Capitalism!

[Casey]

With no disrespect intended, I have to say this about that. This sounds to me just like, "well, those Christians aren't TrueChristians™.

 

The money problem is a symptom of the disease, not the disease. Even if every dollar traded were an actual gold or silver coin nothing save perhaps the speed of exploitation* would change. Money, what ever its form is not wealth any more than board-feet is a tree or even a house. Money is merely the permission slip that entitles you to a steak or porridge, a hovel or a mansion. It is the idea of needing permission to live a decent life that is the problem, not what the permission slip is.

There is nothing intrinsic about gold that makes it more valuable than paper or bytes when it is used as money. The idea of money is psychological smoke and mirrors. It should be no surprise that the smoke gets wispier, and mirrors less shiny. Fixing the money will do nothing. Money has been fixed many times and the fixing has never undone economic injustice.

(emphasis mine)

 

First of all I apologise for not having responded sooner; I wished to think about what I should post in response. I would agree with you that money is, as you say, a "permission slip". However, what can replace it? If there were no money of any kind, the only economy possible would be one based either on barter or upon brute force. Money evolved in order to supplant the barter system and its difficulties. With respect, have you a better solution?

 

I would however dispute your statement that the form the permission slip takes is of no importance; on the contrary it makes a very big difference what form money takes, as I shall attempt to point out:

 

At first, money was commodity money, that is to say, it was based on some rare but easily divisible material. For various reasons, the market adopted gold and silver specie or coinage as commodity money. There were problems with this, it was true. One of the earliest problems started when rulers took upon themselves "the monopoly of the mint", ie they stated that there could be no private currencies; all money was to be issued by State mints and later, printing presses. The "monopoly of the mint" is known in today's law as "issuance". It was from this seizure of issuance from the market that the legend arose that what made specie valid was its having the head of some living, or long dead monarch or ruler stamped upon it. Nothing could be further from the truth; it would not matter in the least if the specie had been stamped with a representation of the hindquarters of a jackass or had been stamped with nothing at all.

 

What gave hard money specie its value was that it was a coin of a specified weight and fineness of gold or silver. Now because of the drawback of the weight of the coins, over time, money warehouses (banks) came to issue receipts for specie. These notes were exchangable for gold or silver, a practice that continued in the US until 1933. Now banks could practise fractional reserve banking (ie issue more receipts than they held gold or silver and lend these at interest). However any bank which did so was tecnically insolvent from the instant it did so, and well they all knew it. Therefore it was in their best interest to be economically prudent, the more so because there was no Government protection for them, and there never should have been, nor should there be.

 

Right through the 19th Century in the US, hard money (gold and silver specie) was by and large the standard adopted. Indeed the Constitution, (Article One, Section Ten) states quite clearly that, inter alia, "No State shall emit bills of credit (unbacked fiat currency) ... nor make anything but gold or silver coin a tender in payment of debt". However this provision was ignored during the Civil War when greenbacks were first issued by the Lincoln Administration, and a legal tender law enacted to enforce their use. In fairness it has to be said that when Lincoln tried to borrow money he could only get it at interest rates between 24 and 36%. As he dared not raise more than a certain amount of money by taxation, he ordered the greenbacks issued. He also had to enact an income tax but that was to check inflation as much as anything else. That income tax was repealed some time after the end of the Civil War. Although one could have, (and many have) argued that the Civil War was not so much an issue of slavery as it was a conflict over taxes, that is another story.

 

In the last quarter of the 19th Century, the US was on the gold standard, and it was, by and large, the most prosperous period in US history. Although Government had increased in size and scope, it was not empowered to practise Imperialism in its own dominions or elsewhere; it had not the wherewithal to do so, and THAT was as the Founding Fathers had intended. There was no central bank, and because there was none, although there were "Panics" occasionally caused by the collapse of some financial institution or other, these did not last very long, however severe their effects were. The gold standard forced Governments to practise frugality; if they resorted to printing too much money, the people would withdraw their gold and tell them where they might go with their paper and what they might do with it when they got there. Because of the absence of a central bank or "lender of last resort", banks could not inflate or deflate together unless they formed a cartel between themselves, and no cartel in any industry can last without Government enforcement; that is human nature.

