Planet Money and the Invention of Money

Thursday, January 20, 2011

Yesterday I sent a second of two emails to Planet Money giving my thoughts and applause to their presentation on the Invention of Money on NPR's This American Life: Sunday, January 7.  I highly recommend you listen to it and contemplate how it changes or adds to your view of money. I admire how articulate and concise they are in describing money's strangely magical qualities. They dwell on the truth that money is trust, a powerful and apt description. Alas, I regret that this may be the first time that the word trust appears in this blog. Thanks, Planet Money. Otherwise, I find support in their words--and much food for further thought. L I S T E N, then read my response:

3. Plum Local

Plum Local
Bob Komives
  ::

I had my first course in economics in college. I forgot most of it, except for the fascinating way that banks create money as they lend out most of the money that we deposit with them, then receive most of it back again in new deposits, and then lend most of this magically expanding cash out again, and on, and on. We see that bad banks fail, and we know that even good banks make bad loans.

Why only blame
—if our banks create money—
why only blame our government for inflation?

||

I turned my studies to art and architecture. Along the way I discovered a maverick named R. Buckminster Fuller. He stood among other heroes such as Louis Sullivan and Frank Lloyd Wright in describing the unity of design and nature.

Can projects designed
following principles of our biosphere
ever be too ugly,
ever be too expensive?

||

I got married, and we went to the Peace Corps near the Pacific Coast in Guatemala. I saw discrepancy between strategies for national economic development and realities of community development.

I had to ask
" Does it make sense
—for our poverty, our sickness, our exploitation—
that our cure
cannot come
with our economic development,
but only after?"

||

We moved to Little Rock Arkansas where I tried my hand at city planning in the Model Cities program. This was 1969, a time of large investment in troubled cities. Our successes were real but modest.

Is it not strange?
Even during prosperous times
since our era of generosity,
they say,
we cannot afford to budget for success.

Since Our Era Of Generosity

I went back to school to get my professional planning degree. There I discovered economics, learning its many applications to local public policy. It was elegant; it was beautiful. The curves conveyed information to me in ways that no other medium ever had.

One weekend, I took a rest from my studies and read a book by R. Buckminster Fuller. I believe it was Operating Manual for Spaceship Earth. There, I encountered for the first time his elegant formulation of the fundamental law of economics:

Wealth is a function of energy and knowledge.

Absent was any mention of scarcity, supply, demand. This was the economics of abundance. Fuller's economics made every bit as much sense to me as the crisp logic of market economics.

Humankind developed
laws,
traditions,
and institutions
to deal with scarcity.
At any point
in time and space,
scarcity is specific.
It is real.

We live scarcity,
but we come to live
and to thrive
through abundance.

Please do not misunderstand me.
I believe in scarcity.
I have lived it and seen
both its pains
and its benefits.

Yet, abundance is as real as is scarcity
and is even more fundamental.

Without scarcity,
the economist cannot draw
supply curves
and demand curves.
But these curves cannot anticipate
mathematics,
art,
democracy,
communities,
back rubs,
interplanetary exploration,
civil rights,
the popsicle,
or the yo-yo.
Nor could they have anticipated
the brown trout,
the monarch butterfly,
or the horned toad.
Each is part of our biosphere.
Each is our wealth.
And wealth must be the stuff of economics.

Today,
if we choose to love our wealth and our biosphere
we seem unable to seek the best for one
without harming the other.
Today, also,
sages preach to us of the evils in our economy.
They tell us to be more moral,
to separate pretension from wealth.
Let us heed such sermons.

Yet, the moral sage does not free us
from the choice between two loves.
Neither sage nor economist can free us
unless we know
how wealth and biosphere are one—
how we live scarcity,
but come to live
and to thrive
through abundance.

We Come to Live and Thrive

I lay sandwiched between a straightforward explanation of supply-demand-utility and Fuller's statement that wealth is a function of knowledge and energy. I found myself in that muddled layer of confusion and witchcraft called macroeconomics —including gold flow, balance of payments, balance of trade, inflation, and the like. The economy uses the biosphere's model of abundance, while conventional economics uses a model of scarcity. Beneath scarcity lies a supportive abundance —a macro-abundance. Beneath microeconomics, which specializes in scarcity, should lie a supportive macroeconomics specializing in abundance.

