This is a fabulous non-fiction narrative that rivals many of the best novels ever written. Even the fact that it made the New York Times bestseller list and also won the Pulitzer Prize hardly does it justice. Tom Reiss obviously spent many months, even years, doing very original research on at least two continents and as many languages. But let’s begin at the beginning
If you have ever read the novel The Count of Monte Cristo by Alexandre Dumas, and you liked it, or like me, loved it, Reiss’ book is a must-read for you. Dumas also wrote The Three Musketeers and The Man in the Iron Mask, as well as dozens of other fiction and non-fiction books and articles. The Count of Monte Cristo is a story of revenge; the story of a man imprisoned for life on unknown charges as the result of a conspiracy of three enemies he didn’t know he had. He is condemned to a medieval prison, whose castle walls are several feet thick. He makes a daring and miraculous escape aided by another prisoner, an aging abbe, who reveals to him the location of great treasure. The hero becomes fabulously wealthy and the rest of the book is about how he wreaks revenge on those who had condemned and then forgotten him. The Hollywood movie version in my opinion ruined the story by changing the ending.
What I didn’t know is that the author of these sagas, Alexandre Dumas, was a mulatto, and his father, Alex Dumas was a very dark black man from the island of Haiti who intermarried with a white French woman. Through the real story of this man, Reiss takes us on a global panoramic tour of the institution of slavery itself, with many surprises along the way.
Slavery of course, has been around since the beginning of man’s recorded history, and obviously predated that history. All acquisition of property and power throughout the ages was through conquest, and the victor took all, including the vanquished as slaves. Slavery was not racially tinged until the 18th century. Before then, anyone anywhere was at risk of becoming a slave if a predator group won the battle. For example, when Alexander the Great conquered Egypt, he made slaves of the Egyptians, but he also imported lots of white slaves from what are now eastern European nations populated by ethnic Slavs, which is where we got the word slave. Christians during this time period thought slavery was fine as long as the slaves weren’t other Christians. So making slaves of non-Christians and especially the Moors, was acceptable. In time these ethnic Slavs, who became known as Mamelukes, revolted against their Egyptian masters, and the Egyptians became their slaves–until Napoleon came along and drove off the Mamelukes. Read more..
In the western hemisphere, there were large population centers located among the Mayans, the Aztecs, and the Incas. One of the Incan cities had a larger population at the time than the European city of Lisbon, the capital of Portugal. Each of these south and central American civilizations had slave populations themselves. When the Spanish conquistadors invaded they absorbed the existing slave populations and also made slaves of the former masters. Those who didn’t die of the white man’s diseases were turned into slaves and were sent to die in brutal, murderous silver and gold mines. None of this was race related.
When other imperial explorers reached the islands of the Caribbean, they didn’t find precious metals as they had hoped, but instead found sugar cane, which they learned how to refine into sugar. The sugar capital of the world became the island of Haiti, then known as Saint Domingue. Growing sugar cane was labor intensive, and unlike in central and south America, there were no large concentrations of population that could easily be enslaved. The African slave trade in the 18th century was largely concentrated around the sugar plantations of Saint Domingue. There were few African women imported to Saint Domingue, and the men were treated so brutally they died quickly of starvation and beatings. This rapid turnover further exacerbated the labor shortage, requiring more and more slaves.
Reiss traces how the imperial expansion into the western hemisphere took place concurrent with the philosophical movement of The Enlightenment with its special emphasis on liberty and individual rights. The French were the first to attempt to come to grips with the contradictions between slavery and liberty. The French were intrigued by the American experiment and the principles embodied in our Declaration of Independence and Constitution, and of course our revolution only came to a successful conclusion due to the assistance of the French navy. As a matter of fact, the French involvement in our revolution drove their nation into bankruptcy, and precipitated food riots and their own Revolution. The French Revolution championed the rights of man at the same time that it engaged in a Reign of Terror against its own citizens, sending thousands of innocent people to the guillotine.
The French resolved the slavery/liberty debate at first by declaring that any black man who made it to the shores of France proper was a free man, and the French sort of washed their hands, Pontius Pilate-like, of what happened in the slave-holding colonies such as Saint Domingue. Activists pressed the issue however, and within a short time freedom was being promised to slaves in the colonial territories, which of course enraged the plantation owners, who withdrew their support from the French Revolution. This facilitated Napoleon’s rise to power, culminating in his naming himself emperor of France and ending the centuries-old monarchy.
Alex Dumas, the father of Alexandre, came to France as a young man and entered the military, and quickly distinguished himself. For a while he actually outranked Napoleon, but in time came to report to him. He was captured in what is today Italy, and spent several short years in a medieval prison, held without charges. His prison experience broke his spirit and his health. Napoleon meanwhile, in an effort to placate the very wealthy plantation owners of the French Caribbean colonies, rescinded many of the freedoms that the Revolution had instituted for blacks.