 

All of this changed in 1913 when the Federal Reserve Bank was enacted into law. The Government now had its own bank and that bank was granted sole issuance of US money. Now the Government could borrow money at will, and the interest upon the debt would be paid by the US taxpayer. To see that it would be paid, the Income Tax (16th Amendment to the Constitution) was passed in the same year. Nonetheless, because of the gold standard, there was yet a check on the inflation this process caused (and still causes).

 

The rest, as they say, is history. The last checks on inflation were removed firstly when FDR consfiscated the people's real money (gold) in 1933, and secondly when Nixon repudiated the Bretton Woods Agreement in 1971. To put it bluntly, FDR stole the people's money in order to get on with his cockamamie ideas to get the nation out of the Great Depression, and Nixon, you might say, filed bankruptcy.

 

I shall leave the last word to Thomas Paine:

 

The only proper use for paper, in the room of money, is to write promissory notes and obligations of payment in specie upon. A piece of paper, thus written and signed, is worth the sum it is given for, if the person who gives it is able to pay it; because in this case, the law will oblige him. But if he is worth nothing, the paper note is worth nothing. The value, therefore, of such a note, is not in the note itself, for that is but paper and promise, but in the man who is obliged to redeem it with gold or silver.

 

Paper, circulating in this manner, and for this purpose, continually points to the place and person where, and of whom, the money is to be had, and at last finds its home; and, as it were, unlocks its master's chest and pays the bearer.

 

But when an assembly undertake to issue paper as money, the whole system of safety and certainty is overturned, and property set afloat. Paper notes given and taken between individuals as a promise of payment is one thing, but paper issued by an assembly as money is another thing. It is like putting an apparition in the place of a man; it vanishes with looking at it, and nothing remains but the air.

 

Money, when considered as the fruit of many years industry, as the reward of labour, sweat and toil, as the widow's dowry and children's portion, and as the means of procuring the necessaries and alleviating the afflictions of life, and making old age a scene of rest, has something in it sacred that is not to be sported with, or trusted to the airy bubble of paper currency.

By what power or authority an assembly undertakes to make paper money, is difficult to say. It derives none from the constitution, for that is silent on the subject. It is one of those things which the people have not delegated, and which, were they at any time assembled together, they would not delegate. It is, therefore, an assumption of power which an assembly is not warranted in, and which may, one day or other, be the means of bringing some of them to punishment.

(Emphases mine)

 

To which I might add that, looking at current events, the said punishment may not be far off.

 

Casey

[Casey]

There is nothing intrinsic about gold that makes it more valuable than paper or bytes when it is used as money.

 

From here: It appears the US Fed holds 8,133.5 metric tonnes of gold. That constitutes 67.5% of the total "reserves" they hold. Think they might know something we don't?

 

Casey

[Guest drphilosopher]

I understand what you are saying, but you are not taking into consideration the capital required to compete in certain industries. Starting your own fitness training business requires little if any capital at all, so anyone can come in and compete with you, which forces you to price your services accordingly. But want to start your own local telephone company to compete with the one company that currently monopolizes a given region? Well if you don't have a billion dollars or so laying around your house required for the buildout of infrastructure required to do that, I hope you have a very rich uncle because no bank, venture capitalist, capital market or private investor in their right mind is going to loan your the money or provide you the capital to fund a project like that.

 

Don't be too sure. It depends upon whether the monopoly is efficient or not and whether it is providing a good value or not. If the monopoly is attempting to sell products or services at well above the fair market price, then there is the potential for making a lot of money by entering the market. You or I might not be able to set up our own telco, but a large company like GE or Exxon could and a smaller business could if it were backed by Morgan Stanley or some such company --- those companies might back you if the potential ROI was sufficient.

 

And that's why in the US even though the telco's have been broken up, the local markets are still dominated by only one company..... there's just no money to be made by competing with them. And that's why they are heavily regulated by the government.

 

The reason there isn't much competition in the local telco market is because of regulation. Cities often prevent new-comers from laying new cable because they don't want them building new poles or tearing up the street. But that is not a natural result of capitalism. That is a result of government intervention in the market place.

 

As I said originally I was mainly talking about essential services. Yes people can live without an Ipod or a new bike if the price is too high, but people can't live without food,

 

Food delivery is one of the least regulated industries in the U.S. (if you discount food safety laws). It is an essential service that is provided in brilliant fashion by the free market.

 

Darrell

[Guest drphilosopher]

1. I view Rand as something like a fundamentalist religionist. She takes capitalism to its logical end -- everything I can get and screw you. Fundamentally Capitalism is about accumulating wealth and then using that wealth to accumulate even more. That ethos necessarily means exploitation of people and resources.

