Thursday, April 29, 2004

Me and My Cabbie

On a recent business trip to New York, I hailed a taxi at the airport to take me to my mid-town Manhattan hotel. Upon entering the taxi, I gave the driver the address to my hotel and, in a perfunctory fashion, I asked the cabbie, "How's it going?"

In reply, he told me that prices were too high.

Gas prices for his taxi were climbing, he told me.. Food prices were climbing. And they just raised the price at a storage locker facility where he was renting space.

Since I follow prices for a living, I knew of what he spoke. "Yeah," I agreed, "prices are climbing. Most people don't realize it yet, but they are climbing and it is only going to get worse."

"You should buy some gold to protect yourself, if you can," I advised.

He then proceeded to lecture me for the rest of the trip on why he would not buy gold.I didn't say anything. I just let him talk. Gold, he told me, has very little use. It has some use as jewelry but outside of that it has no use, was the gist of his argument.

"You can't even eat gold," he said. He labored on the fact that you couldn't eat gold, for some time. This seemed to prove to him that gold was nearly useless.

As we arrived at my hotel and since I had an unopened Nestle's Crunch bar in my briefcase, I offered to pay my fare with the bar. "Heh, heh," he laughed.

"No," I said "take it. Why would you want paper dollars? You can't eat them,you can't even make jewelry out of them."

He laughed nervously again. "No, no," he said "I don't eat candy."

"But you can't eat any dollars I give you either," I said.

I then decided to give him a short lecture in economics to help bail him out of his predicament.

"You see some things sometimes have value simply because of their exchange value," I said. " You and I both accept dollars in payment for our services because we know we can exchange them for other goods and services we want. When something is widely accepted in exchange, economists call it a medium of exchange. It doesn't necessarily have to to have any other use. Dollars are a medium of exchange. We can't eat them, but we accept them in exchange because once we have them, we can buy
food with the dollars or we can exchange the dollars, as you know, for many, many other things."

"Now the one drawback of dollars is that the government can print more of them any time it wants. By printing more dollars and spending them, it is competing against you for things you want. That's where gold comes in. To increase the gold supply you have to dig it out of the ground.This is hard and expensive work. The government can't print more gold. The government can't produce gold at will. That is why the government has always maintained a propaganda campaign against it. FDR even made it
illegal to own gold. This legislation stayed on the books for decades. But
despite all this, many people still respect gold as the ultimate medium of exchange. And when the government begins to aggressively print more paper dollars, more and more people choose to hold some of their monetary reserves in the form of gold. That is why gold is valuable. No, you can't eat gold, but it's exchange value can't be corrupted by the government either, and exchange value is very important."

"Now again I am going to offer to pay this fare two ways. One with this bar which you can eat, or with these dollars which have no value outside of exchange value. Now if you accept these dollars, you are at least implicitly acknowledging that exchange value exists and I think you are a smart enough man to know that prices are going up because more of these dollars are being printed. Now if you are a real smart man, now that you understand exchange value, you should go and do something smart and hold some of your reserve funds in a medium of exchange that the government can't print at will. That's gold."

"Now, as far as this cab fare, will it be something you can eat or something that only has value in exchange?"

"I understand," he said "I see why dollars have value, and why gold has even more stable value."

I paid him the fare in dollars. As he counted it, he asked, "How many new dollars are they printing?"

"A lot," I said, " an awful lot."

Robert Wenzel is Editor & Publisher of and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.

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  1. did you tip the guy at least?

  2. I didn't realize this website has been up since (at least) 2004. I have a question though about your response to the cabbie's question of "How many new dollars are they printing?" and your response of "A lot, an awful lot". Were they really printing a lot of dollars back in 2004? If so, why? I was under the impression that the massive money printing came in 2008 during the bailout (and continued w/ QE1, QE2 and other programs since). I didn't realize that there was a lot of money printing in 2004 though. Or were you just referring to the idea that they were likely going to print money in response to the eventual bursting of the real estate bubble?


  3. Repthglican White Econoid Men don't tip. The proper etiquette is to thnk them for gracing us with their prescence.

  4. Anonymous (7:20 PM) is confusing Mr. Wenzel with a Republican. Obviously, he's only been reading the blog for the last five minutes.

    Kevin has really exposed an irony in this story. In 2004, the government WAS expanding the money and credit at an awfully high rate; it's only just gotten worse since then, relatively, a lot worse.