by Hans Eisenkolb
1. Everybody, who thinks at all about economics
takes it for granted and hardly gives it a second thought.
Yet hardly
anybody understands how deeply it controls all aspects of the base of human
survival- our economy.
2. In the following paragraphs we try to shed some light on it.
3. The following graphic shows the law of supply and demand as it applies to money.
The formula should therefore read : P = M times V divided by S
The most basic law of economics is the law of supply and demand. Very simply it states that the price of some good changes in relation to the supply of it and the demand for it. That is all!
Expressed as a mathematical formula it is stated: Price equals= demand divided by supply. The classic economists showed it in form of a scale:
Instead of demand one can use money and then you have the so-called Quantity theory of money.
There is only one thing missing. The old economists did not think that money is not only used once like most goods on the supply side of the scale but over and over again therefore the formula should correctly be: The price equals money times turnover divided by the supply.
This can also be shown as a scale:
The sides are switched over here and the money or demand side of the scale is mounted moveable on one arm of the scale to show the turnover. ( The proportions are not correct. The arm on the money or demand side should be much longer.)
Before we go any further lets first explain this scale in more detail: P is the price and it moves too minus or plus depending on the forces in the two pans of the scales and the position of the money pan on the sliding turnover scale.
Now a few examples: Let's take cherries! A good harvest, which means a big supply will lower the price. Nevertheless, there is now a counter force: with lower prices more people will decide to spend more of their income on cherries - so demand will increase until a new level of price is found. There are also some long range results: If prices are lower than costs cherry trees will get chopped down or on the other hand, if prices allow a good living for the owner of a cherry orchard he will plant more trees, by that increasing the supply.
The price of cherries will stabilize if people decide to spend some more of their income on cherries. It does not matter wether they need or want cherries. Need or wanting cannot be equated with demand. Demand in a modern economy is only demand when it is backed by the willingness to spend money for something or at least the acceptance of the responsibility to pay back the therefore occurred debt.
Now, of course, one can increase the demand for cherries if he can persuade people that cherries are good for their health or that they live longer if they drink lots of cherry brandy and that is the reason for all advertizing: Keep the demand high enough that the pressure of the law of supply and demand cannot push the price of a good below the line where producing it is not profitable anymore.
Still, if you now believe, that cherries are a necessity in your life, you might have to forego other expenses to stay in the frame of your income. If you do it, that puts more pressure on the demand side of the goods you did not buy.
Every economic decision on your part is the cause of some effect in the gigantic interrelation system of economics - and all of it is governed by the law of supply and demand. In other words: All prices are subject to the law of supply and demand, and everything has a price.
The price of labor is usually called wages. The price of borrowing money is called interest and the price of money is what one can buy with it.
Now let's play a little bit with words and definitions: there is a saying that the best things in life are free - for instance air - which means air has no price. Why not? Take our equation and when you ask for the price, for example, of air you will see that the dominator demand is of limited size - you have to take only one breath at a time after all. The numerator on the other hand is for all practical purposes infinite and when you divide one side of an equation by an infinite number you get a big fat zero on the other side.
For the general price level measured by an index it works just as well. Faster turnover means higher prices which does not mean that single prices can not go against the trend. More money also means higher prices but sometimes more money does not have this effect, when a slowdown of the turnover counteracts this. Now, while the amount of money is a known factor - the speed of turnover can only be guessed at after the fact.
Something else is the uncounted partial monopolies. They also could not survive a free market but are now so entrenched in the tapestry of our society that nobody realizes what bad influence they have. They block the free competition and distort the real price of everything. What could have been easily adjusted by a little productive effort now becomes an eternal bellyache. An example is rent control that prolongs the scarcity of rental space for ever and ever.
Understanding it might be easier if one thinks of a monopoly - partial, like in a trust, or union shop, or guild, or any licenced trade - or absolute, like in Government monopolies not as a thing but as an absence of something - the absence of free competition.
Not every monopoly is a bad thing as such. Nobody would like to live in a completely lawless society and a government has its uses as long as it keeps its sticky fingers out of the economy. Patent rights, which are a monopoly too, make sense for a short period of time. 16 years seems just right. By that time the owner of a patent should have made enough money and should have recouped his startup losses. He would also still be ahead of the competition because of his Ahands on A experience. What more can he ask?
Copyright is also a monopoly and the law as it is now may be just right. A man should have the right to his own mind and labor, but only as long as he or his first heirs are alive.
