In the beginning there was Money. Well, not exactly. There was barter. There was a high degree of vertical integration, which is a fancy way of saying if you wanted something back then, it was pretty much up to you to grow it or make it yourself. What trade existed was largely between members of the tribe or village or group. If some guy made a pretty cool hunting knife, and his wife was nagging him for a deer to butcher and eat, a trade of the knife for the deer (or parts of it) might take place. Trading was simple, uncomplicated, and very very slow. Life was brutal and short. At the end of the day, when you had run out of you, you had also run out of future. You aged quickly and died young. When groups of nomads found a place to their liking, they sometimes stayed, settled in, and became agrarian. Society became more complex, and slightly greater specialization of labor became possible. One family could grow things from the soil; another could domesticate animals as a source of meat. There was still no Money.
Trading in this primitive context was still taking place among the so-called Indians on this North American continent when the first Europeans arrived. The native Americans were fascinated with some of the baubles brought over by the Europeans and willingly traded furs for them. Eventually some commodities became so commonplace and essential to daily life in primitive societies that they took on new importance as a means of facilitating trade. Salt, because it was needed by everyone for daily purposes, came to assume more importance as a form of “money” than it formerly had as just salt. Since everyone had salt, and used salt, goods and services were traded using salt as the store of value and medium of exchange between trading partners. The same was true of other things of universal value, including furs. Because of their prized ornamental value and scarcity, gold and silver became universally accepted as Money.
The term store of value is very important. Without some universally accepted warehouse of value that had been produced, all exchange was limited to what could be immediately produced and immediately consumed. No long term planning was possible, and without long term planning, the Industrial Revolution with its complex machines and processes was impossible. Modern society was impossible. The invention of Money was a prerequisite to all the amenities of life as we know it. Without the invention of Money, we would all still be primitives. In spite of Rousseau’s idealization of the Noble Savage, the Garden of Eden it was not. Man was the victim of ignorance, superstition, disease, and unmitigated natural disaster the likes of which are only occasionally experienced today in the poorest parts of the world.
In primitive society, wealth was limited to whatever a person could produce in a day, or a month, or a year of his own individual effort. All other wealth was acquired by confiscating the values produced by others at the point of a spear, or in time, at the end of a gun. All great monuments of history were made possible by the confiscation, not only of others wealth, including their grain, their herds, their tools, but also the confiscation of the people themselves, physically. People became property, to be used and exploited by their conquerors. When Rome was starving because of crop failure, their solution was to conquer Egypt with their legions, make that part of North Africa a vassal state and require them to ship their grain to Rome at prices Rome dictated. You might say that Rome “nationalized” Egypt; Cleopatra, in name at least, still “owned” the means of production, but the prices were dictated by Rome, her Master. For a while, she was able to continue her pretense of being in charge of her country, of being Queen. Then one day Caesar extended an invitation she could not refuse: to come to Rome to visit, as his “guest”. The dress code for the event was a little intimidating–naked, in shackles, to be paraded as the spoils of war through the crowds of Roman rabble and oglers, the nobility and the great unwashed. Cleopatra committed suicide.
If you were successively victorious, you celebrated by building temples to the gods who had blessed you, or you worshipped the gods among you Of course you also built monuments and palaces to your leaders and warriors, as totems to their greatness. And if your civilization succumbed to a rival some time later, your enemy sat on your thrones and lived in your palaces that they acquired the same way you did–by force. You supplicated your gods and you placated your gods, and you worshipped and obeyed your kings and princes as gods themselves, or the sons of the gods, or the direct representatives of the gods. And sometimes the Great Leaders and Warriors had to share the power in an uneasy alliance with the Priests and Shamans who controlled and manipulated the fears and superstitions of the human herd, who provided opaque and inscrutable explanations for why things sometimes went wrong, who demanded sacrifices for the gods of both this world and the next. It reminds us somewhat of the chief economists and central bankers ‘divining the liver’ of the economy, reading the stars, making their prognostications and gobbledygook commentary about what it all means, and who also require sacrifices so that the gods may be propitiated.
There were two ways to acquire wealth; the tedious, slow way of trading successfully with others, or the riskier but faster way–to seize what others already had. You could do this as a petty murderer; or as a tribal leader, a mass murderer if the occasion demanded it. You could enslave others, or you could be enslaved by others. The spoils went to the winner. For those who chose the route of peaceful and voluntary trade with others, the advent of Money was an organic process that developed naturally as a more efficient way to trade. It expanded the possibilities of what could be traded, as Money was a way to store value. Money was a symbol of value that had been created and was warehoused somewhere else. If on the other hand, you were a Ruler, Money facilitated the confiscation of the wealth of your subjects. As a Ruler, you saw Money as nothing more than an extension of your right to plunder your subjects; if you insisted that your subjects pay their taxes to you in salt, or grain, or gold, you didn’t care what medium of exchange they used among themselves, as long as you controlled the form in which they paid you. This became your Treasury.