After many years of valiant service to the Revolution in which he devoutly believed, Alex Dumas found himself without a pension, without a home, and with no means of support. Napoleon, who knew him well and personally, ignored his requests and his lieutenants ignored the requests and pleas of his widow after Alex died, still fairly young and impoverished.
This is broad brushing this delightful narrative, which holds many insights you’re not going to find in a history book. Reiss approaches his topic without bias or political correctness, and what I came away with was that the lot of the common man of any race, color, or origin from time immemorial has been to serve as the cannon fodder of the ruling class of every nation, and that the golden rule prevailed: he who had the gold ruled.
Reiss is quick to point out many of history’s ironies:
Napoleon and Alex Dumas fought against the Spanish in southern Italy. This is the same Spain that was colonizing the central and southern Americas. And that is how the South American tomato made it’s way to southern Italy, which of course made it famous. or was it the tomato that made Italian cuisine famous?
The French continued to refer to black and mixed race people in France as “Americans”, in America members of its Congress would not permit blacks into their presence except to serve refreshments or sweep up. Says Reiss: ”But having enjoyed prestige as “Americans” during the[French] Revolution, black and mixed-race soldiers now found themselves denigrated as “Africans.”
The French helped us achieve the rights to life, liberty, and pursuit of happiness, and were also the first to give blacks freedom, at a time when General George Washington said he didn’t think Virginians were ready for that step yet. French General Lafayette of Yorktown fame had to flee for his life from his own Revolution. He was captured by the Prussians and spent the next five years in prison. His friend George Washington was powerless to help him because Prussia [parts of what is now Germany] and Austria at the time refused to recognize the new United States.
Miscegenation , or racial intermarriage, was common until it too was outlawed. Haiti, the sugar capital of the world and probably the richest island on the planet, experienced the first successful major slave rebellion. The slaves fought 80,000 of Napoleon’s troops to a standstill; the French left, the plantations closed, and today Haiti is quite possibly the poorest island on the planet. Today Haiti has experienced something of a brain drain as their best and brightest have abandoned her to seek their fortunes in the United States and elsewhere.
New post-revolutionary France decided to deflect attention away from their internal problems by invading most of their neighbors, which is how Napoleon and Alex Dumas came to know each other and fight almost literally side by side. As always, the government attempted to finance their wars with debt, in the form of bonds backed by property–that had been seized from the Church. These bonds were on pieces of paper called assignats, which were used as money, and of course they printed more assignats than there was real estate collateral, which resulted in devaluing the assignats and creating massive inflation. Eventually the floor under the assignats gave out–literally. At the Paris printing house someone piled up too much of the worthless paper in one place and the floor of the building collapsed under the weight. Their real-estate secured bonds were worthless. Nothing familiar here, is there?
Reiss peppers his story with personal vignettes such as this description of one French revolutionary: ”. . . his main character flaw was that of so many French revolutionaries: a zeal for human rights so self-righteous that it translated into intolerance for the actual human beings around him.” I’ve often thought the same of the purported champions of the war on poverty; their concerns are usually self-serving and they wouldn’t want to get too up close and personal with real poverty. They preach humanity but don’t like poor people moving into their neighborhood.
Reiss weaves a wonderful and complex tapestry of events that spans the globe and leads to even more questions. Life is never quite what it appears to be, and the more it seems to change the more it stays the same. If you have strong opinions about modern race relations in the U.S., read Reiss’ book for a more global perspective. Without our Constitution and limited government, there is nothing left but the governments guns, the moneyed powers behind the throne, and the ragtag mob. Without individual freedom that cannot be voted away by any block of voters of any color for any reason, there is no freedom except by permission, and that is not freedom at all.
For author Alexandre Dumas, his novel The Count of Monte Cristo was the fantasy version of his father’s life. Indeed part of the story begins in an obscure little village in Haiti (Saint Domingue) near the border with the Dominican Republic (Santo Domingo) called Monte Cristo.
Many parts of this biography of Alex Dumas, and his legendary fictional counterpart, the Count of Monte Cristo, read like a Kafkaesque novel. Until we figure out a way to change human DNA, the possibility of a return to this world should never be dismissed lightly. Liberty is and always will be under siege.
I did not watch the first presidential debate when it took place. I watched it two days later on a video replay. The first ten minutes, that is. That was all I could stomach. This country is at the biggest crossroads since its founding, and the candidates were given two- minute segments of time to address the most complex and dangerous issues. In some cases the candidates simply ignored the questions and used their time allotment to make a pre-scripted pitch directly to the voters, or to bandy about accusations and labels in sound bite form. And indeed, there wasn’t much time for anything else. It was the triumph of form over substance, as indeed is the entire electoral process. I think we could have learned as much from the candidates if we had turned the sound off and simply watched their mouths move.
