of one country (of economic power) menaced by the improbable but not impossible fact that other foreign powers will call in thier chits.

[Winslow R.]

How about Gift Cards...

"But so far, we haven’t seen electronic forms of private money emerge as anticipated. Why not? Our historical review holds a clue. All of the different problems private money and scrip emerged to solve can be seen as problems with liquidity—liquidity problems that the official, government-supplied money of the day did not meet."

All the different problems? What a nut. Ford, GM and every other modern day issuer of financial assets has the same 'problem' and does just fine as long as they hire the banking monopoly to 'help' in the creation process.

The real problem is Barney Frank types that keep WalMart Gift Cards just that. Give WalMart access to the Fed window and all 'exchange' issues will evaporate.

[Winslow R.]

"Undoubtedly, too, there will be new voids in the future that will require new forms of money. Perhaps these voids will be filled by innovations in money provided by the Federal Reserve. But the private sector might also jump in and fill them, too."

I think the author misses the issue. The problem isn't filling voids, but how to limit the concentration of the leverage of Federal Reserve provided money as those voids are filled. Why give the primary dealers and their cronies prime access to 50x leverage? Most Americans have limited access to leverage of 5x on a home perhaps?

This is how money is literally made. The concentration of leverage is an indication that the money making process is concentrated in too few hands. In order to create the financial assets demanded by the economy, issuers have to become highly leveraged to meet demand. We should increase the number and reduce the size of these leveraged issuers as they become 'public liabilities' if they fail.

WalMart would be a fine start. The American public would even be better.

[Winslow R.]

When a bank takes in a 'cash' deposit those are Federal Reserve Notes issued by one of the Fed banks.

The number in your checking account has almost no relation to the number of Fed Reserve Notes your bank holds. As Bruce Wilder noted, in past times there was a reserve requirement but it has been bypassed with money market sweep accounts and hence there is almost no relationship left as of the mid 1990's.

http://research.stlouisfed.org/fred2/series/BOGNONBR?&cid=50

Further more, the checking account represents 'bank money' issued by the particular bank you have your deposit. The 'bank money' has been created out of thin air but carries with it potential liabilities.

1)If a bank refuses to pay interest, increasing their liability, a depositor will likely move their deposits to another bank forcing the former bank to pay the interbank lending rate. BofA pays lousy rates on its deposits because it is in a monopolistic position with too many 'lazy' customers (including myself).

2) Once the customer 'spends' their deposit, the seller receiving the deposit may or may not hold an account at the same bank. If the seller deposits the money into a different bank, the customer's bank will have to pay the interbank lending rate.

It is important to understand what limits this potential Ponzi scheme. It is the Federal Reserve and their auditors. It is the American people that pick up the tab for any lapse of judgment once the FDIC fails.

[Lafayette]

WR: "WalMart would be a fine start. The American public would even be better."

What is all this rabbiting about "liquidity"?

China (and the rest of the world) is loaning the US (by purchasing T-bills) all the liquidity it needs to purchase Made in China produce at WalMart. And America, in its feeding frenzy, gobs it up.

Perhaps what you need is a real credit crunch to wake up to the fact that you are collectively living beyond your means.

My point: Liquidity is NOT the problem. It's like saying the engine is seized because there's no more oil. Liquidity is simply the lubricant to an economic engine. When that economic engine piles up debt at a hallucinatory rate, who should be surprised that it looses speed and inevitably falters?

[Winslow R.]

L wrote: "My point: Liquidity is NOT the problem. It's like saying the engine is seized because there's no more oil. Liquidity is simply the lubricant to an economic engine. When that economic engine piles up debt at a hallucinatory rate, who should be surprised that it looses speed and inevitably falters?"

The engine has all the oil directed at a single cylinder through wealth consolidation. Your views on debt are a carry over from the gold standard.