Microeconomics covers those situations in which flow of wealth mimics a traditional marketplace. People buy; they sell; they trade. The demand for a product in relation to its supply sets the price. Economists do not. Buyers and sellers do so, acting upon their needs and desires. One day, two chickens are worth two yards of cloth. The next day, they may be worth three yards in the morning but only one after lunch. Marketplace economics explains well the dynamics in this true marketplace and in myriad public and private markets in which goods and services are bought and sold. It can explain how the price for cloth changes as well as how the weaver decides how much to produce. It cannot, however, go on to explain how cloth came into existence nor how chickens were domesticated.

From graduate school I launched my planning career. I went to the island of Martha's Vineyard where I worked for five years to protect its resources and foster sensitive development. I moved as a consultant to Colorado, worked for a while in the analysis of socioeconomic impact from energy development. I went on to typical land-use planning. The gulf between my professional work and my struggle with the theories of economics seemed unnecessary, but enormous.

The economics of abundance remained a closet hobby until 1980 when I pulled together some of my notes in a hand-printed, ten-page document called Plum Local. It began with my apology: "Pardon my boldness ." I wrote, "The valid world economics will show the tie between genetic and economic evolution," and "Taxes, Bah!! Let's phase them out Let's balance our budget by investing communally (politically) in the growth of knowledge for mankind." I sent one copy to R. Buckminster Fuller. When I received his encouraging one-sentence response I felt some comfort.

The four-page 2nd Plum Local of 1981 took my ideas further: "Taxation is role playing. Monetary return as we have in the national income tax system has no role to play. If there is a utopia it will be found in a humanistic management of instability."

Now, as then, I find it hard to put forth theories of economics that disagree with the teachings and preachings of intelligent people who are economists by profession. However, I would find it harder not to share ideas that help me find some sense and science among a potpourri of confusing theories and popular maxims.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 3. Plum Local ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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44. A Better Money Legend

Plum Local IV ::: Part III 

National Investment and Money

=== chapters 44 - 50 ===

=== look to right column for direct links to chapters ===

A Better Money Legend
Bob Komives
::

Who Created Money?

Money is one of humankind's great inventions.
I was not around when it was invented,
but I do think I know how it happened.

In the third or fourth grade I was taught:
primitive people traded things for things;
we needed a better means of exchange;
we invented money.
What an image!
These hapless primitive people
dragging around elephants and chickens
to exchange for coconuts,
while their suave modern cousins
sit under a tree sipping coconut milk
passing a few coins back and forth.
I have since heard many adults and children
tell this same simple history.
My hair was turning white
when I found something missing--
Who?
Granted,
trading chickens for coconuts could be cumbersome
for the poor folks who walk to the marketplace,
but poor folks do not create money.
Kings, queens, emperors,
bankers, and empresses create money.
They always have plenty of burly helpers
to carry their chickens and coconuts.
Which one said:

"My poor subjects are so overburdened.
Trade is so bulky.
I, nice person that I am,
will give them a means of exchange."

Even if one leader were that smart and that good,
why did cruel and dim despots continue the practice?

Listen to this story.

Let us imagine that first money was made of gold,
and it was issued by an empress.
Before making her coins the empress needed gold. 
Whether she stole it,
got it through in-kind taxes,
inherited it,
or had it mined in her own mines,
she had a storehouse of gold.
Gold held great value in her empire.
She could buy armies, loyalty, roads, music, or whatever.

Now, suppose her artisan made her a radical proposal:

"Your highness,
you are so beautiful;
I am so skilled.
Let me melt your gold
and cast it into little disks
carrying my beautiful rendering
of your beautiful face."

She feels flattered and tempted.
But she says,"no,"
and puts the artisan in the dungeon for treason.
After all,
some gold would spill on the foundry floor.
The artisan could hide away bits of the gold--
making him a rich and disloyal man.
Many laborers would be needed.
The melting would use up many trees.
The dungeon was almost too little punishment.

Then there arises a great crisis in the empire.
In the east a horde of barbarians prepares to invade.
In the west, three princes want a good road to market.
Without it they may sever their lands from the empire.
The empress summons her advisers.
They report:

An army to defeat barbarians
costs 10,000 pounds of gold.
A good road over the mountains to the west
costs 10,000 pounds of gold.
In the empress's storehouse
are 10,000 pounds of gold.
The barbarian invasion by itself,
or the secession of the princes by itself
will bring destruction of the empire
and death to the empress.