As the Ruler, what did you need a Treasury for? Well, your subjects didn’t always have the products or skills to do what you wanted. So you had to bring people and products in from other places, and to do this you had to trade with them. You could force your own subjects to engage in slave labor, but you could not do so with others outside your domain, for most likely they belonged to another Ruler, another Tyrant. They were his property, not yours. If the other people were accustomed to gold as a means of exchange, as you were, trading was simple. If they did not use gold, trade quickly got more complicated. Now there were two forms of money, your gold and whatever they were using. A rate of exchange had to be negotiated. If they were using salt, then you had to establish how much salt was equal to an ounce of gold. Your joint answer to this question would become your exchange rate between two kinds of money.
You also need a Treasury to finance your wars. You may have had your own troops, but many, if not most wars were fought with soldiers-for-hire, mercenaries. Either way, they had to be paid. If soldiers didn’t get paid, they and their families didn’t eat, and when people don’t eat, they get deeply unhappy. Unpaid soldiers have a nasty habit of slipping away in the night and disappearing. So they had to be paid, with Money that would be recognized and accepted by others with whom the soldiers would want to trade. In ancient societies, soldiers were paid in coin. When the Treasury of the Ruler was low, he would order his minions to shave slivers of metal off the coins, then melt the shavings down to forge new coins. The coins of the realm tended to get smaller and smaller and people would notice and feel they were being defrauded. And of course, they were. By the Ruler, who was trying to expand his Money supply the only way he knew how. When Rulers figured out alloys, they would instruct their keepers of the Treasury to mix base metals with the precious metal, again in an effort to take the existing amount of gold or silver and make it go farther by cheapening it. When people felt they were being cheated, they demanded additional coins in payment to make up for the parts shaved off, or the new alloy coins. They started making etched ridges along the circumference of the coins, so that if any shaving of the edges was attempted, they would know it because the ridges would be missing. All through history people everywhere showed a basic desire to keep what was theirs, and all through history they tended to distrust their Rulers intentions with their money. And with good reason. The Rulers treatment of their Money was the equivalent of a cheating pair of scales.
Over the millenia, nothing has really changed very much. With the advent of the printing press, it became a lot easier to steal from one’s subjects. Until shortly after World War I, the currencies of the world’s governments continued to be pegged to gold as a means to facilitate trade between nations on an objective standard. Because the rest of the modern world had been decimated by the ravages of what had come to be known as The Great War, the American dollar had become the currency of the world; in other words everyone was willing to be paid in American greenbacks because it was agreed that those dollars could be redeemed in gold on request from the American Federal Reserve, our central bank. Because there was a steady loss of gold over the years from the American Treasury, President Nixon unilaterally decided to take the American dollar off the gold standard in 1971. Confidence in the American dollar was waning, and foreigners wanted the gold instead. Well, no more. The Law of Unintended Consequences prevailed, as always. In today’s world, when foreign governments acquire larger quantities of another nation’s currency than they are comfortable with, they sell the undesired currency on world markets. You see, paper money, like gold, oil, cotton, grain, or cattle, can be sold in markets created specially for the purpose. Currency is bought and sold on what is called a Foreign Exchange market, or FOREX for short. Well, after Nixon took us off the gold standard, foreign governments rushed to get rid of their dollars by dumping them on the world market, exchanging dollars for other currencies then considered more valuable. When there are more sellers than there are buyers, the price of a commodity goes down. The dollar is a commodity, and the price of the dollar went down. Now let’s make this next connection in a flying intuitive leap: A paper dollar unattached to an objective gold standard has no value in and of itself. It represents only the faith of the people who use it. When it is obvious that governments are trying to unload a lot of dollars, it quickly erodes people’s confidence in that dollar. When the confidence in the value of the dollar goes down, what the dollar is able to purchase goes down also. When it takes more dollars to purchase the same item than it used to, you have inflation. The same thing has happened as when an ancient Ruler mixed other metals with gold in order to create more of it. The purchasing power of the unit of currency goes down when people don’t trust it; so they want more of it in payment than they used to. Prices go up. If you have the same quantity of a currency as you had before, but the purchasing power of that currency has done down, you have just become poorer, as surely as if someone had robbed you during the night.