Apparently it doesn’t matter all that much. The country is split down the middle ideologically, with a lot of hatred flowing both ways. The Democrats and Republicans will vote along party lines, and there’s about 5% of the electorate that is still undecided and could be swayed one way or the other in the final days before the election. No matter who wins, about one half of the country will be quite certain the wrong choice was made and will be wringing their hands and preparing for Armageddon. No matter who wins, very little of substance is going to change. Political debts will come due, and favors will be rendered. The spoils of victory will be parsed out. Our military-industrial complex will continue with its global adventures, the Fed will continue to expand the money supply, and the warfare/welfare state will continue in imitation of the universe itself—expanding ever outward.
Congress will pass another 600-700 new laws each year, most of which probably will be read in their entirety only by the congressional staffers who wrote them. Each of these laws will benefit a focused few that passionately pushed for passage, and will be ignored by the stupefied, confused, and disorganized masses. And no matter who wins, economists, like trained seals, will flip fantastic numbers back and forth like bright colored balls, orbs containing mostly hot air. But the delighted crowds will applaud and award prizes to those with the prettiest algorithms and formulas and prognostications. We will still have millions of unemployed we don’t
When Gridlock is Good
We voters in this land of Oz look on in suspended animation, waiting for someone, anyone, to please perform some magic, some sleight of hand, to make all this go away. We bemoan the stubborn, irrational, and obstructionist position taken by the other side, and fantasize about how much better everything would be if we didn’t have the political opposition to deal with. I would caution my readers, regardless of which side of the political aisle you come from, that our nation and our economy is like a big 18-wheeler rig loaded with 80,000 pounds of freight picking up speed on a steep downgrade, and the brakes are acting funny. The only thing between us and certain disaster is the runaway truck ramp, and that ramp is the political opposition. Why do I say that? Because our government, and its handmaiden, the Federal Reserve, are making everything worse. Some congressional gridlock is the only brake on a runaway government that currently exists. That and an election just three weeks away. Both sides are going to do a lot of talking, but very little doing. No one wants to set off a land mine that loses the election. That’s good for everyone.
The Operation Was a Success, but the Patient Died
Let me illustrate it another way. Our government is like some incompetent doctors; it doesn’t know when to stop treating the patient and simply let the patient’s body heal itself. Like that doctor, our government must do something, because the voters expect it. And like that doctor, our government prescribes unnecessary treatments, increasing the possibility of unexpected side effects and increased possibility of infection.
The voters, like that ignorant, vulnerable and unsuspecting patient, look at their government and demand action. So they get action, and the patient dies from complications of the ill-advised adjuvant therapy. Is the doctor going to come out of the operating room and approach the survivors of the deceased and say, well, hindsight being what it is, maybe we shouldn’t have done that? Not in our lifetime. When the economic sepsis of endlessly printing money triggers all the monitors and this nation goes on life-support or flatlines, the politicos and the Fed are going to put their hands up in the air and say, sorry, we did everything we could. Nothing worked. And we voters will grieve and feel sorry for ourselves, or angry at the injustice and unfairness of life. Who knows, we may even feel sorry for Mr. Bernanke and the experts on his team—after all, they did the best they could. The government’s very predictable response will be more treatments, for us, those still left standing, some new and better interventions so that what just happened will never happen again. Of course. Is any of this beginning to sound familiar?
Political and Financial Sleight of Hand
True sleight of hand requires psychology. We saw that in the first debate, and we’ll see more of it soon. This means our candidates need to understand what the voters want, and then they need to convince them that they can have it, in defiance of all odds. Yes, we can spend our way to prosperity. There will be no unintended consequences. As a matter of fact, now that we have belatedly learned this, who needs a budget anyway? Such unnecessary unpleasantness!
Then comes misdirection, getting the public’s mind off of what you’re really up to. A good crisis usually serves the purpose, possibly domestic, but preferably foreign—a crisis created by an enemy outside our borders. If no one is challenging us militarily, we can always invoke some foreign demons of economic warfare. China will do nicely. Something will have to be done about their being smarter and more efficient at producing the goods we want and providing them to us at lower cost. This has to stop. New tariffs, perhaps, to force them to charge higher prices. Then we Americans will have to pay higher prices for goods produced domestically and less efficiently. Higher prices means the buying power of our dollar went down. We just got poorer. Now there’s a good move to improve the economy! True, it will hurt your and my economy, but it will do wonders for the economy of the handful of companies who are protected by the tariff. Their sales go up, their profits go up, and their contributions to their PAC go up. No crisis should be wasted. The experts tell us jobs were saved, and that’s what it’s all about right? Not your job, and not my job. A handful of jobs were saved, and fees will be paid, but you’ll never see it. The magician is too clever and he had us looking in the wrong direction when the favors were exchanged.
Timing is important too: sometimes we need enough time for the amnesiac voting public to forget what we said or promised, or manufacture and release some “good news” before the vote, or deliver the hammer right after the vote. There is a time to loudly publicize the jobs that were saved, and there is a time to be silent about the domestic jobs that were lost when our foreign competitors retaliate and impose tariffs on our goods we sell to them. Trade wars have a nasty habit of leading to shooting wars. But wars are good for our economy. Think of all the jobs we create or save!