Despair sets upon the empress and her advisers--
until she remembers the artisan.

"Free the artisan
Instruct him to melt all my gold
and mint me 20,000 gold coins carrying my image.
I proclaim,
each coin has a value of one pound of gold.
Spend these coins to raise an army.
Defeat the barbarians.
Build a road over the mountains to the west."

In her selfish interest the empress spends coins.
Her subjects must accept them at twice their value in gold.
Through this great and official hoax
she proposes to save her empire and her life.
To her own amazement,
the hoax works.

She builds the road.
The western provinces boom in productivity
as ever more commerce uses the new road.

She defeats the barbarians.
In the eastern provinces,
under peace and stability,
farmers and artisans produce as never before.

Once coerced to accept the coins,
citizens now covet them.
With more goods and services to buy
people welcome the new means to buy them.

The secret cannot be confined to one empire.
Kings, queens and emperors imitate the great hoax.
Some invest their coins wisely and prosper.
Their subjects revere and follow them.

Other rulers are less wise.
They spend their diluted gold coins
on pleasures that drain wealth rather than nourish it.
Drowning in a sea of over-valued coins,
their subjects resort to trading of a-good-for-a-good,
and they rise up to throw out their worthless rulers.

Who created money?
Someone powerful and selfish and a little wise.
Someone like the empress.

Who Created Money

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 44. A Better Money Legend ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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47. Three Siblings: Loan, Stock and Money

Three Siblings: Loan, Stock and Money
Bob Komives
::

Every time I use my credit card to buy something I issue a piece of real or symbolic paper --paper which embodies a loan secured only by my promise to pay. A bank gladly accepts my new paper. Its accountant calls my paper promise, an asset. With that new asset my lender bank can invest more than it could lend yesterday. Every time a business buys something using its line of credit it issues a piece of real or symbolic paper --paper that embodies a loan secured only by the business's promise to pay. The lender bank gladly accepts the new paper as a new asset. Today's new asset makes the bank worth more to buyer or investor than it was worth yesterday. The paper loan --floated on nothing but a promise-- is an unsecured loan. This unsecured loan is a sibling of money.

Money has another sibling --a fraternal twin adopted by corporations. Common stock floated by corporations is the fraternal twin of money floated by national governments. Both are worthless paper with an initial value in the marketplace based only on speculation that proceeds from sale of the paper will be invested wisely.

Many corporate leaders and investors, and perhaps you, believe a national government should run like a business --claiming that a government is unbusinesslike if it spends more money than it collects. This dogma makes it difficult to see the family resemblance between stock, loans and money. Please prepare to suspend your belief for several paragraphs. If you hold this dogma the most I can ask is that you consider what you are about to read to be science fiction. Try to enjoy reading of a different world. Later, over a cup of your favorite drink, please ponder the possibility that this different world is our real world.

When good-old General Motors and I had good credit ratings we were allowed (often encouraged) to not balance our budgets --to paper the world with more credit than we can pay for immediately. Lender and investor wanted to hold our paper because they believed they would be well repaid for holding it.

Good-old General Motors issued paper called stock. Each new issue reorganized the investing public so that some of us gullible people played our assigned role and gave General Motors our money in exchange for the stock. If Jane had not been so induced she might have put a California hot tub on her back porch. Part of her wealth would have flowed to a small hot-tub company in California. Instead, it flowed to a giant in Michigan. Mary got laid off in California and moved to Michigan where her cousin, Sid, had just been hired for a new General Motors' project.

When good-old General Motors invested Jane's money poorly, it experienced inflation: Sid got laid off; Mary failed to find a job; Cadillac prices went up, or profits went down; the value of General Motors' common stock went down.

Jane and other stockholders took a risk for potential reward. Her risk and potential reward parallel those of a holder of national currency. If government invests well money holders will be well repaid.