Land ownership also is a monopoly as it excludes others from the use of the land even if it isn't used by the owner. The solution to this problem is simple. Tax the land and not the improvements. Not an outrageous percentage. One per cent should be plenty and one could even let the owner set the price of his land. Only in case of an expropriation this would be the price he would get. That would prevent him from setting to low a price on his land. On the other side, if he puts an unrealistically high price on his land, he would have to pay higher taxes.
The price of land like as other prices of goods and services is governed by the law of supply and demand which means: Land without people is worthless and if more people need and want land and are willing to pay for it, then and only then will the price of land rise. Land as such has no intrinsic value but because it can't be increased it lends itself to blackmail by the owners. They know that other people are dependent on the use of it. Therefore a tax system that would tax away the unearned increase in price would be just.
All other goods can be increased in quantity if the demand warrants it and are actually quite often worthless to the temporary owner. What use are 100 pairs of shoes to a shoemaker for instance? He can only hope that they have a retail value. If they have that, fine, then he can sell them - hopefully with a profit. Nevertheless, he has to sell them, and wether he makes a profit or not. The people, who have temporarily the ownership of money know or feel this and unless they are barefoot in winter they wont let him get away with outrageous profits.
No sane man will produce shoes, of course, if he cannot expect a price on the open market that will pay him back for his outlays and his labor . . . and that takes care of the Marxist theory that the value of a good depends on the average hours of work, that are necessary to produce it. What nonsense! A good is worth, what somebody is willing to pay for it. So even when all the good communists work endless hours to produce - lets say pots and pans and other useful things - if there is no market for them, they are worthless.
So yes, even taking into consideration that only a planed economy consistently produces things that have no market and a producer in a free market economy does so to his own peril and usually not very long it still means it is guesswork. Yes, the shoemaker knows that he can make shoes better and cheaper as the guy who wants to be self-sufficient and makes his own, but there might be a factory in the next town, which will underbid him and all of them can only hope that the law of supply and demand will allow them a price that will cover their costs. Sometimes it does not.
With money - remember that is part of the demand side in our equation - there are also some monopolies involved. First, there is the privilege of printing it. That is a clear monopoly, but there is also a second hidden one. The temporary owner of money can hold it back and can so prevent the exchange of goods until his demands are met. That is the monopoly to strike. The strike of money is a much stronger force as a strike by workers. Money does not have to eat and can wait indefinitely until its demands are met. In former times, when money was equated with gold ( or silver) this had some far-reaching results, like the demise of the Roman empire, the stagnation of the middle ages and probably the fall and rise of untold civilizations
Now, of course, we just print more money instead of the one that is on strike, but if one looks back in history, the time of gold backed currency is not so long gone. Even now somebody can get a Nobel price in economics, who promotes a gold standard. As short a time ago as 1907 a single banker ( Morgan) could plunge the world into a depression resulting afterwards in world war one.
Of course, the printing of money does not solve the problem either. What happens when the people who held back their money, which was replaced by the newly printed one now decide to go back into the market and ask for goods?
New and old moneys compete for goods with the result that there are not enough goods for the money - one could also say that there is to much money now, which means - inflation.
Now lets apply our knowledge to the stock exchange. Here we have a good example of the psychological workings of the law of supply and demand. The price of a stock goes up if more people want to buy it and it goes down if there are more sellers than buyers. As simple as that! Wether a stock certificate is worth the paper it is printed on or not does not really matter as long as there are people who believe that a stock is worth their money. When enough people buy a stock and the price of it starts to go up it adds to the psychological pressure to buy before it goes up still higher and the potential sellers are in no rush to get rid of their so nicely rising stocks. It means that there is hardly any supply available, while on the other hand investors scramble to get on the band wagon of a rising stock by that increasing the demand.
Some stocks, of course, pay dividends but the earnings are usually far below the ones one can get in a term deposit and there you do not have to take the chance to lose part or the entire principal. The fact that there is a dividend sometimes enhances the value of a stock but cannot be the reason for investors to buy it. They would be much better off putting their money into a bank account. No, it is a gamble, plain and simple and even if you know how it works, there will always be the inside traders, who will skim off the profits of these countless pyramid schemes.