 

That is a non-sequitur (depending upon what you mean by exploitation). The creation of wealth is generally good for people and that includes the ones doing the creation.

 

To me the idea of "TrueCapitalism" is as nuts as "TrueChristianity. TrueCapitalism whether Laissez Faire, Libertarian, or what have you is a religious belief in that it claims that if only X then everything will be hunky dorier. All the while it ignores the trouble trying to do X has caused as a symptom of a stupid idea. To the "TrueCapitalist" of the Laissez Faire sect like LB the solution is to be more pure. As we've seen with Marxism of what ever sect Capitalism of whatever sect doesn't work for the majority of people.

 

The more true to capitalism one is, the better the result. That has been seen in practice. The truer to Marxism one is, the worse the result. That has also been seen in practice.

 

This is pretty hard for an American, Canadian, or Western European to understand, because even the poor here seem to be ok. As a portion of population there are less abject poor here than in say India. As a consequence they are much less visible, but they are here and their numbers are increasing.

 

There is no evidence that the number of poor people in the U.S. is increasing. Moreover, the argument is somewhat disingenuous given the massive increase in the size of government in the U.S. over the last few decades. The argument that the latter is the source of any apparent problems is much more convincing.

 

Lightbearer attempted to label me communist or fascist (a sect of capitalism) because in his mind if I'm not a capitalist then I must be one of them.

 

Facism is not a "sect" of capitalism. Rather, it is anti-freedom and therefore anti-capitalism.

 

3. Just what is a rich vibrant market? Most of the world's people don't have any practical access to them. It does no good to ague that people will have access eventually as things trickle down. First, pie on the ground when your time comes around is no better justice than pie in the sky by and by. Secondly under any present major economic system wealth does not trickle down; it flows up. A rich vibrant market still operates to concentrate wealth into fewer and fewer hands.

 

There is no evidence of that conclusion either. In fact, just the opposite is the case. For example, more people than ever (and a larger percentage than ever) own stocks and make "passive" income.

 

I would say that just as there is no absolute truth in religion, there is no absolute truth in economics. However, I've noticed this in my 57 years: the more centralized anything gets the worse it is for most people and for most species, even though things get much better for the centralizers and the rats.

 

Centralization is the result of government action, not capitalism.

 

Darrell

[Guest drphilosopher]

And on a separate note, I find it interesting that so many rail against the type of social programs found in the US, when if SS were seperated out, the amount of spending on these programs is a pittance compared to military spending, corporate welfare, and farm subsidies. In order to truly make a dent on taxes and government spending, and as such provide more money for investment and for a strong economy and strong dollar, wouldn't it be best to focus on those areas that are dwarfing the teensy social programs first?

 

To some extent, I agree. Social Security, Medicare, corporate welfare and regulations (which are often designed to favor one business over another) are the major areas that should be addressed. Defense spending is required to maintain our freedom in the face of any number of global threats (radical Islam, Putin's Russia, Communist China, North Korea, etc.).

 

Darrell

[Guest drphilosopher]

Casey, I have read a number of your posts and you seem very knowledgeable about the history of currency, the money supply, etc. However, I don't really understand your objection to the current monetary system. To me, it makes no difference whether gold or fiat money is used as currency, so long as it holds its value relatively well.

 

I am not an expert on economics, but I was thinking about what I would want in a currency. I would want something that at any moment in time had a finite supply. However, I would want something where the supply would grow at a reasonable rate in order to avoid serious inflation or deflation. I would also want something that was divisible into a large but finite number of units and so on --- something that could be carried about, etc.

 

Gold is fundamentally a commodity. The amount of gold increases at a rate that depends upon how much of it is discovered, mined and refined. Therefore, its value, relative to other commodities, real estate, etc., fluctuates based upon its plentifulness.

 

Now, if the rate of increase in the supply of gold is relatively constant and predictable and if the rate of increase matches reasonably well the increase in the plentifulness of other commodities, products, etc., then it is a stable medium of exchange and can be used for temporarily storing value. The actual value of gold to most people is rather small as it serves no purpose for them other than to be attractive. It is used in some manufacturing processes, but if used as currency, the manufacturing processes would be a minor use and can be discounted.