[cm]

Based on Winslow's one-cylinder metaphor, I propose another (not so original actually) thesis, that inflation is a response to concentration of wealth and control over currency flows (not quite the same, as much of such control comes without actual ownership), as the economy would otherwise stall. As much of the newly printed money is quickly sucked up by the economy's money-sink "leaks", you have to keep printing.

[cm]

In other words, inflation should correlate with "leakiness" (sinks of concentrated wealth and financial control) of the economy.

[Winslow R.]

cm wrote: "In other words, inflation should correlate with "leakiness" (sinks of concentrated wealth and financial control) of the economy."

Partly, though the inflation will likely never become apparent as savers are likely to remain savers. I'd call it potential inflation.

There a little bursts of apparent inflation every time the government steps in to bail out some non government entity (turns private money into public money). There are little bursts of apparent inflation every time the government increases deficit spending beyond GDP/savings desire growth.

I'd like to see what is really required to 'bring it on'. So far inflation is much more difficult to create than almost every economist believes, take Japan. It takes either a vast amount of corruption, or very little taxation along with large amounts of government spending. Bush has hit the trifecta yet very little inflation has become apparent so far.

[yartrebo]

"Bush has hit the trifecta yet very little inflation has become apparent so far."
- Winslow

You're just not looking in the right places. Inflation right now is concentrated in asset prices, such as houses and stocks. Healthcare prices have been on a multi-decade long tear, and even the recent 'moderation' still has prices increasing faster than CPI. Energy prices have also increased rapidly, though quite erratically.

I have certainly felt the rapid inflation of the last decade or so (before that I was too young to note much more than candy prices). The big bills such as medical care go up fast, more than doubling for an average pill or doctor's visit. Rents have risen a little less, about a 50% increase in 10 years, but that is with rent stabilization. Market rate rents have risen even more then that from what I've heard.

Computers and electronics might be cheaper, but they're a tiny part of my budget, being under $1,000/year, including accessories and consumables like DVD-R's. Same goes for other stuff that's dirt cheap now like furniture (I've spent less than $200 on furniture in the last 7 years) and clothes (my clothes budget, including the cash spent on clothes given to me as gifts, is about $100-$200/year).

In short, I've been feeling about 5%/year inflation in my basket of goods, which is probably far more representative of what a poor person buys then what the CPI uses.

[Greg]

Actually, there =is= online "private money. E.g., Linden dollars, the currency of Second Life, can both be used in the game and sold (legally) for USD (see http://secondlife.com/whatis/currency.php). Some other MMOs/virtual worlds also allow this. Most do not; EverQuest plats and World of Warcraft gold are not supposed to be transferrable outside the game, but people do it anyway (Google "WoW gold").

These currencies are not created to solve a liquidity issue, however, but to avoid having tax liability created by earning in-game currency (presumably there is a tax liability if/when you cash out, however). And also to preserve a sense of verisimilitude in-game--it sounds nicer to pay gold for a magic sword from the dwarven blacksmith than USD.

[cm]

Winslow: Are you kidding me? Little apparent inflation? Many local grocery prices have gone up somewhere in the 5-10% range annually, for the past 6 years or so I live in the US. Maybe I'm just buying the narrow range of products that go up in price, or get vastly improved product without noticing, but I think not. Medical costs I cannot readily quantify, but my premiums sure have too. Should I mention gas?

As yartrebo, I buy computers and other tech items only occasionally.

[Winslow R.]

"Winslow: Are you kidding me? Little apparent inflation? "

I kid you not, while I share your pain. We all could come up with our favorite 'basket of goods' but I still defer to the 'core rate' because that is the rate the Fed pays attention to and thereby affects the short term interest rate.

When/if inflation creeps into the core rate that is when the fireworks begin.

[cm]

Winslow: No pain so far, just observation. I generally don't defer to "expert" opinion when I smell bullshit. And there is a lot of that around in all walks of life, not just in inflation reporting.

[cm]

Inflation will never "creep" into the core rate, as there are "measures" in place to fend this off. Compare Barry Ritholz's line of "inflation ex inflation".