Now let's try out our new perception on an old story. Surely you all know the story of Joseph in the Old Testament. Remember that he was sold by his brothers to some traveling traders. What does this presuppose? First that there was a society that used money and had essentially free trade across the boarders. Secondly there must have been some division of labor or the traders would not have goods for which to trade. On the other hand there must have been a recession or the brothers would probably not have sold their brother into slavery. Joseph must also have had some education or he would not have risen in the service of the Pharaoh so fast.
For us the most relevant part of Joseph's story is how he made the Pharaoh so powerful. Remember that the Pharaoh dreamed about the seven fat cows that were later eaten by the seven thin ones. That was thanks to Joseph a self fulfilling prophecy of seven good years followed by seven bad years. How did Joseph do it?
Read it in the bible! First he brought all the money together in the house of Pharaoh. What did this cause? With little money available on the market the farmers could not sell their produce and as they were already in a stage of economic progress where the division of labor made a medium of exchange a necessity they could not go back to bartering either. Sitting on a not saleable harvest they, of course, curtailed their production. Most of the previous harvest they had sold to Joseph at rock bottom prices. Remember, most of the money was in the house of Pharaoh, therefore the law of supply and demand forced the prices down. ( Less money = lower prices, more money = higher prices).
The bible never tells exactly when in the proposed 14 years what happened, but is quite clear in a general way what happened next. Next year ( or later ) the farmers had to give all of their livestock in exchange for bread and later they had to give up their land and became serfs to the Pharaoh who afterwards let them have 80% of what they produced. All this times the preachers were exempt as the bible states a few times. They must have made a killing on the backs of the farmers and were so an excellent guard for the Pharaoh.
Joseph's brothers, the Jews, got quite a revenge for selling him. They could now supply most of the workforce to build the pyramids.
So far we have barely touched the role of money in the economy and that without a medium of exchange division of labor is impossible and that without division of labor civilization is impossible and not only that - the very life of 80 % of humankind would be impossible because for self-sufficient hunters and gatherers there is not even room enough. So we better learn how money works better than the hit and miss approach used so far even in the highest economic circles.
Money is on the demand side of our equation. In fact money times turnover IS demand in a market economy. And why is money a necessity to the division of labor? Simply because there is no other possible way to find an honest and for both sides of a deal agreeable price of a good or service. The only way to a fair price is the bidding in a free market and money is our ballot paper with which we vote day for day what and to what price goods will be produced and services will be offered.
The piece of paper or the coin that is the agreed upon medium of exchange makes it possible that someone can improve his skills of production and can even build and invent machines that will enable him to produce ever more. Doing so without a simple means of exchanging his personal overproduction for the work of others would be senseless for him.
Without a generally accepted medium of exchange and a free market nobody would know the real value of a good or service and the only way of production would be forced labor - in other words slavery. Not that there can be any slavery in a society with a more or less functioning money system or is it not that when you let yourself be brainwashed into buying a fancy house on credit and then spend the rest of your life as a slave to your mortgage....
The Marxists thought originally that they could have a functioning economy and even a more humane one without money. From everybody to his ability and to everybody for his need was the slogan. They did not ask who will decide what anybodies needs are and do the able ones have to work themselves to death for the unable or just lazy ones? In short, our Russian friends tried right after the Communists came to power to get rid of the money. How? They simply printed so much that it nearly became worthless but they still expected the farmers to sell their produce for the now worthless money. Yet how could they? They also needed some goods and there were none to be had for this money. So they refused to sell and were - after millions of people died of hunger in a country that once was the bread basket of Europe - forcible expropriated.
Later the state took over everything, decreed prices for all goods, reduced the amount of money he gave the workers in this paradise of the working man and could even with excessive force not prevent a black market.
The existence of a black market, which is actually a free market in spite of a brutally oppressive regime shows that the market forces are nearly irresistible and are better
taken into consideration in all economic decisions.
We should know by now that one just cannot print money indiscriminately and still expect that it will keep its worth. What else can we do? Back to Gold or Silver as currency standards? Some economists really propose this but that would open the doors to a depression that would make the great depression of the thirties look like children's play and would surely destroy our civilization. Would you want to give a two days Pharaoh the tools in hand to do unto us as the old Pharaoh did to the Egyptians?
