An Exchange of Views on the Nature of Money
Scott Bergeson, Dan Sullivan, David Hillary, Mark Monson, Harry
Pollard, and Jeff Smith
[Reprinted from an online Land-Theory
discussion, January 2003]
Dan Sullivan
In the current economy, where money is loaned into circulation, it is
a necessary evil. People cannot trade without money, and there is no
money without borrowing, because the system is rigged that way.
Periodically it collapses, and the money lenders foreclose on the
actual wealth producers.
Without the expansion of credit, either due to government borrowing
or land speculation borrowing, the system could not operate, and we
would be forced to resort to an honest, egalitarian monetary system.
I'd be interested in hearing the basic outline for your "honest,
egalitarian monetary system".
I'm also curious as to your understanding of the basic nature of "credit"
and its relationship to "money". Let me put my basic
understanding of credit on the table just as a jumping off point.
Exchange is often mutually beneficial and so barter arises naturally.
Unfortunately barter has many limitations, too obvious to need
mentioning. Credit arises naturally to solve some of these
limitations.
Basically credit allows one party to get what they need now in
exchange for a promise to give the other party back the equivalent in
value sometime in the future. This can often be mutually beneficial.
For example, take a farmer and a grocer. The farmer has not planted
his crop yet but he is hungry now. The grocer has fresh food now but
he will need more fresh food later. So they agree to a mutually
beneficial plan. The grocer will supply the farmer with fresh food now
and the farmer will return fresh food later - when the grocer will be
needing it.
Underlying this example is a fundamental principle - namely that
production requires time. There is a time gap between the beginning
and the end of production. In order for the production to take place
the time gap has to be filled. For example, the farmer has to eat in
the interim until his harvest comes in. The natural function of credit
is to bridge that time gap. Credit allows both the farmer and the
grocer to continue to do what they need to do -- to their mutual
benefit as well as the benefit of the whole community.
One very interesting point to note in this example is that whenever
credit is created a corresponding debt is simultaneously created. This
is basic double entry bookkeeping.
Another even more interesting point to note is that when the farmer
harvests his crop and pays back the fresh food to the grocer, his debt
and the corresponding credit are wiped clean from the books. It is as
if they never existed. In fact they did exist for a time to fulfill a
purpose but when that purpose was served they disappeared. Neat. And
there is no reason for debt to be continually expanding because with
production debt is being continually extinguished.
Of course this leads naturally to the question of how credit is
established and works in a community. It would be nice if "a
man's word is his bond" (the motto for the city of London) were
all that was needed. Unfortunately this is not the case today. So
credit instruments are needed and this leads naturally to a discussion
of money. But I think we'd best leave this out until we see if we
agree about credit.
You'll notice I've sidestepped the issue of interest. A tremendous
amount of agitation arises on the mere mention of this word and I
believe it is possible to discuss credit and money without bringing in
the issue of interest. As a matter of fact, once the issue of credit
and money is resolved, it becomes a lot simpler to resolve many of the
issues related to interest.
Dan Sullivan
Yes, the whole community benefits from mutual credit and mutual
trust, in the true, organic sense of both words.
However one must be careful in reverting to such simple models as
microcosms of the world. In your microcosm, credit and trust are
social forces rather than purely economic forces, involving the
desires of the participants to gain esteem among their peers. In the
modern world, credit and trust are institutionalized legal and
economic terms, involving the desires of the lenders to live in
perpetuity from the efforts of the borrowers, and involving the
borrowers' desires to trade, not with the lenders, but with one
another, and to fulfill their obligations to tax collectors,
landlords, and previous money lenders.
Mark Monson and Dan Sullivan
MARK MONSON:
How do we get to a system without parasites?
DAN SULLIVAN:
We don't, but at least we can get a system that wasn't designed by
the parasites.
MARK MONSON:
Would you say that in a system free of monopolies all private capital
would flow from the voluntary savings of workers producing consumables
to workers producing tools with interest flowing in the opposite
direction?
DAN SULLIVAN:
No, I wouldn't say that, because nobody would understand what I
meant. There is, indeed, a natural return to capital over time, but
the rate of that interest is an excess over monetary interest.
That is, if you could lend money at 10%, or have to borrow at 10%
plus risk and handling charges), and your return to capital is 12%,
the actual return to capital is 2%, and that is true interest in the
Georgist sense. Lending money could, in some cases, be a proxy for
lending capital, but the prevailing rates are determined not by
lenders of earned money, but by rentiers of monetary privilege.
Mark Monson and Jeff Smith
MARK MONSON:
How does a person experience too much money in the marketplace?
JEFF SMITH:
Touche! Send them my way.
MARK MONSON:
What exactly is a shortage of money? How do we know when there is
neither a glut nor a shortage of money?