When Rulers, or governments, for whatever reason, add to their Money supply, you have more money chasing the same goods, which means the purchasing power of the unit of currency goes down, which is just another way of saying the price went up. The price is nothing more than how many units of currency are required to purchase an item, any item.
The American consumer nation became an empire of debt in order to pay for all the goodies it imported from foreign nations. America paid those nations in dollars, and by 2001 almost 80% of all dollars in existence were held by foreigners according to Bonner and Wiggin in Financial Reckoning Day Fallout. Under normal circumstances foreigners can get rid of dollars by buying American goods in return, and this keeps foreign currencies in balance. That didn’t work because we were importing way more than we were exporting, so the imbalance grew. Foreigners could have once again dumped their excess dollars on the foreign exchange market, which would have driven the value of the dollar down, which would have made foreign goods more expensive, and our exports cheaper. That would have reduced demand for foreign goods, and reduced their sales to us. They wanted to keep their factories going at full production, and that meant continuing to sell to America at maximum levels. So instead, what did the foreigners holding excess dollars decide to do? They decided to get rid of those dollars by buying up American assets, including businesses, real estate, and financial investments.
But the plot thickens. At about the turn of the millenium, America was in the throes of a recession. The Federal Reserve, determined to make this go away, decided to make credit cheaper by lowering interest rates to unheard of levels. They wanted Americans to buy, and they figured the best way to do this was to make money cheap. Cheap credit, combined with government incentives to lenders to make residential mortgages available to people unlikely to pay those mortgages, resulted in a lot of toxic mortgages out there. Because money was cheap and easy, demand for residential real estate went through the roof, and that of course, caused the prices for that real estate to go through the roof as well. So prices of real estate are spiraling up, money continues to be cheap and easy, there are a flood of unworthy mortgages. Now for the rest of the story. The flip side of cheap money is that lenders, who make their profits off of interest they charge, now have sharply reduced profit margins because their product, money, is too cheap! They are practically giving it away! What to do? Simple: slice and dice these toxic mortgages that everyone knows are going to result in default by the borrowers, repackage them, take them off the lenders hands, and sell them to ???? Why the foreigners who are holding more dollars than they know what to do with, and let them buy them at outrageous premiums! And why would they do so? Why, because the prices of real estate have been spiraling upward like the forced steam of a 19th century locomotive.
Now to put this in perspective, if you got a twenty-dollar bill from an ATM machine, and then went to the grocery store to make a purchase only to find your twenty-dollar bill is counterfeit, what would or could you do? The bank won’t take it back, and the grocery store won’t accept it as payment. The one last holding the counterfeit bill takes the hit. That would be you. You are out $20. Unless of course you go up the street to McDonalds or Starbucks and use the same bill to make a purchase, and get change in non-counterfeit denominations. You have successfully handed off your risk of loss to someone else. This is what the lenders and Wall Street did with the toxic mortgages. They pawned them off, at exorbitant profit to the first suckers they could find–the foreigners looking for a place to put their excess holdings of American dollars. Foreigners such as foreign central banks, for example.
The rest, as they say, is history. The bubble price level of real estate popped, the mortgages were much higher than the value of the properties that collateralized them, the foreign holders of these toxic repackages had a fit, American lenders who didn’t leave the party early enough got stuck with a lot of non-performing loans, which meant that they no longer had sufficient reserves on hand to cover their exposure to those bad loans (which meant they were insolvent and a prime target for a run on them by their depositors.) Then there were the insurors of these toxic assets who were extremely overleveraged and ready to go under, starting with AIG. The American government came to the rescue, and bailed out the banks, the insurors, the foreign central banks. How did they pay for all this? At the heart of it all is a defective product–the toxic mortgages and the packages they became a part of. There is no market for mortgages worth 30% less than the homes that are the collateral. And to make matters worse, the prices continue to drop, and no one really knows how to determine what these properties are worth, other than to put them out to sale in a market where no one is buying. So the Federal Reserve decides to buy the toxic financial instruments at prices that are made up, pure fiction. And the Fed buys these mortgages with more fiction, pretend money. Money created by making book entries in digital ledgers. The banks receive the digital money, their reserves are stabilized, and they are removed from the Endangered Species list.
