A family member recently sent me a post from the Reddit Subreddit, r/wallstreetbets. The post was written by a McDonald’s worker who received a shipment of special coins at his restaurant. These coins allow the bearer to exchange a coin for one Big Mac. The post asks, “Since the U.S. dollar is no longer backed by gold, does this mean that the Big Mac coin is more stable than the dollar, since that coin is backed by Big Macs?”
It is a humorous post that illustrates how the U.S. dollar is backed by peoples’ confidence. I accept dollars in payment because I am confident someone in the future will in turn accept them from me. If this confidence evaporates, people will stop accepting the dollar in exchange for goods and services and the value of the dollar plummets.
Having a dollar backed by a precious metal like gold helps instill confidence in the dollar. If the dollar can be exchanged for ounces of gold in a fixed ratio (such as $20 per ounce), then someone is likely to accept dollars for payment since they can exchange the dollars for gold, something which has held its value throughout human history.
What the Big Mac coin does is allow us to see where inflation and shortages come from. Suppose McDonald’s produces 100 Big Macs per year and mints 100 Big Mac coins. This means one Big Mac costs one Big Mac coin. Suppose McDonald’s mints another 100 Big Mac coins but does not increase the production of Big Macs. Now, one Big Mac costs two Big Mac coins, meaning there was Big Mac inflation. Suppose instead, McDonald’s keeps the price of Big Macs at one coin. In this case, 200 coins will be trying to purchase 100 Big Macs, meaning 100 coin holders will get a Big Mac whereas 100 will go without. In other words, there will be a shortage of Big Macs.
This illustrates how inflation results from an increase in the money supply that is not matched by an increase in the production of goods and services, not “price gouging.” Mandating prices be held constant while the money supply increases results in shortages, which is what would happen if anti-price gouging legislation was used to fight inflation.
What the Big Mac coin does is allow us to see where inflation and shortages come from.
The cure for inflation is simple: limit money supply growth to match the growth of the production of goods and services. Had McDonald’s produced an additional 100 Big Macs when it minted 100 additional coins, the price of a Big Mac would have remained stable at one coin.
A benefit of the Gold Standard Act is that it made it difficult to increase the money supply since the world supply of gold is fixed. Inflation only became an annual phenomenon after 1971 when President Nixon closed the gold window, permanently taking the dollar off the Gold Standard. Inflation is not inevitable, but a deliberate choice by policymakers, since it is easy to finance government spending by printing money.