Do Pickpockets Declare their Earnings?
Illusion is important; the voters need to be led to see what they expect to see. Like magic, something has to come from nothing. As with every good magician, this usually requires picking the pocket of some unsuspecting someone to please the audience. We are ready to believe. We are ready to be persuaded that nothing is what it appears to be. We need to believe that we can achieve a painless recovery, or at least, with someone else bearing the pain. Just not us. If we can get out the vote, we can make sure we get ours. It’s not our fault some have more than they deserve. As we pick the pockets of those above us, it never occurs to us that there are those below us waiting to pick ours. I can’t help wondering, do pickpockets add to GDP?
Mayer Amschel Rothschild, the godfather of modern banking, purportedly said “Give me control of a nations money supply and I care not who makes the laws.” What did he mean by that? Is it true? Since the Federal Reserve Bank controls the money supply of the United States as the world’s largest and most influential Central Bank, does this mean that this institution is more powerful than Congress, more powerful than the Executive Branch of the government, that it operates above and beyond the control of the Republicans or Democrats? Is the Federal Reserve above the law? Was Rothschild right? What exactly is the money supply, anyway?
Let’s begin at the beginning. What is banking? Before modern banking, virtually all trade was in the form of barter. Barter only works when there is a double coincidence of wants, which means you have hot dogs for sale at the same time that I have lemonade for sale, and you happen to want my lemonade at exactly the same time that I have a craving for a hot dog. We both want whatever commodity the other is selling at the same time. Obviously, this kind of trade quickly becomes very cumbersome, slow, and difficult. Eventually people found that certain commodities became so common, and so universally in demand, that they became more useful as a means of exchange than for their original value. This is, for example, how salt came to be used as money. Originally it was universally desired for its ability to season and preserve food. People started using salt as a means of trading all other commodities, because they all knew that if they received payment in the form of salt, they could in turn use that same salt to trade with others. Salt became more valuable as money than it was as just salt.
In time two precious metals replaced salt: gold and silver. They were used as money because they were universally in short supply, universally desired, they were portable, and they had high value for their volume and weight. Gold and silver had to be mined from the ground, and there was no way any speculator was going to be able to mess with the “money supply” of the day by pumping large amounts of new gold or new silver into existing circulation. These metals were too hard to find, too hard to dig out of the ground, too expensive and too labor intensive to extract from the soil for the money supply to expand unexpectedly or significantly. The money supply in the form of all the gold and silver in circulation was stable and therefore not prone to change. The purchasing power of an ounce of gold did not change much.
Because these metals were heavy, in time individuals became gold brokers: that is, they stored the gold for others. They would receive the gold, and write out a receipt to the owner of the gold. The owner of the gold would then use that paper receipt in the same way he would have used the actual gold: as money. These gold brokers, also called goldsmiths, quickly learned that mostly the gold just sat in their warehouse collecting dust, and they decided they would write more receipts than they had gold. In theory, each receipt they wrote could be redeemed at face value for real gold, and that was 100% true when they only wrote receipts at a 1 to 1 ratio for the gold. When they wrote twice as many receipts as they had gold, they were counting on the high unlikelihood that the holders of both sets of receipts would attempt to redeem them at the same time on the same day. Eventually they wrote more and more receipts for the same stockpile of gold. Why would they do this? Because they charged interest for the use of these receipts. Now for a moment, just stop and think of the profit potential of this racket. You own no gold. You agree to warehouse someone else’s gold, and you give him a receipt. Then nine more people come to you for a loan of x amount of gold, but you don’t give them gold, you give each of them another receipt. All ten of those receipts now in circulation are acting as the same amount of money as the gold on deposit—multiplied by ten!! You as the goldsmith have increased the money supply out of thin air!! There are ten receipts floating around out there, each of them supposedly redeemable by the same brick of gold in your warehouse. And the goldsmith is charging interest on all those pieces of paper, and he is counting on only one of the borrowers asking to redeem his receipt at a time. And thus is born the fractional reserve system of banking. At heart the system is based on fraud: the banker (or goldsmith) is pretending that he has the full value of the paper he gives you available for redemption should you ask for it, when he knowingly has only a fraction of that amount available. He is playing the odds at the margin, betting the future of his business on the odds that you will not ask for it all back at one time, or even at the same time as his other customers.
The money supply is the total number of receipts he has in circulation out there at any given time. Now let’s fast forward to the current 21st century. You’ve already figured out that receipts have morphed into money, or currency. Now all of a sudden, it becomes much easier to mess with the money supply, i.e. all the currency in circulation at any given moment. How? Well, since currency is no longer redeemable for precious metals, it is in effect anchored to nothing more than the willingness of the public to use it and accept it. So if you want to increase the money supply, all you have to do is print more paper currency and slip it into circulation. But in the digital age even that isn’t necessary. Printing of currency is done to replace worn out currency, and other than that, printing is used only metaphorically to mean digits transmitted electronically; journal entries into a national bookkeeping system.