JEFF SMITH:
Inflation signals the glut and, they say, falling prices signal the
scarcity. But falling prices also signal techno-progress. Maybe
something else is inhibiting trade, like idle land?
David Hillary
The price of money in terms of goods and services is *not* the basis
for consideration of the quantity of money as being short or excess.
The free market for money leads to a common apolitical standard of
value and money good, that is gold. Money such as bank deposits and
promissory notes are substitutes for physical gold and redeemable to
gold on demand.
The demand for money is derived from its ability to reduce
transaction costs. An individual's wealth consists of a portfolio of
monetary and non-monetary assets. Monetary assets are near perfectly
liquid and have very low transaction costs. In financial form (i.e.
bank deposits) they also bear interest and are ultra-safe. Individuals
will allocate their portfolio on the basis of equal marginal return.
The marginal return on bank deposits is the interest rate. Assets are
allocated to other forms of wealth to the extent that the owners
expect risk adjusted returns, at the margin, to be equal to the
itnerest rate. While other forms have higher gross returns, net of
transaction costs, non-monetary wealth can deliver worse results than
the interest that could be obtained from a bank. For example if you
buy securities worth 1 kg and it costs 1 g transaction fees to buy and
sell it, if you expect to hold it for one month and gain 1.5 g in
capital gain/dividend, you actually expect to lose 0.5 g in the mnth,
which is less than the, say, 1g you might have gained by leaving it in
the bank for the month and avoiding the 2 g in fees.
Money is produced primarily by banks who hold assets such as loans,
bonds and reserves against their liabilities (deposits). The banks
incur the transaction costs of buying and selling the assets and bear
the credit risks in exchange for the margin between the interest rate
and the return on its assets. Banks therefore are a transaction cost
reducing service offering very low fees, very low risk, and payment of
interest, and hold longer term assets for longer periods, knowing that
on *average* they will not be called on to liquidate at a discount.
The transaction costs and operational costs for the bank determine
the supply curve of money produced for the market. The price is the
margin between the interest rate and the rate of return on bank
assets. The demand is also a function of the transaction costs of
other forms of wealth holdings, and also on the risk appetite in the
market. (note: risk appetite is indicated by the risk premium on risky
investments such as corporate bonds (i.e. return on bonds vs the
interest rate).)
In macro-economic terms, the price of money is the price of the asset
to which money is redeemable for, e.g. gold. The relative price of the
redemption asset can vary with the costs of producing the asset and
the demand for the asset. The monetary asset has an inventory or
stock, which is used as a reserve and ultimate means of settlement by
banks. The surplus of deficit of production over consumption can
indicate the state of the market for the monetary asset. If there is a
shortage of the monetary asset held in reserve (inventory or stock),
the interest rate is bid up. This brings loan, investment and
consumption demand down and leads to deflation (i.e. rise in the price
of the monetary asset), which increases production and reduces
consumption, eventually eliminating the shortage. Or if there is a
surplus of the monetary asset, the interest rate is bid down, loan,
investment and consumption demand rise and this leads to inflation
(i.e. fall in the price of the monetary asset), which increases
consumption and reduces production, eventually eliminating the
surplus.
A small open economy in a world using the same monetary asset
equilibrates aggregate supply and demand by rising or falling factor
prices. If an economy is super-competitive, and enjoys low costs of
production, rents and wages are bid up by firms seeking to enjoy the
profit margins in that economy. Rising factor prices reduces the
competitiveness of the economy and restores the equilibrium between
aggregate supply and demand. Alternatively, an uncompetitive economy
is leads firms to exit the economy, unemployment of labour and
property, falling rents and wages to restore competitiveness.
So inflation can have two causes: local competitiveness of global
surplus of monetary asset. Deflation likewise has two causes: local
uncompetitiveness or shortage of the monetary asset.
Jeff Smith responds:
While a complete description of mainstream IS, it leaves out the
periphery and the OUGHT, such as consensual currencies.
The supply of money and the price of money are therefore not one and
the same issue. Money is created from other assets (bonds, loans,
reserves) and depends on transaction costs of various forms of wealth
holdings and the costs of operating banks. Money at the global level
is priced by the market for the monetary asset, in terms of its
production costs and demand, and works through the interest rate.
Consumer goods at the local level are priced by tariffs on imports,
indirect taxes on sales, and factor prices and productivity on
non-tradable goods produced and consumed in the local economy.
Harry Pollard
First things first. What is money?
In terms of theory, this is what George had to say in The Science of
Political Economy, pp. 493-4:
"What then shall we say that money is?
Evidently the essential quality of money is not in its form or
substance, but in its use.