Let us find out, who decides today how much money gets printed. Ask the question and you will get a surprising answer. Nobody and everybody! If you or anybody else wants to borrow money and you are an acceptable risk every bank will give it to you. They are in the business of lending money and usually lend as much as the traffic will bear. Now, if they have not enough cash on hand they simply go to the Federal Reserve or whatever the money issuing National bank is called and in turn borrow some money there. If they have not got it either - they print it! . Now you or I might have some reason to borrow money short term and will be very careful about it, because we will think, that we have to pay it back. The government on the other hand has no such scruples and it can borrow money just as well.
Of course, most of the time they try to keep a lid on excessive printing and raise the bank rate to curtail borrowing. ( I use the word printing here instead of "expansion of the money supply," which a real economist would use because I do not want to confuse you by using the word supply on the money side. Remember: money is demand.)
Nevertheless, there are two sides to this. On the one hand makes the higher bank rate borrowing less attractive and on the other hand finds the higher cost of borrowing its way into the economy and forces prices up. This push and pull at the same time account in part for the unholy mess in which the currencies of most countries are.
A high bank rate is often excused by the imagined necessity of keeping the value of a currency against other currencies up. This is nonsense! The exchange rate of one currency with another is also a price, which is governed by the law of supply and demand. Over time the decisive factor is the inner value of a currency, which means what you can buy for it.
Let us play a mind game, which I found useful to clear up misconceptions in my mind. Exaggeration! We assume that goods in one country cost only half what they cost in a neighbor country, jet their currencies exchange one to one. What will happen? At first the citizens of the country with the more expensive goods will flock into the other country and will buy what they can get their hands on by that increasing the demand for the cheaper country's currency. This demand will force the price of the cheaper country's currency up, until it is not profitable anymore to buy in the cheaper country because the exchange rate expresses now the real parity of inner values: about one to two.
Currency speculation is usually allowing for all this and yes... In a circumspect way could an increase in the bank rate bolster the worth of a currency. When speculants think that the higher bank rate will curb inflation by decreasing the amount of money in circulation they will act on that assumption and - presto - for a short time one currency is worth more by a quarter point. Until the cost of high interest rates forces prices up and higher prices means money is worth less and that is - inflation.
You see now that the government or the National bank has no real control over the circulation of money. The control over the speed of turnover is completely left to the public and even the printing of money and the amount in circulation is barely regulated. Horrible as it is - we are sitting in a rudderless boat.
As long as there was a gold standard gold through its rarity kept a lid on inflation but favored instead the even more destructive deflation and the boom and bust cycles. One could say that gold was the reason for the stagnation of the time between classical Greece and the reformation when a new influx of gold from America brought an upswing to the world economy.
During all this time there was only a short interlude of relative prosperity. That was the Gothic time when all the gothic domes were built in Europe. Yet so short was the time in which as an aside printing and pocket watches were invented that nearly all of the domes were left unfinished. They were all originally planned with two large steeples on one side and a smaller one on the opposite side. When the moneys run out they had to hurriedly cap the half-finished towers or abandon one or even all of the planned three towers. Go to Europe and look at these witnesses of stone and remember that they were built not by slave labor but by well paid guild members and mostly from their donations.
Remember also that most of these churches were built in towns with less than 10,000 inhabitants. Do not think that those people were over worked. They had a free Monday for bathing. Sunday was a day of rest and attendance in church. There was also an abundance of church holidays, where nobody worked. What had happened? What was the reason for this surprising wealth?
The church then did not allow its members to charge interest for lending money. They called it usury. Therefore, people kept their spare cash hidden. This caused of course, widespread scarcity of circulating money and as we know that means falling prices and economic stagnation. As an aside: Jews were not bound by this rules and as most other professions were forbidden to them were forced to become bankers.
The lack of circulating money did not only hurt farmers and tradesmen but also the rulers. So they started to mint their coins thinner and thinner and started to call them back for re-minting on a fairly regular basis . Whenever they exchanged them for new coin they charged for re-minting as the weight of the coins was later prescribed by law.
What happened now? The money was forced into the market and business started to bloom. Nobody wanted to keep spare cash around - it would be worth less with the next re-minting. Now the priest harassed the steadily wealthier trades people and as they could afford it they started to build the gothic domes.
We will not dwell on the crusades which also happened at that time - with our new insights this is the work of generations of historians, but will continue with the main trend of the history.
As it always happens when government has a good thing going, they soon overdid it with the re-minting and that caused quite an inflation and people clamored for better coins. After a while they got them and, presto, deflation, no more spare cash for churches, the knights became robbers, the farmers became slaves and nobody knew what hit them...