Central Banks are created to facilitate the manipulation of the money supply in a nation. The Central Bank is a consortium of the largest banks in a nation that acts like a cartel, like OPEC does for oil producing nations, and it acts as the lender of last resort for all the other banks in that nation. It pools the national money supply, and makes funds available to its member banks as the need arises. It is determined what the amount of reserves should be required for each dollar the member banks loan out. Now let’s do some simple math. If it helps, get out a piece of paper and a small calculator and follow me along here for a minute. Suppose the Federal Reserve loans $1,000,000 to a member bank, Bank A, at its inter-bank interest rate (lower than the public rate). Suppose also that Bank A is required to keep 10% of all deposits in reserve. So it keeps $100,000, or 10% in reserve. Bank A then loans out the balance of the $1,000,000, or $900,000 to a customer of the bank. The customer takes the face amount of his new loan, or $900,000 and uses it to buy something from a supplier. The supplier deposits the $900,000 in his bank, Bank B. Bank B keeps 10% of that $900,000, or $90,000 on reserve, and loans out the balance of $810,000 to another of its customers. Just keep doing this for fifteen consecutive transactions, and you will discover that the original $1,000,000 that the Federal Reserve loaned to Bank A has already become almost $8,000,000 in circulation, with over $200,000 of the original $1,000,000 available in the fifteenth bank! Almost as if by magic, in just fifteen transactions, $1,000,000 has been multiplied to $8,000,000 in the money supply.
So why would anyone want to expand the money supply? Politicians do, in order to create inflation. Inflation is increasing the money supply in order to reduce the purchasing power of the currency, in our illustration, the dollar. This is called intentionally debasing the currency. When you have more money chasing the same amount of goods and services available for exchange, the price of the goods and services goes up. Which is another way of saying it now takes more of the currency to purchase the same thing. This is good for debtors, and bad for creditors. Why? The debts the debtor owes are being paid back with dollars that have less purchasing power. The creditor gets the face amount of his principal back, but those dollars now have less purchasing power than when he loaned them out. Suppose that creditor loaned out those funds at 5% interest, but they are repaid to him with 7% less purchasing power. That lender will soon be out of business. He has lost money.
Now, who is the biggest debtor you can think of? Come on now, try hard, it will come to you. Yes! The U.S. government. As the theory went, it never mattered how much money the government borrowed, as long as it borrowed from its own citizens. But if that government paid its own citizens back with intentionally devalued currency, it actually committed an act of fraud against its own citizens, did it not? It picked their pockets without a vote. If a political party raised taxes by an equivalent amount, it would be summarily voted out of office. But when the Federal Reserve Bank does the dirty work for them, through the back door, financially illiterate people just shrug their shoulders; what can anyone do about inflation? It’s probably those greedy businessmen raising prices to improve their profits!
But wait a minute, you say! Stop! The government hasn’t been just borrowing from its own citizens. It’s been borrowing from foreign nations and global investment funds. In fact it has borrowed so much from these foreigners that many of them have doubts about the ability of the U.S. government to ever repay them, even with devalued currency. They have stopped buying U.S. government debt. So let’s see, now. The citizens of the country aren’t buying much of the government debt; the foreign governments have stopped buying U.S. government debt; our government is running out of potential lenders. Who can it borrow from next? Ah, they found a creative answer: the U.S. government will go to their lender of last resort, and borrow from them. Who is that? You guessed it: the Federal Reserve Bank. How does the U.S. government borrow from the Fed? The U.S. government borrows money by selling Treasury Bonds, which are nothing more than a government-issued I.O.U. A Treasury bond, also called a T-bill, is a debt instrument, a promise to repay at some future time. When no one else wants to buy them, the government sells them to the Fed. In buying the bonds, the Fed gives the Treasury money to spend, which puts it into the money supply of the nation. And when you increase the money supply by $1,000,000, in the fractional reserve banking system, after only fifteen transactions, with a 10% reserve requirement, that money has been multiplied by a factor of 8, with money still working in the system. What happens when you inflate the money supply by hundreds of billions, or trillions, as has been happening in the last 24 months?
So the Fed creates money out of thin air, gives it to the government, which puts it into circulation into the economy in an effort to jump start the economy. So where’s the inflation that should be there? Prices are holding their own or even going down slightly. What’s going on?
I’m going to address this and other questions in my next article, but in conclusion of this one, I want to paint a mental image for you. The U.S. government isn’t the only nation in this poker game. All of them are on board. As one of our original patriots said in a totally different context, “We’ll all hang together, or we’ll each hang separately.” No one wants to be left out of this poker game. All of the currencies of the world are tied to the dollar, and have been for over forty years. Most of the rich countries and many of the emerging nations have invested heavily in U.S. debt; so much so that if the U.S. decides to default, it can take the global financial system down with it. So as the U.S. goes, so goes the world.