Its use being not that of being consumed, but of being continually
exchanged, it participates in and facilitates other exchanges as a
medium or flux. This use comes from a common or usual consent or
disposition to take it in exchange, not as representing or promising
anything else, but as completing the exchange.
The only question any one asks himself in taking money in exchange is
whether he can, in the same way, pass it on in exchange. If there is
no doubt of that, he will take it; for the only use he has for money
is to pass it on in exchange. If he has doubt of that, he will take it
only at a discount proportioned to the doubt, or not take it at all.
What then makes anything money is the common consent or disposition
to accept it as the common medium of exchange. If a thing has this
essential quality in any place and time, it is money in that place and
time, no matter what other quality it may lack. If a thing lacks this
essential quality in any place and time, it is not money in that place
and time, no matter what other quality it may have.
To define money:
Whatever in any time and place is used as the common medium of
exchange is money in that time and place.
There is no universal money. While the use is almost as universal as
the use of language, and it everywhere follows general laws as does
the use of language, yet as we find language differing in time and
place, so do we find money differing. In fact, as we shall see, money
is in one of its functions a kind of language - the language of value."
In terms of practice, it would be instructive to choose a specific
money, such as United States money in the year 2003. I'll leave this
to the experts on the list (but please don't make it too technical -
where just looking for the basic fundamentals).
One piece of trivia. When I was in England last fall I was told that
British Pounds represented only 3% of all the British money in
circulation. I wouldn't be surprised if the numbers were similar in
the United States between the Federal Reserve Notes (Dollars) in
circulation as compared to the total money in circulation.
One final thought on the money supply from a book about U.S. Federal
Reserve chairman Alan Greenspan by Bob Woodward called Maesto:
"[the money supply is] technically the amount of money in the
economy - including currency, bank deposits and money market accounts.
As people moved large amounts of money into mutual funds in the early
1990's, the money supply became almost impossible to
measure...Greenspan didn't disagree with the formula, but the key
variable, the velocity - or number of times money changed hands -
could no longer be measured accurately for a variety of reasons that
were accepted by most economists. That was why the Fed was essentially
just setting the fed funds rate, not attempting to target the money
supply directly. Greenspan reiterated his view to Darman that the Fed
had been unable to control or even accurately measure the money supply
for years. The notion that it was possible was outdated."
Jeff Smith and David Hillary
JEFF SMITH:
So inflation can have two causes: local competitiveness of global
surplus of monetary asset.
But are those the same "inflations"? In a free market, the
former makes a temporary bump up in prices. In a managed market, the
latter never lets prices fall. Same difference goes for "deflation".
DAVID HILLARY:
They are the same inflations. The local inflation is a byproduct of
factors influencing supply of goods on the local market, i.e. sales
taxes, tariffs, local factor prices and local productivity.
In small open macro-economy terms, factor markets ultimately
equilibrate supply and demand. So factor prices (wages and property
rents) are moving up and down as needed, and thins influences consumer
prices in the small open economy. This is therefore driven by factors
like local productivity/profitability vs global
productivity/profitability driving local net immigration/investments,
driving local factor prices and consumer prices vs global factor
prices and consumer prices.
The second type of inflation/deflation relates to the market for the
monetary reserve asset, which is global because it has very low
transport costs as an internationally tradable commodity. The market
for money sets the global price of money and the world interest rate.
JEFF SMITH:
While a complete description of mainstream IS, it leaves out the
periphery and the OUGHT, such as consensual currencies.
DAVID HILLARY:
The *OUGHT* of currency is fairly simple. Governments aught to define
their currencies in terms of that market commodity that the market has
found most marketable and most suitable for standard of value and
means of payment: gold. It can do this by converting central bank
foreign exchange to entirely gold and gold receivables, then
irrevocably peg and redeem at the pegged rate. De-regulate the
interest rate and the banking industry and privatize the central bank.
This involves allowing banks to issue their own notes.
Harry Pollard
David, Inflation is not really an economic term. It's a physical term
describing an increase in volume. As such, it was useful to describe
the increase in volume of whatever was used as the "measure of
value". One of the effects of an increase in volume of the
measure of value is that prices rise.
With that quick sleight of hand we have come to know and love,
neo-Classicals began to use the term for the cause as the name of the
effect. Then they found the effect could be caused by reasons other
than an increase in the measure of value, so they added prefixes to "inflation".
Which shows that although they may not have read Henry George - they
have read Humpty Dumpty's remarks in Alice and Wonderland.
There is an advantage to being nonsensical. When politicians increase
the money supply and prices rise, they can then mount a campaign to "fight
inflation". They can also blame high profits and high wages as
the cause of rising prices. One recalls, but not without wincing,
Gerald Ford's WIN campaign (Win Inflation Now).