,Most of this you have to read between the lines in the history books and it would be a worthwhile effort for generations of historians with our new insights into the workings of economy to rewrite these books. Then we could learn something from history. So far there was only one historian who made a start at it: Fritz Schwarz, Segen und Fluch des Geldes in der Geschichte der Voelker.
Isn't the world a crazy place? Only because some ruler needed more money ( He was Bishop of Magdeburg ) and found an innovative way to do it within the framework of existing laws were these beautiful churches built. And because lots of other small rulers followed his example were medieval towns and castles built.
People did not realize a good thing when they saw it and the rulers were too greedy and did not know what they were doing in the first place. That is why centuries of misery followed this short spring of the gothic age.
We touched the subject of interest briefly in previous paragraphs but did not get around to a really deep look. What is interest? Interest is the price one pays for borrowing money and what one gets for lending money. Who decides how high the interest should be? We like to believe that the National Bank or in the U.S. the Federal Reserve does this. That is only partly correct. The price of borrowing money like any other price is governed by the law of supply and demand. If many people want or need to borrow money then the interest rate goes up. On the other hand if there is lots of money around looking for borrowers, the interest rate goes down.
It might be quite interesting to find out how interest comes to be paid in the first place and why historically there was always a market situation that allowed the collecting of interest. We won't go into this now because that would fill a book of its own. It is enough to know that the people who built the Gothic domes already showed us how to get rid of the interest and that is enough. We only have to find out if doing something about it is really necessary.
First let us explain on hand of an example that eternal interest is impossible. The example only slightly changed is from the book of an old friend: Otto Valentin "Die Ueberwindung des Totalitarismus" to whom I am also indebted for an in depth explanation of monopolies.
I will not use the different currencies through the ages but simply start with the equivalent of one cubic millimeter of gold. It is invested at the time of the birth of Christ at a rate of 7.2% that is quite conservative at to days rates. I took this rate because it just doubles the principal with compound interest in ten years, give or take a few Cents. This simplifies our calculation. In the year 10 we would also have two cubes.
Now it starts to double every 10 years. One 2,4,8,16,32 and so on. In the year 100 we have already one cubic centimeter, in the year 300 A.D. a cubic meter and than it really starts growing: one cubic kilometer in 600 A.D. and the pile of gold keeps growing until it reaches the mass of our earth in the late twelfth century and somewhere in the 15. centuries the mass of the sun.
Obviously, this is impossible but on the other side is it a fact that interest at a rate that is not much less than the seven percent gets paid since ancient times. Our example only shows that the sums involved are gigantic and it is curious who pays all this interest. Somebody has to pay it because nobody would be so crazy to lend his money free of charge when he can get interest. Nobody would invest his money into something that would not promise even more return. There are after all more risks involved.
Hold it! Does this mean that every good in this world has to be paid interest? The machines, the factories, the merchandise in the stores of the businessmen, everything? It seems so. What does this mean? It means that every good in this world has to be paid within 10 years ( 7 percent interest assumed) to the interest takers all over again. All together quite a tidy sum! No wonder that the beneficiaries of this system fight tooth and nail for their privileges.
Some people could not care less because they think that they get more interest as they pay but they never realize that they pay interest in the price of everything they buy. The businessmen and the producers have to recoup the interest they pay in their prices The Government owes money and it has to recoup the interest it has to pay in your taxes.
Nobody can add all this up correctly because one never gets the real numbers but a good guess would be that 90 % of the average income from labor ( A businessman works too ) goes for interest and taxes. Interest including the interest that the government pays amounts to the Lions' share of that.
But even that would still be acceptable if it were not for the fact that the strike of money sets in whenever the interest sinks below a certain mark ( historically around 3 percent) thus preventing general wealth by causing unemployment and business disruption. This is probably not caused by a world wide conspiracy even if it looks like it sometimes, No, it is inherent in the form of our money that has an impossible dual character. On the one side it is a medium of exchange and on the other side a medium to store wealth. Both of this attributes are mutually incompatible. Whenever one uses it to store wealth, he pulls it out of the market where it is supposed to make the exchange of goods possible. That mankind survived this mess for thousands of years is due to the fact that one can be self-sufficient and only barter his surplus. Mankind survived but many civilizations did not.
Our own civilization is now tethering on the brink of destruction and it will collapse if we do not change our money system and make land available to the people who will work it. Doing this will also get rid of most of the government bureaucracy. What else is government doing than trying to keep the workers docile and redistribute some of the unearned wealth of the "capitalists" .