 

The problem is that the rate of increase in the supply of gold is rather unpredictable. On any given day, someone may discover a large vein of gold which, when mined and refined, would flood the market, leading to inflation. Inflation is especially bad for lenders who had hoped to gain a reasonable return on their investments only to find that the currency with which they are being paid is now worth less than it was originally. And, overall, inflation can lead to economic problems.

 

In some respects, deflation is even worse. Deflation would occur if no more gold were discovered. If no more gold were discovered, the price of gold would rise relative to other commodities and products. That would be bad for borrowers. A borrower might discover that the amount of money he owes is increasing faster than he can pay it off and faster than his salary is growing, even with increases in productivity.

 

Of course, if the rate of deflation was relatively constant, the borrower could demand a very low interest rate up front so that he wouldn't get screwed by the rising cost of currency, but there is a limit to this process. The lender would never agree to a rate less than or equal to zero, because he could make more money by simply holding on to his gold and not lending it at all. That is, the value of his gold in terms of other commodities would be rising faster than the rate of interest that he could charge a borrower. The result would be the collapse of the monetary system. People would be forced to resort to a barter system for lack of a useful currency.

 

So, what is needed then, is a kind of currency that is produced at a reasonable rate, a rate that is consistent with the rate at which other commodities and products are produced. But that is exactly what the fiat currency provides so long as it is managed properly.

 

What is a reasonable method of managing the currency? Well, if you want the value of it to remain constant relative to other commodities and products, then it makes sense to tie its value to those commodities and products; to create more currency in a deflationary scenario and less in an inflationary scenario so that its value never wanders very far from its original value relative to those commodities and products. But, that is exactly what is currently done (more or less). So I conclude that not only is the fiat currency a workable solution, but it is often superior to the use of specie, if properly managed.

 

Darrell

[♦ nivek ♦]

drph:

 

Not Casey, however he and I discuss quite a bit of money/currency issues.

 

If you are not yet familiar with Mises Instiute they are one of the leading Schools of "Austrian Economics", a place and philosophy that Casey and I read from with gusto.

 

Lew Rockwell dot com is another great place for politics and economics with a libertarian to practical anarchist bent.

 

I don't know of *any* system that can't be exploited by the greedy, set to usury by those inclined, and robbed blind by the banditry. Best I can hope for in *trade* is that faith in currency/paper holds, despite its abasement, and then hang onto the hard goods that I've managed to accumulate.

 

The rotten kid who fills my "Easy Answer Jar" went to work for Mao*mart last year and hasn't been by to fill the slips I once pulled out with ease.. Damnit, I have to work for answers now!

 

kL

[Guest drphilosopher]

Hi KL, I am familiar with those sites though I haven't spent a lot of time at either. Is there something in particular that I should look at?

 

Darrell

[Casey]

What is a reasonable method of managing the currency? Well, if you want the value of it to remain constant relative to other commodities and products, then it makes sense to tie its value to those commodities and products; to create more currency in a deflationary scenario and less in an inflationary scenario so that its value never wanders very far from its original value relative to those commodities and products. But, that is exactly what is currently done (more or less). So I conclude that not only is the fiat currency a workable solution, but it is often superior to the use of specie, if properly managed.

(Emphasis mine)

 

Hello Darrell, and thank you for your carefully considered response. As far as the Mises site goes, there is so much there that I could not in all honesty tell you where to start. However, the documentary they have called, "Money, Banking and the Federal Reserve" would be, I should think, as good a place as any. You'll find this in their Media section under Videos.

 

"If properly managed". Aye, there's the rub. You'll find on this page a very interesting dissertation on the subject mentioned, namely the money supply or money stock (M3).

 

While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living. But every system has its pros and its cons and our monetary system has a doozy of a flaw.

 

It is run by humans.

 

Oh, wait, that’s a valid complaint but not the one I was looking for.

 

Here it is: Our monetary system must continually expand, forever.

 

Which means it has a math problem in the same way that a beached whale has a breathing problem. In each case we have a massive organism that was optimized for a very different set of conditions than those in which it currently finds itself.

Our monetary system was conceived at a time when the earth seemed limitless and so nobody gave it much thought when we designed it such that every single dollar in circulation would be loaned into existence by a bank, with interest. In fact most thought it a terribly modern concept and most probably still do.

 

Since some people might begin grumbling about whether the earth is limitless or not, for the moment let’s remove any debates about natural constraints and simply talk about the mathematical evidence that our monetary system is now entering a stage of explosive, exponential growth.