The other function (use) of money is said in every textbook in the
land to be a "medium of exchange". (I won't bother with "store
of value".)
Yet, something that is very useful as a medium of exchange is not
particularly good as a measure of value. In fact, the term "money"
cannot link together the two functions. (I use "Money" only
as a term for the "measure of value").
Most of the exchange function today is carried out with instant
pieces of paper. At the retail level, one writes checks, or
manufactures a credit card slip. I use a credit card whenever I go to
the supermarket.
At higher levels than retail, paper transfers much larger amounts of
value.
I call all these pieces of paper "Purchasing Media" (PM).
No doubt, Fred Foldvary would call them "Money Substitutes".
If at Christmas time, the amounts recorded on paper double or triple,
this inflation - this increase in volume of PM does not increase
prices (though the price mechanism might hunt a bit in response to
demand. This because the manufacture and destruction of PM doesn't
affect the "measure of value". (Which over many millennia
has been gold and perhaps should be again.)
States produce bits of paper in standard denominations - along with
coins which these days are like bits of paper. They are useful for
buying a package of gum.
David, unlike OZ, here there is a black market in drugs that uses
State money in large amounts. Drugs are a cash business. It's said
that cocaine residues can be detected in every American's wallet.
Otherwise, I think the amount of actual money would diminish
considerably over the years. As you suggest, it isn't all that much
now.
This analysis throws out the oft repeated complaints such as "the
banks create money" (they don't).
Dan Sullivan
I have heard a great deal of nonsense about money, and it is
analogous to the nonsense about land from non- Georgist libertarians,
so I will get right to the nub of the matter.
There is no coercion in government issuing money. Rather, the
coercion comes from government demanding rent in a money that it does
not issue on an egalitarian basis, or in a form that ordinary people
cannot produce.
While gold might have served as money in the absence of government,
it does not serve for government to demand gold, or to demand produce
of any kind according to its value in gold, for the latter is a
distinction without a difference. If one cannot get the demanded gold
for a ton of turnips and pay in gold, then the turnips are, de facto,
not worth the gold demanded, and will not satisfy the tax.
Wherever gold or silver, but especially gold, has been the currency
standard, it has been relentlessly hoarded, with the hoarders issuing
allegedly gold- backed notes and demanding interest for them.
Nor is there any reason to play around with bonds, as a government
that can be trusted to issue a $100 bond can also be trusted to issue
a $100 bill. Republics have successfully issued fiat currency
throughout history, and, contrary to the hysterical stories of the
gold-bugs, have done so with great integrity, creating stable values.
All government needs to do is stop borrowing money and simply print
it and spend it. The volume of money put into circulation should
simply be that which keeps overall prices stable. That is, if the
Consumer Price Index does not move, the right amount of money is in
circulation, and government should issue money at the same pace as the
prior month. Government should merely slow the issuing of money when
the price index rises, and hasten the issuing of money when it falls.
Within a system of productivity taxation, government would issue new
money simply by meeting its payroll with new money, and notifying
taxpayers to reduce payments accordingly. In a system of dividends,
government would simply tack the new money on to the amount of the
dividend. Thus, each person might get a $300 dividend from rent, and
an extra 25¢ from new money.
Meanwhile, much funny-money could be removed from the system by
raising the fractional reserve requirement and/or reducing FDIC
insurance to depositors. Ultimately, people would stop borrowing from
banks, and depositors would get no interest anyhow. They might even
have to pay a storage fee.
It really isn't as hard as people make it out to be.
Scott Bergeson and Dan Sullivan
SCOTT BERGESON:
Dan Sullivan proposes tallies by a different name. Why not use wheat
receipts? Most any arable area can produce it, and without it (or
another grain) cities become impractical. Obviously a standard
(protein and water contents, absence of pesticides, etc., just as
Saudi light is the standard for trading oil) is needed, and it will
trade against other foodstuffs. It also suffers modest, but non-zero
storage costs, so excessive hoarding will not be economical. Obviously
the receipts must be dated and charged storage upon presentation.
Issuing elevators can compete on that and other aspects. If you wish
to hoard value, perhaps gems or precious metals will better suit you
on the bases of storage, portability and appreciation, although you
will have to sell them for wheat receipts should you wish to rent
land. For money grains meet all the requirements of value, durable,
fungible and divisible. And anyone can produce them, in many places.
In fact they are one of the main products of land; food. They aren't
very portable, thus the preference for receipts.
DAN SULLIVAN:
Nor is there any reason to play around with bonds, as a government
that can be trusted to issue a $100 bond can also be trusted to issue
a $100 bill. Republics have successfully issued fiat currency
throughout history, and, contrary to the hysterical stories of the
gold-bugs, have done so with great integrity, creating stable values.