Now picture a large room with many tables and poker players, all engrossed in the Global Poker Playoffs. Every player acts civilly, but every player ultimately seeks to trump all the others. About a dozen or so of the players have nuclear weapons strapped to their belts, and the weapons are hot. Nerves are raw. Every player in the room knows that he is playing with the entire wealth of his family and tribe back home, and he knows he dare not come home empty handed. His life might depend on it, and certainly his stature in his community, his personal economic future. His family would share in his economic loss and disgrace. In the center of the room is the largest table, with the biggest players. The playing is intense, and the bidding escalates. No one calls, no one dares to call, and the chips pile up in huge piles on the table. Everyone is starting to question what resources lie behind those chips, and everyone knows what the risks are if a player isn’t good for his bets. Everyone knows everyone else is bluffing, but no one dares to call, because everyone has overplayed his hand. Suddenly the unthinkable happens. Someone bumps the table; piles of chips fall over, spilling into each other, rolling towards the edge of the table. Players start grabbing for the most valuable chips at the margins, upsetting the entire table. Nervous hands move quickly towards their belts, chaos breaks out in the room, some run for the exits . . .
All knowledge is hierarchical, which means we learn in layers, and each layer is built on what went before it. You have to learn the letters of the alphabet before you can grasp how they go together to make words, and you have to master the concept of words before you can formulate sentences. The same principle is true of economics or financial literacy. You have to master basic concepts before you can move on to more complex, higher intellectual planes. So let’s take a few baby steps here, and make sure everyone has a grasp of the fundamentals.
But before we begin, once again let’s deal with the issue of Why bother? Economics is generally considered to be the dismal science, and even the briefest mention of the subject causes the eyes of most people to glaze over in disinterest. Paradoxically, let them lack for money and they will riot in the streets, kill each other, and overthrow governments. We are so accustomed to technological progress, and we have become so certain of its inevitability that we become intellectually lazy and expect things to happen today and tomorrow as they did yesterday. We do not want to trouble our pretty little heads or interrupt our texting, youtubing, or endless chatter on social media to really learn what causes an economic chain of events. So we blithely throw around terms such as money, markets, investing, supply and demand, or wealth without any comprehension of what those terms mean.
We tell others we have a position on matters, such as ‘we are for free markets’ or we are ‘against bailouts’ without realizing that we are using labels as a substitute for thinking. I do not write to tell you what you should think, or what positions you should adopt, or what conclusions you should draw. I write to give you the tools with which to analyze and make your own judgments. And I AM here to tell you that when the crowd is going North, you almost always want to look South. But it takes more effort and learning to be an effective and intelligent contrarian. Taking an opposition viewpoint without solid information is as ignorant as traveling with the herd and rivals adolescent behavior for conformity.
I have written repeatedly that money is NOT the same thing as wealth, and yet folks still don’t get it. If you asked most anyone on the street, if they had one wish, what would it be, the answer for most would probably be “More money.” They are equating money with wealth, and that is totally wrong. As a matter of fact, if you make that mistake in your mind, you are going to make a lot of financial mistakes because of it. Once again, money has no value in, and of, itself. Money is a symbol, and it draws its value from what it symbolizes. Money represents the use of the human mind to create value.
What is value? Something people will act upon to gain or keep. If you value your car, you will change the oil and maintain proper air pressure in the tires. If you value your house, you will mow the lawn. If you value your spouse, you will show a sustained interest in him/her. Value means there is a valuer. Value is not an abstract concept; it implies there is someone who is doing the valuing. To value implies action. Therefore different people will value things differently. In any given society, people trade values, and they use some form of money as the medium of exchange. There is no absolute, intrinsic, abstract value to anything. The value is assigned by the person doing the valuing.
A powerful speedboat may be worth $75,000 to you and of no value to me whatsoever. For you, the speedboat may serve as a totem of your financial success, or it may help you attract the beautiful chicks. For someone like me, who maybe has violent motion sickness, can’t swim, and is happily married, such a boat would represent a needless expense and headache to maintain. So if I won the speedboat in a sweepstakes, its only value to me would be to trade it with someone for something else. If we did that, we would, again, use money as the medium of exchange. For me, money permitted me to exchange an asset, my speedboat, for someone else’s asset, and the transaction was made possible by our mutual acceptance of a currency.
All assets are created, or enhanced, by the creative use of the human mind. The asset itself is wealth, not the money you paid for it. The money you paid for the asset is the numerical value you attached to that asset. The production of that asset required raw materials, tools, a place to manufacture it, and people to perform the specialized functions to make it all happen. Every single person involved was trading with everyone else, and in every case, the medium of exchange was some form of currency, or money. The system of exchange only worked because everyone involved accepted the currency at the same face value.
