Thursday, August 17, 2017

Show Me the Money!



Last Thursday we asked the eternal question, Where does the money come from so people can buy capital and supplement or replace what they produce with their labor?  As we promised, here is one possible answer.  But first, why is where the money comes from such a big deal?  Money is money . . . right?  Well . . . maybe.  Up to a point.  And the point is . . . ?

Mayer Amschel Rothschild (1744-1812)
Back in 1838 Mayer Amschel Rothschild declared “Permit me to issue and control the money of a nation, and I care not who makes its laws!”  This was a pretty good trick, since Rothschild died in 1812, but no matter.  We have the word of the great monetary theorist Gertrude Margaret Coogan (1898-1986), the economic advisor to the popular “radio priest” Father Charles Coughlin (1891-1979).  Coogan assured us in 1935 that Rothschild said it, and that’s all we need.  She never cited a source, but so what?
Some party poopers have pointed out that what Coogan reported Rothschild as saying sounds an awful lot like something Andrew Fletcher of Saltoun (1655-1716) said, “I knew a very wise man so much of Sir Christopher’s sentiment, that he believed if a man were permitted to make all the ballads, he need not care who should make the laws of a nation.  We don’t know who “Sir Christopher” was, but George Bernard Shaw (1856-1950) said something like that about letting the English write the history as long as the Irish write the songs.  Obviously Fletcher stole what he said from Shaw, just as Rothschild stole what he said from Coogan.
"Pay no attention to those other defunct economists. Just me."
Clearly the monopoly over money and credit — having it and creating it — gets some people a little excited.  Control over money and credit is the life’s blood of an economy, so it tends to be a pretty sensitive area.  The thing is, it doesn’t need to be that way.
The fact is, despite what you might hear from Keynes or/and other monetary conspiracy theorists, it is possible for you or anybody else to create money if you have something of value to exchange.  After all, money is just the medium of exchange, and is defined as anything that can be used to settle a debt.  Any time someone promises to deliver something of value, money is created, and every time someone keeps that promise, money is cancelled.  It’s as simple as that.
Taking that to its logical conclusion, if you have something that someone else values (you can’t exchange something that no one else wants, obviously), you have “money” . . . at least, as soon as someone accepts your offer you do.  You can go to the market with a bushel of apples and say, “Anybody want a bushel of apples?” and as soon as someone says, “Sure, here are six chickens,” you have a deal; between you and the chicken guy, money has been created and cancelled by the offer, acceptance, and completion of the deal.
Yes, but will you deliver the apples in autumn?
Suppose it’s springtime, however, and you only have apple blossoms, not apples.  You can’t eat apple blossoms, however, so you get a piece of paper, and write down, “I promise to deliver to the bearer one (1) bushel of apples as soon as the apples are ripe and I can fill a bushel basket,” and sign and date it.  You go to the market with your piece of paper and say, “Anybody want a contract for a bushel of apples for delivery as soon as they’re ripe?”
Nobody says yes, so you think a bit and add a codicil to your offer: “If I don’t deliver the apples as promised, the bearer can demand one ounce of pure silver that I have on deposit with Fred the banker as certified by Fred’s signature.”  Having added collateral — “debt insurance” — to your offer, it is soon accepted, and you trade what you got for the contract for what you need for dinner.
Now suppose you don’t have an apple tree or anything else, but you have a chance to buy an orchard.  The current owner says, “I’m tired of apples.  You agree to give me half the crop for the next ten years, and the orchard is yours.”  Everything is fine and you make the deal.  Money has been created, and will be cancelled over the next ten years as the debt is paid, that is, as you keep your promise.
But what if the current owner says, “I want the value of half the next ten years’ crop in silver right now, but since I want it now, instead of half, I’ll take the value of a third of the next ten years’ crop in silver — as long as I get it now”?  You take a contract for half the value of the next ten years’ crop down to your local bank and trade it for the value in silver of a third of the next ten years’ crop.  The current owner goes away happy, and you pay the bank the value of half the crop for the next ten years to buy back your contract.  If you don’t, of course, the bank takes the orchard.
I love you a bushel and a peck . . . and another bushel. . .
Chances are, however, that you will make good on your promise.  The bank will get half the value of the crop for the next ten years, you will get the other half, and all of it after that.  The old owner already got what he was promised, and the bank made its profit of one-sixth of the value of ten years’ worth of apples for putting up the silver.
Now, suppose the bank doesn’t have silver.  What it does have is pieces of paper giving the bank’s promise to deliver value on fulfillment of a promise that it can exchange for your promise to deliver value when the promise is fulfilled.
What’s the good of that?  All the good in the world.  Everybody knows and trusts the bank, while they might not have a clue who you are or if you can be trusted.  People who never heard of you will accept the bank’s IOU, while they would simply ignore or reject yours.
That, in very simplified form, is how new capital can be financed without existing savings.  Any money system is a system of promises.  A promise to deliver value in the future has value now, and that value can be used to purchase capital.  Once the capital is put into production, a portion of the income can be used to redeem the promise, cancelling it out.  The capital pays for itself out of its own future income.
That’s the simplified version, believe it or not.  How would this work in a modern advanced economy, so that ordinary people can afford to buy capital?  That’s what we’ll look at some time next week . . . assuming something more important or immediate comes up.
#30#

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