All government needs to do is stop borrowing money and simply print
it and spend it. The volume of money put into circulation should
simply be that which keeps overall prices stable. That is, if the
Consumer Price Index does not move, the right amount of money is in
circulation, and government should issue money at the same pace as the
prior month. Government should merely slow the issuing of money when
the price index rises, and hasten the issuing of money when it falls.
Within a system of productivity taxation, government would issue new
money simply by meeting its payroll with new money, and notifying
taxpayers to reduce payments accordingly. In a system of dividends,
government would simply tack the new money on to the amount of the
dividend. Thus, each person might get a $300 dividend from rent, and
an extra 25¢ from new money.
Meanwhile, much funny-money could be removed from the system by
raising the fractional reserve requirement and/or reducing FDIC
insurance to depositors. Ultimately, people would stop borrowing from
banks, and depositors would get no interest anyhow. They might even
have to pay a storage fee.
It really isn't as hard as people make it out to be.
I agree wholeheartedly.
Just one question. Why has interest disappeared from the system?
Jeff Smith, Rob Rubin and Harry Pollard
RON RUBIN:
It really isn't as hard as people make it out to be. I agree
wholeheartedly. Just one question. Why has interest disappeared from
the system?
JEFF SMITH:
Plus, there's nothing sacrosanct about today's prices. Why deny the
possibility of ever more affordable computers?
Plus, the need for new notes lies with whom? Not everybody, but
them's that ain't got any. Newcomers to the workforce with zero track
record. They can create new notes via consensual currencies, with no
need for the state.
Plus, the US, enjoying the global currency, is a special case. Most
of its notes exist outside its economy. When or if the dollar loses
that role and all those chickens come home to roost, expect US
inflation to rival Russia's or Israel's or Brazil's. Might be handy to
have alternative currencies up and running then.
HARRY POLLARD:
Jeff, Well said.
In terms of exertion - which is the true cost - improvements in the
power to produce should appear in the market as less exertion paid for
the same goods.
The task of the government with the issuance of its notes is to
confirm values. It isn't essential, but it's a convenience. If a
dollar is worth an ounce of gold, the market will adjust the values of
goods in terms of the standard measure of value - the dollar (but
really with the value of gold in the market). Pricing something as "1,000
dollars" then merely places it's value in relation to other
things.
Then overwhelmingly business is carried out with bits of paper with
values written on them. The only importance of money is to establish a
standard value. Gold has proven good for this over millennia. Maybe
something else is better. If so, the market will find it.
David Hillary and Jeff Smith
DAVID HILLARY:
The local inflation is a byproduct of factors influencing supply of
goods on the local market, i.e. sales taxes, tariffs, local factor
prices and local productivity.
JEFF SMITH:
You mean these factors cause a one-time jump in prices or a continual
escalation, eventho' the taxes' rates might not change?
DAVID HILLARY:
The rise in factor and consumer prices in a small open economy could
be ongoing if the underlying productivity growth differential
persists, or could reach a stable price premium or reverse, if the
underlying productivity growth differential is reversed.
Scott Bergeson and Dan Sullivan
SCOTT BERGESON:
Dan Sullivan proposes tallies by a different name. Why not use wheat
receipts? Most any arable area can produce it, and without it (or
another grain) cities become impractical. Obviously a standard
(protein and water contents, absence of pesticides, etc., just as
Saudi light is the standard for trading oil) is needed, and it will
trade against other foodstuffs. It also suffers modest, but non-zero
storage costs, so excessive hoarding will not be economical. Obviously
the receipts must be dated and charged storage upon presentation.
Issuing elevators can compete on that and other aspects.
DAN SULLIVAN:
Adam Smith also suggested a wheat standard. However, it is not
necessary to actually redeem money for anything. People will accept,
and even need, whatever form of money is demanded for taxes, rent, and
prior debts. It is taxes, far more than legal tender laws, that
maintain the U.S. dollar or any other currency.
SCOTT BERGESON:
If you wish to hoard value, perhaps gems or precious metals will
better suit you on the bases of storage, portability and appreciation,
although you will have to sell them for wheat receipts should you wish
to rent land. For money grains meet all the requirements of value,
durable, fungible and divisible. And anyone can produce them, in many
places. In fact they are one of the main products of land; food. They
aren't very portable, thus the preference for receipts.
DAN SULLIVAN:
Yes, portability was the other reason gold was used in trade,
although it was mostly used in foreign trade, and rarely used within
countries. However, once the substitution of notes is made for the
actual specie, portability of the specie is irrelevant, and arguing
based on specie becomes specious. Furthermore, under fractional
reserve, the fraction of notes *not* backed up by the precious metal
are counterfeit. Banks get most of their interest on loans of
counterfeit money.