The government does not do a very good job anyway and most of the redistribution ends up in the salaries of our public servants or worse in the pockets of some third country despots. When Labor gets his full price the bureaucrats are superfluous and we can pension them off.
Now let us repeat what we learned so far even for the danger of repeating over and over again things that should be common knowledge. Without money there is no division of labor! Without division of labor there is no civilization! Without civilization about 90% of the worlds population would die because they could not produce and gather enough food to survive. Why was America nearly empty when the white man came? The Indians had no money! That's why!
What happened to the ancient civilizations? In the first place, they had money, usually as gold or silver coins, or there would not have been a civilization. Usually they robbed gold or silver from some other more primitive countries, then minted it and got the economy going in this way. Later with interest dividing their own
population into interest-takers and interest-payers and the following internal fights money, that is gold, disappeared from the economy. A good part of the Roman gold disappeared into India for spices. The ( not so ) wise king Salomon put gold into the temples and even adorned a tree with it. Gold, in this case the coins, which were money, disappeared from the market and you should know by now, what was the result. More goods chasing the elusive coins means after the law of supply and demand that the prices of goods had to fall thereby making commerce impossible because everybody was waiting for goods still to became cheaper. That was bad luck, of course, and they still did not know, what hit them. But do we?...
Let us go back to the Gothic times once more.
We know that the rulers re-minted the coins quite often and charged a much to high price for this service. The result was a speeding up of the turnover to a point where the fact that the money had to change hands brought the speed to a natural limit. It is beside the point that they overdid it which in the end caused people to balk. In any case, have a look at our scale. With the turnover hitting a natural limit, we have now all known factors in our equation. Imagine the pan with the money at a more or less stable endpoint. As in Gothic times less money now moves more goods if we put a similar tax on idle money.
What would follow? With the turnover a more or less stable number we can control the money side of our equation. The goods and services side is such a slow changing number that we do not have to think about it at all. The amount of money is also an exact number, controlled down to the last Cent. How much there is and what denominations is a matter of record. And the average price? That is easily measured by an index .In Gothic times, of course, they did not have an index and had no easy way to control the money in circulation, but we should have no problems.
The moment, we make the political decision to stabilize our currency we can do it. ( Germany did it after World War one and two without gold).
With a more or less fixed rate of turnover, if we use something like the re-minting of coins as they did in Gothic times we only have to control the amount of money. That is easily done! We could have a stable currency and all we need is a printing press and a furnace.
The moment prices, measured by an index, go down, we would print more money. If prices go up, we would burn some. The charge for reissuing money would give us enough leeway to do so. And the charge has to be regardless of the cost for new paper. It has to be to take the power to strike away from money. It has the power to strike now only because opposite goods and services it has an inherent superiority - it does not rust or deteriorate and neither does it go out of fashion and it does not need to eat. When you take away this superiority you start with an honest competition.
How high would this charge have to be? Easily answered! Just as high as the interest is now, that money can blackmail out of the economy! Three to six percent!.
Yes, the interest rate this days might be higher, but this is only because there is an inflation and risk premium on top of the basic rate.
Now we have it! The solution to our economic woes is so simple that it is hard to believe and our economists won't hesitate to tell you that only a simple-minded ignoramus could believe in it. What about the book-money they will cry and the transfer of money on accounts without the use of cash?
First, what is book money? Simple answer. Book-money is credit on a bankbook or account! And transfer from one account to another is movement of credit ultimately dependant on availability of cash. Or in other words - turnover! Just as with cash there is a natural limit to the speed of it. What do you think the banks will do when it costs them money to keep cash on hand? Remember they will also have to pay exchange-charge or idle money tax, whatever you want to call it. They will roll over this charge on the short term accounts, which means they will charge you for the save keeping of you money and by so doing will force this accounts into circulation. What else? More questions? Will the whole world have to a accept this new money at once? It would help but isn't really necessary. All we need is for one country or even one region to adopt the new money. Just as the other rulers in gothic times followed the example of one innovator other countries will follow the example of the country which first introduces it. Success is after all very persuasive.
What would happen if a small country, only just big enough to have a currency of its own would change to our proposed money? At first, it is sure that the other countries would not trust this newfangled money and even the people inside the country would have doubts. For that reason not many people would ask for this money therefore keeping it undervalued. Remember the law of supply and demand! But there is also another law of economics.