There is only one problem. The Fed, when they came to save the day, expanded the money supply of the world’s largest debtor nation to a degree unprecedented in history. The whole world’s financial system continues on life support, and the machine is making disturbing noises. You see, there is one minor detail everyone seems to be forgetting. There are only two ways to acquire wealth: produce value, or steal the value produced by someone else. This nation’s value comes from its manufacturing plants, research and development departments, its science labs and production facilities. There are no current economic indicators that reliably tell us these numbers are improving. So can we print our way to recovery and prosperity? Ben Bernanke says we can. Tim Geithner says we can. The President says we can. In time, all that wildly inflated Money supply is going to work its way out into the economy, which means the purchasing power of the dollar is going to drop. When ordinary people sense in their gut that the value of their dollar is dropping, they will rush to get rid of their dollars, just like foreign governments did in the last ten years. But who will take them? As the floor drops out of the dollar, we will rush to spend them in the morning, because they will be worth less by the evening.
Will the government’s debts be honored? Of course. Everyone who is owed will be paid. With currency devalued to a fraction of its face value when it was borrowed. But who can argue? Everyone can see the numbers printed on the paper. We will all be poorer, except those favored few who are in on the insider trading, who get rid of their money first.
The remainder of the burden will be borne by the taxpayer. Isn’t it amazing how much better we can feel, knowing we are taxpayers and not slaves? Would we ever agree to becoming slaves? Of course not. At exactly what point does a taxpayer subjected to Washington’s gang warfare become a servant of the State? 10%? 25%? 50%? 75%? Are we perhaps like Cleopatra, passively accepting our vassal state, as long as we are allowed to pretend we are still a free people? Do you think Cleopatra felt better knowing that her country’s production of grain was being confiscated for the “good of society”, society as defined by her captors? Roman society? Like every other tyrant cum Benefactor in history, Cleopatra eventually got what she deserved, for she also was one of them. She too had been one of the Gods.
The claim of governments to control over money has no basis in nature or any rule of law recognizing individual rights and private property. Statists all believe in the moral superiority of the collective; for them the sovereignty of the State trumps the sovereignty of the individual the State supposedly serves. It is not hard to figure out which philosophy prevails in our culture. The well funded collectives who contributed heavily to the campaigns of our politicians have been generously rewarded. And what of the well-heeled financiers, bankers, stockholders and managers of the insurance companies, the foreign central bankers, and our own professional bureaucrats who created this problem? They are the very ones selected to be bailed out or worse, chosen to correct it!
We, the individuals, the smallest and most unprotected “group” in the nation, will foot the bill. Between inflation and taxation, dear Reader, it is our wealth that will be confiscated or destroyed.
Perhaps, like Cleopatra, we too have been given an invitation we cannot refuse.
The gods are still among us.
I have defined money many times in articles on this blog. Money includes currency; it is a means of exchange and it represents value outside of itself. Money has no intrinsic value; its value is directly related to its general acceptance in the population. Money is a means of measuring wealth, and a store of wealth, but it is not the wealth itself. So what is wealth? Wealth is personal, material property; wealth is accumulated income, earnings, savings (stored as money); wealth is income producing assets. Wealth can be created, earned, dissipated, stored, inherited, accumulated, expropriated. Wealth is always relative; when we say a person is wealthy, we mean in comparison to others. A person on welfare in our society today often lives much, much better than the wealthiest of the so-called robber barons of 100 years ago. How do we compare a poor household of today with a large flat-screen TV, numerous digital toys, e-mail, and air conditioning and a microwave with the rich of the 19th century who did not have indoor plumbing or telephones? When we talk about eliminating poverty in today’s terms, we are using very, very relative terms.
In any context, wealth represents a responsibility and potentially a burden; wealth requires action not only to earn, but also to preserve. If a person’s wealth is greater than he is, he will lose it (or she, of course). Wealth is created by work, primarily the use of one’s mind, and by good judgment. When the mindless inherit wealth, unless there are appointed guardians of that wealth to protect them from their own foolishness, the wealth will diminish and eventually disappear. The most important type of wealth, for the financially literate, is assets that produce income. This is when your wealth is working for you. Ultimately your wealth is measured in time, not money. How long can you survive financially without working, without even getting out of bed in the morning (if you didn’t want to)? Are you one-day wealthy, one month wealthy, one year wealthy, or the rest of your life wealthy? Likewise, whenever the human mind devises a way to produce more goods and services that improve the human condition with less time and effort, wealth is created. Wealth and money are frequently confused, and those who cannot understand the difference are at a serious disadvantage in the competition for limited resources. For a short video on why money is not wealth, go to: http://www.youtube.com/watch?v=9iVebppIIFA