Mark Monson and Dan Sullivan
DAN SULLIVAN:
Meanwhile, much funny-money could be removed from the system by
raising the fractional reserve requirement and/or reducing FDIC
insurance to depositors. Ultimately, people would stop borrowing from
banks, and depositors would get no interest anyhow. They might even
have to pay a storage fee.
MARK MONSON:
It seems to me that the flow of capital would increase in a more free
and prosperous society, but that is not enough information to predict
interest rate. Just as there must be a pressure differential to induce
water to flow through a pipe, there must be an interest differential
to induce capital to flow from the saved wages of workers to the
makers of tools. Also, there must be a conduit (pipe) through which
capital may efficiently flow. In their most useful function, banks are
that conduit.
Workers who deposit savings in bank accounts are deferring
consumption of part of the wealth they produce. The wealth itself is
not being saved, but consumed by other workers who are producing
tools. If the savings do not accrue interest there is no incentive for
the saver to deposit in an account. He may as well keep dollars in his
mattress.
What happens when dollars are hoarded? What happens to the wealth
made but not consumed by the producer? The total store of community
wealth has not changed. A worker makes bread. He cashes his check and
puts half in his mattress.. The bread he made is still consumed. What
about the maker of tools? He looks for a loan of money, but what he
really wants is bread to eat while he works on a project that cannot
be exchanged for a month. He must have bread, so he borrows bread.
From who? Not the worker who produced it. Who lends him the bread? The
bread produced by the worker became the property of the store he sold
it to. Somebody (it doesn't matter who) must come forward to lend
money to the tool maker so he can buy bread. This person who comes
forward must have wealth stored up (or a deposit slip that represents
wealth, or cash he borrowed).
In any case, when cash is hoarded, it decreases the available cash
for exchanging. This likely has some negative effects, though I
haven't tried to trace them. It certainly can't be the best way. The
best way is for people to deposit savings in some sort of mechanism
that can issue credit to those who want to borrow. In other words, an
efficient mechanism facilitates the flow of some wealth from savers to
tool makers. Tool makers bid against each other for capital. Savers
bid against each other for compensation. The equilibrium is general
interest rate.
But interest is necessary for flow to occur, taken alone, interest
rate is not a way to measure flow of capital. You can have high
interest rate with low volume of capital flow, or you can have high
interest rate with great volume of capital flow. The same is true of
pressure vs. flow in a water pipe. A house can have high pressure at
the kitchen tap but terrible flow.
A sudden increase in interest rate will indeed cause an increase in
flow of capital, but after a time, the interest rate may revert to the
previous level though the flow remains as increased. In periods of
rapid technological progress, where tools become obsolete quickly,
demand for capital can raise interest rates like a vacuum on one end
of a pipe increase the pressure differential action on water in the
pipe. As the demand for capital is satisfied, the suction on the end
of the pipe is removed, and interest rates drop. On the other hand (or
other end of the pipe), a sudden increase in savings has the same
effect. By increasing pressure on the input side of the pipe the
pressure differential (interest rate) is increased thereby inducing
more flow (dollar value of capital). As the surplus of capital
(supply) drops, so does the interest rate.
Ron Rubin and Dan Sullivan
RON RUBIN:
It really isn't as hard as people make it out to be.
DAN SULLIVAN:
I agree wholeheartedly.
RON RUBIN:
Just one question. Why has interest disappeared from > the system?
DAN SULLIVAN:
True interest, i.e., the return to legitimate capital, does not
disappear. The rentiering of money disappears, because money is no
longer loaned into circulation. There would still be lending of
*earned* money, and the interest arising would be a private matter
between the borrower and lender. However, it is unlikely that people
would accept bank notes as money once real money exists and the two
are clearly distinguishable.
Usually, when bank's get the money-issuing power, they contrive to
make their bank notes look like government currency, which is why
Federal Reserve Notes have dead Presidents on them, etc., and notes
issued by the Bank of England display the Queen of England.
By the way, the Bank of England has been nationalized, which is a
good thing, but they still issue currency by lending it through the
various British banks, when they could simply give it to the
government to spend. Thus, the cycle of bogus indebtedness continues.
Mark Monson
The last sentence of my previous post in this thread:
"By increasing pressure on the input side of the pipe the
pressure differential (interest rate) is increased thereby inducing
more flow ( dollar value of capital). As the surplus of capital
(supply) drops, so does the interest rate."
Here I have become confused by my own analogy. A sudden increase in
supply of capital will have the effect of decreasing the interest
rate. As the supply of capital drops (assuming unchanged demand),
interest rate will increase.