It is called Gresham's law and it says that bad money drives the good money out of
the market. This is easily understood. People save the money that they conceive to be of higher value and try to get rid of the "bad" money. In this case the "bad" money is the one that gets taxed when it stays idle.
Therefore our new money will drive everything else that might be used as medium of exchange like gold or foreign currencies very fast out of the market place. Only much later, when people will realize that the new money keeps its value, while everything else including gold will steadily be less worth, will they use it as a short time medium for savings.
Gold derives its value mainly because it is used as the basis of currencies and if mankind did something more stupid, than digging out the stuff and fighting endless wars over it, only to dig it in again in Ft,Knox, it is hard to imagine. Mind you, gold has some value, but it is not rarity that gives it value. Rarity as such is never the cause for a high price, it is the usability and the general acceptance, that accounts for the value of a good. If you think that rarity alone gives something value, then try to sell the one of a kind white elephant
Gold has its uses in dentistry and if it would be cheap enough one could probably find some uses for it in electric circuits. Jewelry comes to mind as another use, but here the conceived value is bound up in the age-old mystery of gold as a precious metal. But let us go back to our small country and the new money.
With the undervalued currency the goods of this country would be cheap in terms of other currencies and a holiday in this country would be a bargain for tourists from abroad. The undervalued currency would act like an export-premium but slowly things would even out. Especially when people would notice that their own money would keep its internal value, while the other currencies would still be in the throws of inflation.
Slowly the tide would turn. Now investors from other countries with an unstable currency would bring their money into the country with the stable money and would even take a lower interest rate in exchange for safety from inflation. The surplus capital would lower the interest rate even more. This is again a result of the law of supply and demand. The low interest would make investments profitable, which would have been impossible to finance before. You have no phantasy if you can not imagine what is possible with an interest rate of close to zero. Put the whole of the Rockies under glass to grow food. Computerize all manual work and allow all citizens a life of leisure. You name it and you can have it.
But remember one thing. Interest is the price of borrowing money and like all other prices is subject to the law of supply and demand. You can not just degree: No interest! First there has to be an abundance of capital which means: as long as there is a scarcity of real capital like factories, houses, machines that are still able to command interest above amortization money will look for this investments and won't take much less for the sake of liquidity. As long as land-rent is not taxed away money, of course, could also flee into land-ownership.
Examples for that are Swiss bank accounts that pay no interest and even charge one for safekeeping . Or the interest one could get in a Mexican bank a few years back. 35%! That was at a time when the exchange rate Mexican Peso and American Dollar was for years quite stable and many American snowbirds got cought by this bargain. Who would have thought that the Mexican Peso whose exchange rate was 1 to 15 for years would drop to 1 to 500 in a short time?
There is no free ride unless one counts profiting from a monopoly as such. But even there the free ride is only tempo rarely free. Sooner or later will the black-mailees revolt and then even such an all including monopoly as a communist state will topple.
Every monopoly has the seed of destruction already in it. Competition by other "would be" suppliers of the same goods and services or the production of "Ersatz" articles or changes in the buying habits would put an end to them. For instance, what value would the tobacco or alcohol monopoly have in a country of non-smokers and non-drinkers?
Only one thing keeps them alive and well. That is the aiding and abetting role of the most basic of monopolies in the economy - the ability to strike inherent in our money.
The sorry result of all the revolutions and wars in the history of the world is that none of them ever touched the real cause of all the misery. None of the religions could end the eternal fight between interest-takers and interest-payers. And after every war or revolution the same old division between rich and poor started anew.
After every destruction of capital goods caused by a war capital was scarce and could demand fairly high interest. There was a lot of work to rebuild the destroyed houses and factories but after awhile as more and more capital goods started to compete with each other and profits started to shrink and soon the money pulled out of these now unprofitable investments. The strike of money set in!
With gold or silver as money - that was it! Depression, sometimes for centuries until some imperialistic war brought new money into the victorious country's economy. They simply robbed it from the losing country. History called the ruler of the victorious country afterwards "the Great". Alexander the Great, Charles the Great and so on.