Suppose good-old General Motors had required that anyone who wants to buy one share of its stock must pay for it with one share of Ford Motor Company stock. This may seem strange because General Motors normally asks for payment in money. However, if we suppose a time when one share of GM stock was equal to one share of Ford stock the stock-for-stock policy would be reasonable. It is as reasonable as holders of USA dollars exchanging their money for Canadian dollars of equal value. If General Motors had been trying to take over Ford it would have been quite reasonable to give Ford Stockholders new shares in General Motors in exchange for old shares in Ford. The newly issued General Motors stock would have been balanced by new corporate wealth --the assets of Ford. This is an understandable transaction with real balance.

Now, suppose good-old General Motors had been asked by its investors to achieve balance in the way advocates of balanced budgets say national governments should achieve balance. That is, General Motors had to receive one of its own shares before issuing a new one? Here is balance; nothing does balance nothing. Do you not agree that it is ridiculous balance? It would have been ridiculous to require that General Motors take in one share of its common stock for every new share that it issued. Such a requirement would invalidate accepted practice in corporate finance. It is equally ridiculous to ask the national government to take in one dollar for every one it issues.

A corporate stock issue should be balanced by an increase in corporate wealth coming from responsible investment of the proceeds from the stock issue. A national money issue should balance itself in the same way --through good investment. The public and private investment enabled by the expenditure of new money must create wealth to match the increase in money supply.

To review:

Sibling one, Unsecured Loan
We borrowers must invest the wealth of our lenders in productive ways that by choice or impossibility those lenders will not invest directly. We trade unsecured, paper promissory notes for a loan of investment resources. If we do not invest those resources well, we will fail to pay off loans, our credit rating will fall, our loans will lose value (inflation), and our lenders may rise in revolt to take over our remaining assets.

Sibling two, Common Stock
Corporate directors must invest the wealth of their stockholders in productive ways that would be difficult or impossible for individual stockholders to invest. The corporation trades paper stock for investment resources. If it does not invest those resources well its stock will lose value (inflation), and its stockholders may rise in revolt to install new directors for the corporation.

Sibling three, Money
Government must invest the wealth of its citizens in productive ways that by choice or impossibility will not to be private investment. National government trades paper money for investment resources. If it does not invest those resources well its money will lose value (inflation) and its money holders may rise in revolt to take control of the nation and its government.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 47. Three Siblings: Loan, Stock And Money ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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49. Banks Add Money and Investment.

Banks Add Money and Investment.
Bob Komives
::

Would you rather have a thousand dollars worth of stock or a thousand stocks worth of dollars? You might say, "That depends." Would you rather have a thousand potatoes worth of dollars, a thousand potatoes worth of stock, or a thousand stocks worth of other people's promissory notes? I suppose, "It still depends." With some creative logistics you can use any of these assets at the stock exchange to buy stock, at the bank to secure a loan, in your will to endow a university, or, in a pinch, most anywhere to trade for most anything. Why? Because there are secondary markets for potatoes, stock, loans and money. After the first transaction that puts them into the marketplace they can be sold again and again. The secondary markets for potatoes, stock, and loans are giant-but-tiny compared to the fluid markets for money. As the principal means of exchange, money is coveted by one side in most transactions. In modern economies we need a lot of money --so much that even free-spending governments can have trouble keeping up with the demand. They need assistance. While good-old General Motors would never allow anyone else to issue its stock (traders were stuck with the number of stock General Motors chose to issue), the demand for money is so great that most national governments let banks assist them in minting. The economy needs new money as enterprise brings forth new goods and services that the public wants. By choice or by default, governments in countries that emphasize the private marketplace let the banking system issue much of their money. Within the limits imposed on them by government, banks issue new money whenever they borrow from their depositors to issue new loans. If the banking system did not print more money there is no way that most bankers could cover their growing obligations to depositors --to return the deposits, with interest, on demand. Nor could borrowers pay their obligations to the banks.

Bank-printed money is easy to see if we consider the banking system as one bank. One day a man who is known to be reliable and productive takes 100 dollars out of his pocket and deposits them in the bank. A day later he borrows 80 dollars from the bank. The morning of day three he withdraws his initial deposit plus one day of earned interest. Now he has 180-plus real dollars in his pocket and an obligation to pay back his loan. He goes out and spends those dollars at stores that quickly send someone to the bank to deposit their earnings. By close of the business day the bank has assets of more than 180 dollars in deposits and more than $80 in good loans. As the cycle goes on, the amount of money in circulation and deposited in the bank continues to rise. Someone printed money, and, oh yes, during these three days government was on a holiday.