Scott Bergeson and Dan Sullivan
DAN SULLIVAN:
It is not necessary to actually redeem money for anything. People
will accept, and even need, whatever form of money is demanded for
taxes, rent, and prior debts. It is taxes, far more than legal tender
laws, that maintain the U.S. dollar or any other currency.
SCOTT BERGESON:
Correct; why I called your notes "tallies". England issued
them as money, and collected them back up in taxes. While they require
trusting the king, and must circulate so they are exposed to
collection for taxes the king's subjects pay (perhaps have an
expiration date or something, or get taxed out of circulation on a
monetarist basis to maintain a stable price level; I don't know how
the English handled this aspect), they apparently worked rather well
until the founders of the Bank of England got greedy to collect
interest. The U.S. could easily do the same thing with USNs,
preferably with encryption to deter counterfeiting. (The wood grain on
the counterpart stored in the king's treasury served this purpose for
tallies.)
DAN SULLIVAN:
Yes, portability was the other reason gold was used in trade,
although it was mostly used in foreign trade, and rarely used within
countries.
SCOTT BERGESON:
Depends whether you trust the currency issuer. FRNs aren't very
reliable as they depreciate, and if you try to collect offsetting
interest, you become liable as a U.S. taxpayer and vulnerable to
seizure of your financial accounts. Modern shipping easily allows
overseas shipment of grain, so barbarous relics aren't needed for
trade.
DAN SULLIVAN:
However, once the substitution of notes is made for the actual
specie, portability of the specie is irrelevant, and arguing based on
specie becomes specious.
SCOTT BERGESON:
Granted. Even L. Neil Smith's helium accounts would work, though
aren't good from a geolib perspective as helium can only be produced
from some natural gas wells, or at really great expense by atmospheric
extraction. No one proposes hauling a balloon or gas cylinder to trade
for a retail purchase, although one could theoretically haul a drum of
grain. Note that Samuel Clemens/Mark Twain said he saw no one proffer
carrots at the box office for admission to the theater in Great Salt
Lake City. (They used receipts from the Bishop's Storehouse.)
DAN SULLIVAN:
Furthermore, under fractional reserve, the fraction of notes *not*
backed up by the precious metal are counterfeit. Banks get most of
their interest on loans of counterfeit money.
SCOTT BERGESON:
Grains regularly get consumed and replenished. Really old grains,
besides having incurred excessive storage costs, are likely degraded
in quality. Having to pony up the actual grain regularly tends to
deter fractional reserve receipt issuance. It won't stop lending at
interest, as the Mormon Relief Society did routinely (at 50% p.a.!)
until Woodrow Wilson confiscated its wheat. Note the RS lent out the
actual wheat for planting. You can't plant or eat receipts.
Harry Pollard
HARRY POLLARD:
Scott, I pay my taxes with a check. Don't use money.
Nothing wrong with fractional reserve except that the government
imposes its wishes.
In a free society, banks would determine their own "fractions".
The market would require them to indicate what it is - from 1% to
100%.
Mark Monson and Dan Sullivan
MARK MONSON:
Meanwhile, much funny-money could be removed from the system by
raising the fractional reserve requirement and/or reducing FDIC
insurance to depositors. Ultimately, people would stop borrowing from
banks, and depositors would get no interest anyhow. They might even
have to pay a storage fee.
DAN SULLIVAN:
It seems to me that the flow of capital would increase > in a more
free and prosperous society, but that is not > enough information
to predict interest rate.
DAN SULLIVAN:
Bearing in mind that money is neither wealth nor capital, I would
agree that both the amount of capital would increase. I am not sure
what you mean by "flow." Ultimately, the interest rate would
fall to whatever is necessary to induce provision of the capital.
MARK MONSON: Just as there must be a pressure differential to induce
water to flow through a pipe, there must be an interest differential
to induce capital to flow from the saved wages of workers to the
makers of tools.
DAN SULLIVAN: Yes, but that interest differential could be anything.
It could even be a negative interest. For example, I know that I will
be less able to produce as I get older. If I produce extra wealth for
someone else now, and others produce wealth for me when I am less able
to produce for myself, then I have gained in terms of personal
utility, even if the market value of my repayment is less than what I
had put in.
MARK MONSON:
Also, there must be a conduit ( pipe ) through which capital may
efficiently flow. In their most useful function, banks are that
conduit.
DAN SULLIVAN:
Capital does not flow through banks. Indeed, money does not even flow
through banks very much. Mostly, credits and debits flow through
banks.
MARK MONSON:
Workers who deposit savings in bank accounts are deferring
consumption of part of the wealth they > produce.
DAN SULLIVAN:
Workers who stuff money into their mattresses are also deferring
consumption.
MARK MONSON:
The wealth itself is not being saved, but consumed by other workers
who are producing tools.