Because people do not understand money, they are quite flippant about taking someone else’s money or about dictating to them how to dispose of it. Because money represents the use of your strength, time, mind, and other resources to create something trade-able with others, your product, or what you trade, is your private property. If you were a part of a team effort, which is most often the case, your particular contribution is also valued in currency, or money, in the form of a wage. A wage is nothing more than a price for your labor. The higher your skill level, or the rarer your particular knowledge, or even the value of who you know, the higher price you will be able to command in free trade with others. To help you grasp this concept, remember that there would be no such thing as employers and employees were it not for government wanting employers to be their tax collectors and bookkeepers. This is not a job employers ask for, nor do they get paid for it, but if they refuse to do it they go to jail. If they had not been conscripted for compulsory bookkeeping service, employers and employees would be contracting with each other, and there would be no “class” issues or grave power issues. They would be buying and selling to each other. It is interesting to note that the IRS has detailed laws to make sure no one is illegally “contracting” with someone who “should” be labeled an employee, thereby shorting the tax man.
Those who insist that there is a “fair” price to any form of human labor do not understand money or value. Again, value is not intrinsic. God doesn’t send down prices from heaven, but some think society should send them up from the bottom. What creates the value of what you produce? A valuer, also known as a Buyer. A Buyer is someone who is going to take his own money (which represents the value of his creative effort trading with others) and exchange it with you for some service you will perform at your Buyer’s request. The price will be determined between the two of you, and you will both have to come to an agreement on a number, and the medium of exchange will again, be currency, or money. If you cannot come to an agreement, no exchange of values will take place. Each of you will continue to seek other trading partners with whom you can exchange at a value more to your liking. Who knows, at the end of the day you might come back together and make the deal of the morning work, because neither of you has been able to get the price you wanted. Since you are both free to dispose of your effort, how can anyone say it was unfair? To say one or the other should have gotten a higher price is to deny the whole concept of value; that value is not assigned by some elite Know-it-All, but by Buyers. And folks, some stuff never gets bought because there are no buyers at an asked-for price. This is called the market, and the market can be humbling. I may delude myself that I am a terrific writer, and I may further delude myself that I have just completed the next Nobel Prize for Literature. When my novel bombs commercially, I may console myself by stating that the market obviously doesn’t appreciate true literature and good taste (which of course may be true), but the fact remains that I am going to be poor because good, bad, or indifferent, the valuers in my marketplace didn’t value my book enough to open their wallets and hand over their money in exchange for it.
Now in my example, the critics may differ from the public at large, and may give my book high praise. As a matter of fact, I may actually win the Nobel Prize for Literature, but I am still very unhappy because once the prize money is gone, there is no ongoing commercial value to my book because the public ignorantly, and stubbornly, still refuses to buy it. If my book is for sale for $30, and a bricklayer makes that same amount of money for one hour of masonry work, he may decide that a competing value would be more to his taste, perhaps a DVD of a new movie he wants to watch. So he will trade his product (completed masonry work) for his movie instead of my literary masterpiece.
In a free market, there are always lots and lots of people unhappy with how well, or more likely, how poorly, they are trading. They insist that there are intrinsic values that a market does not recognize; they believe in a value without a valuer. Actually, what they believe in is not a free market, where everyone makes their own choices about their money (the symbol of what they worked to produce and trade). Rather, they believe in forced trade, by coercion. They don’t believe that what people earn really belongs to them; they subscribe to a form of altruism that in actual practice becomes slavery; they believe that what each earns according to their ability, belongs to others, according to their need. In fact, everyone has become a slave to everyone else. They therefore subscribe to a control economy where a group of Know-it-Alls can dictate value for everyone, and the result is price fixing. So if I cannot sell my artistic product satisfactorily on the open market, because no one is particularly interested, or at least not at my price, the superior valuers can subsidize me through the National Endowment for the Arts. This is using your money, taken by coercion, to pay me what you wouldn’t of your own free will. Apparently only the superior valuers were able to identify the intrinsic value of my opus. It was necessary to override the obvious poor taste of the bricklayer in the free market who wanted to watch a movie instead of buying my classic.
Price fixing, dear Reader, is all around you; you just don’t know it. Minimum wage, for example, is a form of price fixing. A wage is a price, and the government sets a price floor below which no trading for labor may take place. Now obviously, this is not the same as a free market choice, because the price floor is only set because some folks, both Sellers and Buyers, absent the government’s involvement, would willingly trade below that price level in a free market. The person selling their labor and skills in this transaction is the Seller, and the person acquiring their services and skills is the Buyer. Why would anyone disagree with two people who voluntarily came to a trade agreement and price? Only if they believed there was an intrinsic value that the free market would not recognize. So government coercion is used to mandate a higher-than-market price. If it weren’t higher than market, at least in some geographic areas, there would be no point to the legislation. Interestingly, whenever you hear minimum wage legislation debated in Congress, you never hear the debate framed in moral terms, that it is price fixing, applying coercion to what otherwise would have been a free market transaction. No, the debate is always limited to whether or not minimum wage legislation creates higher unemployment, jobs reduction, layoffs, etc. What everyone is overlooking is that some people, the elite Know-it-Alls, believe they have a superior capacity to determine value than the individuals doing the trading. And in so deciding, they have also de facto declared that the product of your time, energy, skills, and mind, are not your personal property to trade as you see fit, but subject to their superior valuing skills. This is a control economy.