Having once put new money into circulation by lending out money that they have guaranteed to hold for depositors, a bank cannot withdraw that money from the marketplace even when investments turn sour. Borrowers have spent the money. It disappeared into the marketplace --eventually returning to the bank, but with no tag to identify it with the initial loan. Where projects fail borrowers never get enough money back from the marketplace to return what they owe to the bank. New money spent on these bad projects stays out in the marketplace searching for goods and services. Since the projects did not produce their promised economic growth, new money competes with old money for old goods and services --forcing up prices. The value of all money declines. That is inflation. Whether bank or government issues money to finance bad projects the effect is the same: inflation. Whether bank or government issues money to finance good projects the effect is the same: economic growth.

Despite the inflation risk, a banking system can serve its country well. A diverse investment structure that includes banks of various sizes in different locations can develop diverse investment strategies. Local banks can help a nation develop the complex organization at all levels that typifies a robust ecosystem. Because government spending should reflect priorities set by the nation, national government spending is the most direct and understandable way to infuse the private investment market with the money it needs. Centralized investment, however, even if intelligently made, even if made by a giant private bank, tends to over simplify the needs and opportunities of a complex society. A complex system of local and regional banks is a complementary money pump to national investment. It fills investment niches that simpler national strategies cannot find.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 49 Banks Add Money and Investment ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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53. Buy Good Projects.

Buy Good Projects.
Bob Komives
::

A good project is a good investment;
a bad project is a bad investment--
whether building life,
species,
family,
association,
or nation.

A good investment pays
yet bears no debt.
What would the biosphere owe
(and to whom?)
for the inter-galactic loans
that financed its development?
Did the Gulf of Mexico
ever repay its debt to the Mississippi River?
Who could tell Mahatma Gandhi
that he had repaid all investments in his life?

Good Projects Are Good Investments

A good project, a good program, raises the value of the nation. It can lead to deflation even if paid for with newly printed money. A bad project or program causes inflation even when paid for with money in hand. If the government of the United States of America happens to have a million excess dollars, to waste them on a failure would damage the economy and the value of the dollar. Even if the Guatemalan government happens to have four million excess quetzales, wasting them on a failure would damage both the value of the quetzal and the Guatemalan economy. A money-in-hand project puts no new money into circulation, it does use and alter resources and produce inflation as the old amount of money chases after reduced resources.

If failure is to be paid for with an international loan it will cause even more inflation. In order to pay off the loan the borrowing nation has to export resources equal in value to those invested in the project plus an additional amount to cover interest. The net reduction or alteration of resources is greater than if the same failure were paid for with money-in-hand; the value of national currency falls more.

Now, consider a good project. The Guatemalan government has plans for a four million quetzal project. All analyses indicate the social, moral, and environmental results will range from acceptable to beneficial. Analyses also show that the project should increase the wealth of the nation well beyond the four million quetzal investment. Unfortunately, the treasury does not have four million quetzales on hand.

This project should proceed. It will be deflationary even if Guatemala prints new money to pay for it. If analyses are close to correct, this good project raises the value of the nation beyond the current market value of the new money to be spent on it. That is deflation. If Guatemala were to borrow foreign money to pay for the project, the result might also be deflationary. However, the interest payments added to the project cost will lower net national worth below that achieved through the issuance of new money for the same project.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 53. Buy Good Projects. ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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58. Former Debtor Nations

Former Debtor Nations
Bob Komives
::

When we abandon international loans we will see changes outside the walls of treasury departments of national governments. Projects that international loans would finance today may differ when financed locally. Some projects favored and proposed by international lenders will die because the target nation does not forsee enough benefit. Other projects will be designed differently. Local project managers are likely to use and develop local goods and services to replace more expensive foreign options mandated or favored by international lenders. Purchasing departments will make foreign suppliers compete in a free market --rather than in a restricted market that favors suppliers from the lending nations. Conscientious governments in developing nations will feel even greater responsibility for their nations' futures. They will not hesitate to undertake projects that are likely to produce and to distribute justly more wealth than they consume. They will see that newly printed and well invested money out performs newly signed foreign loans.