Now, of course, in the age of paper money, we found another solution. When money starts to strike we just print more - in this way causing inflation which forces the money back into the market. So far so good, but now we have another problem. To begin with, interest adjusts to the new situation and lenders add an inflation premium to the interest charge and they get it too because most borrowers usually have other debts to service and the lack of demand for their goods and the lack of cash flow forces them into more borrowing. One of the worst offenders in this case is usually the government itself where the politicians always promise more than they can provide.
The overly high interest rates make it very difficult for genuine long range investments and the only people besides the government who can afford the high rates are the pyramid-scheme-artists. But pyramid-schemes are bound to collapse. Sooner or later reality catches up to them and they run out of suckers.
But some pyramid-schemes work well for the instigators. How do they work? They always involve unwary investors who still believe in a free ride and as long as new money flows into the scheme some people even make profits, which they usually re-invest because they are on to a "sure" thing. When the inevitable collapse comes will the instigators have long pulled out and usually have disappeared with the loot. This run of the mill kind of pyramid-scheme is quite common and not to hard to spot. But there was a neat one a few years back and laws of libel prevent the naming of names and places. Now to the story. It was a time when money was quite loose and banks lent money left and right to some very shaky customers like unstable third world countries. The developer who introduced the scheme got hold of some run-down city block. He paid a low down payment had it financed by a bank and sold it right away to a company where he was the main stockholder for ten times the amount. One bank gladly financed the deal with 90%. After all, they thought, if somebody is willing to pay so much for this land it is probably worth it. In short after flipping back and forth the same property for ever more inflated prices, having milked his companies for all the profits out of this deals he let the last company declare bankruptcy and one bank ended up with a worthless piece of property and hundred of millions outstanding not collectable debts. And if you think now, good for the developer, think twice, the banks have the power and take their losses out of your hide.... You already paid for their losses to the third world countries.
But back to the original theme. We wanted to know what if. We already introduced the new money, which similar to the gothic bracteata prevents hoarding and have only go down to the nuts and bolts of it. One of the ways is quite simple and was used in modern times in Woergl. Their "money" had fields on the backside, where one had to paste stamps, which one had to buy from the town cashier and which cost every month 1% of the face value of the bill. One percent per month was quite high but nobody complained about it in the nearly two years this money was in circulation. The Austrian National bank, of course, did not like the competition and was suing the Mayor and the aldermen who had introduced this "money". But it took them nearly two years to kill the idea. More than 200 other villages and town were ready to use this new money also, because of what had happened in Woergl. The towns money to 100% backed by government money ( 30,000 Schillings which is about 3,000$) circulated freely and at least ten times as fast as the government money. Within two years the town had paved the main roads, built a bridge and a ski-jump and introduced streetlights. In the middle of depression people were working and all with the help of a few hundred Dollars worth of "Ersatz"money.
The town did not even use all the money they had printed. They started with 1000 Schillings and had at most about 8,000 in circulation.
The economists in the universities did not like the experiment of Woergl at all and one of them wrote a book against it. Quite shamelessly did he equate this money that was circulating 1931/2 in a time of depression with other "Ersatz" monies which were used right after world war one during a time of galloping inflation because the government could not keep up with printing money. That is not the same thing at all....
One could probably find other ways to tax the idle money. One that was proposed was to put money in circulation with four different colors and let lotteries decide
which color will be pulled out of circulation with a cost of 2% instead of the half percent which would be necessary when the whole currency would be exchanged. A neat solution, which should work quite well and would be cheaper and more
elegant than stamp script as proposed by Irving Fisher. But on the other side, the psychological impact of licking some stamps to put on your money might also be worth it.
A personal footnote about the economist who wrote the tractate against the experiment of Woergl. I won't mention his name but I met the man forty years later and the powers that be had done well with him - he had become director of a big bank and was still writing articles about economics in some newspapers. In answer to one of his articles I had written a letter to the editor, but the paper did not dare to print it and forwarded my letter to this bank director instead. He graciously invited me to a discussion and all I found out was that he had changed his mind about the gold standard and agreed with me in this matter. I never mentioned that I knew about his book and I did not tell him that his knowledge about money was not up to my standards. After all, I owed his bank something like 150,000$. Why rock the boat?
Now, nearly another 30 years down the road , I feel bad about it. Maybe I should have confronted him.....
And now, in the eve of my life, even if I intend to stick around for another twenty years to find out how things are going, I do not really care. I will download this to the Internet and let others , who still have more time, try to do their best.
This porno riddled Internet, could after all, be the carpet of thinking brains, that Teilhard de Chardin was talking about.