Another and very current example of government involvement in “free” markets is the issue of health care. Legislation presently on the table for consideration will fix prices of services and some service providers. As with the partially nationalized banking sector and automotive sector, the government will establish the permissible compensation of health care providers. The first issue is, and the one most ignored, of course, Is health care a moral right, and on what basis? Read Professor David Kelley’s answer here: http://www.atlassociety.org/showcontent.aspx?ct=14&h=53. For more information on the disinformation we are being fed on the subject, read Health Care Mythology by Clifford Asness, founding principal of AQR Capital Management here: http://www.stumblingontruth.com/. And finally, since the argument for government mandated health care is based on it being a survival issue, that begs the question of how is health care different from, say, food production, which is also a survival issue? Should the government also fix the price of bread? Or does it already? Read an excellent response from Bradley Doucet here: http://www.atlassociety.org/cth-43-2212-WOE-HealthFreedom.aspx.
Those who favor a control economy always see themselves as the elite valuers, or at least being prominent or influential in determining the final result. They pride themselves in creating social justice, and their vehicle for fixing the world is your earnings. They do not see your earnings as your property, to dispose of as you see fit, but rather as public, or community property, to be disposed of by the community, as vested in them, the valuers. There are quite literally thousands and thousands of manifestations of this throughout our economy, which is known as a Mixed Economy. It is halfway between capitalism and socialism, or as the Republicans dubbed it recently, compassionate capitalism. I guess that equates with a compassionate plantation owner who is well intentioned towards his poor, ignorant slaves. The Big Boss in the big, white, plantation house knows best for all of us.
Every control decision has unintended consequences, because there is no way to predict accurately how the herd will react, or what will stampede them in this direction or that direction. Predicting human behavior is a lot like predicting the weather; there are too many variables to get very accurate about it. In a free economy, you don’t have the burden of predicting; you simply allow people to trade on a voluntary basis and things take their course. Control is not an issue. On the other hand, in a control economy, every control requires even more controls. Combine that with the fact that in a control economy, every decision becomes a political decision, every decision becomes subjected to competing gang warfare among the special interests, all of whom are being paid to obtain and/or peddle influence.
It is extremely difficult to create and preserve wealth when a substantial part of all your earnings are expropriated in the interests of social tinkering. Wealth is created when money is re-invested in additional assets, aka land, manufacturing plants, machinery, R&D, skilled labor to produce further earnings. It is this reinvestment of earnings, through money as the medium of exchange, that results in productivity growth, or higher Gross Domestic Product (GDP). Only an increase in real GDP results in wealth. Wealth is wealth; there are assets at work that produce an excess over expenses that are reinvested over and over again, that lift a society out of poverty. No society in the history of the world has ever taxed its way to prosperity. Some borrowing, and therefore credit, contributes to the growth of GDP: borrowing for further investment. Borrowing for consumption is digging a hole with a shovel. When governments borrow heavily, as the United States government has been doing, they destroy wealth, because the government is now competing with all business for the limited supply of credit available; the more the government sucks up (by offering higher rates), the more expensive commercial credit becomes (or it becomes unavailable altogether). That drives up the cost of doing business, reduces capital investment in business, and halts the growth of GDP in its tracks. Printing money is not the same as creating wealth. The problem with printing money is that it confuses money with wealth. Wealth is investment in assets that create new and further wealth. Sucking credit out of the economy by borrowing so much that government is now competing with business for available capital, and politicizing business decisions, is not a road to financial responsibility, and recovery; business quickly focus on political connections rather than efficiencies and higher productivity. After all, at the end of the day, it will be government that will decide who gets to survive and who won’t.
Sometimes because of a government’s actions, the public loses all confidence in the currency of the country. The currency in effect becomes worthless, quite literally not worth the paper it is written on. In time this could be the price the United States will pay for its present political decisions. We’ll see. When governments succeed in destroying their currency because of ill-fated attempts at social engineering through a control economy, they usually see their only means of correcting their mess to be, of course, further controls. In its final stages this often involves physical repression, incarceration, labor camps, torture and death. Some countries, such as France, during their Revolution, declared that anyone who refused to conduct trade using the worthless currency of the day was to be subject to the death penalty! I have always found it ironic that the motto of their Revolution, that culminated in the Reign of Terror with the tumbrels carrying many thousands to their death at the public guillotine, was none other than the eloquent “Liberty, Equality, Fraternity”. No one seemed to realize that the first two were mutually exclusive; that everyone cannot be free, and still achieve equal results. We are equal in our title to individual rights, but unequal in everything else. Their experiment in social engineering led to the inevitable bloodbath that has been the hallmark of every experiment at State control. But still we persist. Surely we will get it right the next time!???
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