I long planned to teach my children about economics. Way before I was pregnant with my first child, I started putting together an economics curriculum using hand-on, Montessori-like materials. I strongly believe it’s our responsibility as people to be economically literate. When my son, 10, asked me how inflation works, I was ready.

I tried giving the following lessons before this, maybe when he was 8 or 9. For whatever reason, it didn’t really go well. But at 10, I have a child who is eager to learn large systems and who vacuums up knowledge like a Dyson vacuum. Even if the lesson was a bit sloppy and messy (as it is when using materials with children), he could handle the moving parts.

This lesson I gave is overly simplified as far as economics go, but it has to be, in order to start off with the basics. I had the materials ready, which, by the way, I literally bought probably 14 years prior.

First, I wanted to explain how a commodity-based money would work. That we had some silver coins made this all the better. I gave each person in my family (of five) one silver coin. We were going to buy five cars with this. These cars, for simplicity’s sake, all cost the same. It was also everything we needed to live, as humans. Each car cost one silver coin.

But carrying around silver all the time gets heavy. So the bank issues paper notes, purely for convenience. Each silver coin was $50. How much money is in our total economy now? My son, 10, mad hungry at all times for analytical problems to solve, figured this out easily: $250. So, now, each car costs $50.

Now, what happens when someone makes FAKE money? I represented this fake money with a pink paper clip attached to it. And a trickster, our dinosaur here, came to use it as money.

Now that there is $50 more in the economy, how much total money is there? $300. And how much is each car? $60.

Other factors can contribute to “inflation.” A car could get smashed. My five year old happily obliged with smashing one of the cars. With $300 in money supply and 4 cars, what do they cost now? My ten year old, again, hungry for analytical challenges, calculated this easily: $75. Production efficiency can also increase. If car manufacturers can produce 10 cars and we have $250, how much is each car? They are down to $25. This is what we see as computers, TVs, etc., continue to come down in price.

I then explained that once upon a time you could exchange your paper money for an actual commodity. In our example, $50 could be exchanged for one silver coin. In real life, as late as 1933, one ounce of gold was set to $20.67. Just for this article, I looked up the going price of an ounce of gold now. It is $1,647.00.

But the government decided to go off this system. As such, paper money is just paper. It is backed by nothing, and the government can make more of it, through various means (buying debt as I understand it). I explained that the government went off the gold standard to pay for the Vietnam War, which is a way to make money for something that people do not want to pay. My children insisted only taxation takes money and so I impromptu gave them this little classic poem,

Roses are red.
Violets are blue.
Taxation is theft
And inflation is, too.

Anyway, the government now has gobs of money. I started throwing money around like it was nothing. My children thought this was hilarious and started making it “rain money.”

As they did this, I yelled, “Bailouts! Stimulus! More money! Make it rain!”

My kids found it really, really funny to “make it rain” with money. I explained that this, indeed, is why people probably don’t mind inflation. It’s fun to feel like we have money and lots of it. When the government prints money like this, they often give out chump change, perhaps about $1,000, to everyone. They feel happy, everyone feels happy–and we don’t realize our money plunged in value that much more.

For the record, my politics are free market. I would support the free exchange of money and the de-centralization of banking (not necessarily the gold standard). For more, read from any Austrian economist.

My son, 10, readily got the lesson. Personally, it would have been very beneficial to me, I think, to have been simply explained that money used to be tied to a commodity at a fixed rate. I was always confused by this, because on the market now, metal goes up and down in price. I didn’t know it was fixed, even by the time I went to college. I also think that realizing that the “purchasing power” of your money goes down is something that has to be explained with concrete examples to children.

It’s my goal to give my children an education–the real kind. Come back to The Observant Mom for more teaching ideas for children that may be vital for us as we humans go forward.