DAN SULLIVAN:
We don't know what the workers produced, or who is consuming it. We
can only say that people who stockpile money are accumulating
obligations on society generally.
MARK MONSON:
The savings do not accrue interest there is no > incentive for the
saver to deposit in an account. He may as well keep dollars in his
mattress.
DAN SULLIVAN:
So what if he does? If he worked without consuming, then is not the
storehouse of wealth increased, just as if he had put the money in a
bank?
MARK MONSON:
What happens when dollars are hoarded?
DAN SULLIVAN:
Nothing, if the government keeps prices stable by simply issuing more
dollars. If, later on, people start cutting open their mattresses and
spending their hoards, government keeps prices stable by simply
issuing fewer dollars.
MARK MONSON:
What happens to the wealth made but not consumed by the producer?
DAN SULLIVAN:
Virtually all wealth is not consumed by the producer.
MARK MONSON:
The total store of community wealth has not changed.
DAN SULLIVAN: Wrong. It constantly changes. Indeed, if the pattern is
for workers to produce more wealth than they consume, then the total
store of wealth is increasing.
MARK MONSON:
A worker makes bread. He cashes his check and puts half in his
mattress.. The bread he made is still consumed.
DAN SULLIVAN:
Of course it is. If not by people, then by mold. However, how he
chooses to pad his mattress has nothing to do with what happens to the
bread.
MARK MONSON:
What about the maker of tools? He looks for a loan of money, but what
he really wants is bread to eat while he works on a project that
cannot be exchanged for a month. He must have bread, so he borrows
bread.
DAN SULLIVAN:
Not necessarily. After all, he was not born a tool maker, so he
probably ate the bread his parents provided for him. Furthermore, I
bet his parents did not lend him the bread at interest, but gave it to
him outright. As he got older and began to produce wealth, he might
have become a bread maker, or he might have become a tool maker, or he
might have become something else. However, there is no reason to think
that he could not make tools because there is no bank.
Alan Watts once chided people in Oregon who said they could not build
houses because there was no money. He said something like,
You have clay for bricks, trees for lumber, and virtually everything
you need, and so you can indeed build the houses. Yes, you need to
measure the value of each person's contribution, just as you need to
measure the length of the boards you cut. Yet you do not say, "We
cannot build because we have no inches. The Californians have all the
inches, and we will build when the Californians are willing to lend
some of their inches to us."
MARK MONSON:
From who? Not the worker who produced it. Who lends him > the
bread? The bread produced by the worker became the property of the
store he sold it to. Somebody (it doesn't matter who) must come
forward to lend money to the tool maker so he can buy bread. This
person who comes forward must have wealth stored up (or a deposit slip
that represents wealth, or cash he borrowed).
DAN SULLIVAN:
Perhaps the tool maker himself has money stored up in his own
mattress. Problem solved.
MARK MONSON:
In any case, when cash is hoarded, it decreases the available cash
for exchanging.
DAN SULLIVAN:
Not in any case. Only in cases where there is an inflexible supply of
cash.
MARK MONSON:
This likely has some negative effects, though I haven't tried to
trace them.
DAN SULLIVAN:
It would indeed have negative effects in a system of inflexible
supply, as the money hoarders could drive prices down.
MARK MONSON:
It certainly can't be the best way. The best way is for people to
deposit savings in some sort of mechanism that can issue credit to
those who want to borrow.
DAN SULLIVAN:
There is no need for it. Money is by its nature a kind of cosmic
credit against the entire stock of wealth of the community where the
money is issued. If I put my money under a mattress, the community
simply issues more, and your taxes drop, or you citizens' dividend
increases.
MARK MONSON:
In other words, an efficient mechanism facilitates the flow of some
wealth from savers to tool makers. Tool makers bid against each other
for capital.
DAN SULLIVAN:
Tools *are* capital. Money is not capital, but only a draft on
capital.
MARK MONSON:
Savers bid against each other for compensation. The equilibrium is
general interest rate.
DAN SULLIVAN:
Savers of what? Money does not need saving, because it is easy to
create money. What needs saving is the storehouse of actual wealth.
Full shelves and empty banks is better than full banks and empty
shelves.
MARK MONSON:
But interest is necessary for flow to occur, taken alone, interest
rate is not a way to measure flow of capital.
DAN SULLIVAN:
Monetary interest is not necessary for production and exchange to
occur. People have produced and exchanged constantly from the
beginning of time.
MARK MONSON:
You can have high interest rate with low volume of capital flow, or
you can have high interest rate with great volume of capital flow.
DAN SULLIVAN:
What good is capital that flows? I want capital that stays in my
garage until I am ready to work with it. At the bottom of this analogy
is confounding money with wealth, and, by extension, with capital.
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