 

Consider these data:

 

1) Money supply growth has gone parabolic. It took us from 1620 until 1974 to create the first $1 trillion of US money stock. Every road, factory, bridge, school, factory, and house built, every unit of economic transaction that ever took place over those first 350 years required the creation of $1 trillion in money stock. But it only took 10 months to create the most recent $1 trillion and I don’t recall seeing an entire continent’s worth of factories, schools or bridges built during that time.

2) Household debt has doubled in only 6 years. Think about that for a minute.

 

3) Total credit market debt (that’s everything) was about $5 trillion in 1975, has increased by $5 trillion in just 2 years, and now stands at over $51 trillion.

 

4) The wealth gap between the super-wealthy and everybody else is widening at a furious pace.

 

What’s going on here? Could it be that the US economy is so robust that it requires monetary & credit growth to double every 6-7 years? Are US households expecting a huge surge in wages to be able to pay off all that debt? Are wealthy people really that much more productive than the rest of us? If not, then what’s going on?

 

The key to understanding this situation was snuck in a few paragraphs ago; every single dollar in circulation is loaned into existence by a bank, with interest.

 

That little statement contains the entire mystery. If all money in circulation is loaned into existence it means that if every loan were paid back, all our money would disappear. As improbable as that may sound to you, it is precisely correct although some of you are going to consider this proof that I could have saved a lot in tuition costs if I had simply drunk all that beer at home.

 

But with a little investigation you would readily discover that literally every single dollar in every single bank account can be traced back to a bank loan somewhere. For one person to have money in a bank account requires someone else to owe a similar sized debt to a bank somewhere else.

 

But if all money is loaned into existence, with interest, how does the interest get paid? Where does the money for that come from?

 

If you guessed “from additional loans” you are a winner! Said another way, for interest to be paid, the money supply must expand. Which means that next year there’s going to be more money in circulation requiring a larger set of loans to pay off a larger set of interest charges and so on, etc., etc., etc. With every passing year the money supply must expand by an amount at least equal to the interest charges due on all the past money that was borrowed (into existence) or else severe stress will show up within our banking system. In other words, our monetary system is a textbook example of a compounding (or exponential) function.

 

Yeast in a vat of sugar water, lemming populations, and algal blooms are natural examples of exponential functions. Plotted on graph paper they start out slowly, begin to rise more quickly and then, suddenly, the line on the paper goes almost straight up threatening to shoot off the paper and ruin your new desk surface. Fortunately, before this happens, the line always reverses somewhat violently back to the downside. Unfortunately this means that our monetary system has no natural analog upon which we can model a happy ending.

(Emphases mine)

 

What Dr Martensen is saying is that the money supply in a fiat system such as that obtaining in the US can be shown to be an exponential function, that is to say its graph looks like this:

 

(From Wikipedia)

 

This is the graph of the function y=e to the xth power, e being Euler's Constant. When this equation is applied to natural phenomena such as the examples the author gives in the article, growth reaches a peak and then crashes spectacularly. The mathematical curve however goes on without limit. My own tongue-in-cheek comment is simply this: perhaps Dr Martensen has provided the proof of one of Voltaire's axioms, "Paper money always returns to its intrinsic value, nothing".

Casey

[Guest drphilosopher]

Hi Casey, Thank you for your response. I will take a look at the information that you have referrenced. Also, I agree that mismanagement is an enormous potential problem and sometimes an actual problem, though it does not appear to be that severe to me. A gallon of milk still costs roughly what it did 10 years ago, for example.

 

I had thought that there was a flaw in the argument that you presented, but upon further reflection, I think I understand the problem: liquidity. That is, it is impossible to pay back all of the money that has been lent out by the banking system because the amount of money in circulation is only enough to cover the principle and not the interest. So, the system is inherently inflationary. More money than necessary to run the economy must constantly be pumped into the system in order to maintain liquidity.

 

The solution might be a system in which money is "printed" rather than lent. In this case, a limited amount of money would simply be given away --- enough to keep the prices of commodities stable. Here, the problem would be the absorption of excess liquidity during economic downturns. In this case, some money would have to be destroyed or removed from the system. The government could simply remove some of its tax money from circulation (if it had the discipline to do so (!)).

 

I'm still not sure that I completely understand the problem, however. If liquidity were such a problem with our current system, how is it that the Fed can maintain an inflation rate of 2% while lending out money at 4-5%? Is all of the money lent? Or is some of it printed?

 

Darrell