In setting fiscal policy, developing nations will be subject to foreign political and economic pressure, but perhaps the pressure will be little more than that exerted among developed nations. Officers of foreign lending institutions and the International Monetary Fund will lose their extraordinary influence over the internal policies of the former debtor nations.

"Former debtor nations," I have not suggested what can be done with the present international debt. It exists, built upon false principles and good intentions. I have no magic answer. Diplomacy, rather than economics, must eliminate existing debt. As to the future, in order to promote peaceful paths to mutual prosperity among nations we must eliminate both the practice and the machinery of foreign monetary debt. In its place we can hope for constructive cooperation among former debtor and lender nations who act with discipline and responsibility.

As child and parent the word, discipline, intrigued me. One moment it seems to mean a steady rigor by which an individual or group works through a challenge. The athlete who sticks to a rigorous training routine has discipline. So does the scholar who works methodically for years to uncover the mysteries of genetic inheritance, as does the former smoker working through a successful withdrawal. They have discipline. Calling it, self-discipline, is redundant. Directly related to this meaning is discipline as a profession. The discipline of the athlete is high jump, of the scholar, molecular biology. This discipline is also a verb. The microbiologist disciplines herself when she enters a rigorous experiment.

Another moment, discipline seems to mean punishment, structure, rigor imposed upon the unwilling. Parents who confine their children to their rooms on Saturday night are said to discipline their children. The department head who docks the pay of a scholar who did not follow rules for the use of the photocopy machine is said to discipline her staff. As a noun: "Children and scholars need discipline from their superiors or they will be irresponsible."

So, I chuckle when someone says, "There is a lack of discipline here," and everyone nods the head in agreement. They can agree about lack of discipline, yet they might have profound disagreement if pressed to elaborate their views.

Self financing issues no license for irresponsibility. Poor countries need discipline as much as rich countries. There is no special reason that discipline for poor countries must be imposed by the International Monetary Fund and international lenders. How do we prevent developing countries from acting irresponsibly if we let them print money rather than borrow it? Unfortunately, we cannot, with certainty, prevent countries from acting irresponsibly. Responsibility must be learned from the pain and reward that come after investment. We should not expect a country to borrow money it does not need and risk inflation it does not want so that it might acquire discipline.

To invest in the well being of a nation
requires good judgment.
To invest poorly
is to risk disaster.
Nations that invest well
do improve quality of life.
Those that invest poorly
do suffer.
Therein lies the lesson in responsibility.

The Lesson in Responsibility

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 58. Former Debtor Nations ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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65. Monetary Recall: An illegitimate Tax

Monetary Recall: An illegitimate Tax
Bob Komives
::

Our Government tries, in vain,
to finance its actions
by recalling from us
--taking back from us--
a portion of the money
that it minted for us
and spent among us.

||

One government action is conspicuous for its absence from my list of legitimate taxes. The governmental action that we most often call "taxation" is an illegitimate (or pseudo) tax. I call it, monetary recall.

In ignorance, national governments recall money from their citizens, hoping to reduce the market wealth controlled by taxpayers and pass that investment power to the government. Since this pseudo taxation does not tax, it is no wonder that these national governments get confused when they try to balance their budgets. They try to balance real investments with pseudo taxes --fantasy taxes. A minting government can tax national resources by minting and spending money, but cannot get that money back --even though it believes and tries, and tries and tries again.

While few of us will kid ourselves into believing that the day we spend today is actually the day we spent yesterday, national governments continue to believe that the dollar that they recall today to spend tomorrow is the same one they issued yesterday. It is not because --in anticipation of the recall-- wages and prices have risen to null the effect of the recall. Monetary recall generates no income for the minting government, rather it inflates the currency, decreasing its value.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV
:: 65. Monetary Recall: An illegitimate Tax ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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69. Yes, Inflation Is Real.

Yes, Inflation Is Real.
Bob Komives
::

No matter how we do our national accounting, inflation is real. A national budget runs a real deficit if national expenditures fail to balance themselves through income: growth in wealth caused by the communal and private reinvestment of knowledge. What is today commonly labeled "deficit," or "unbalanced national budget," is an accounting fantasy spun from unreal definitions of income. These fantasy deficits get blamed for inflation. Though I dismiss deficit spun of fanasty accounting, I do not dismiss inflation. It is a real phenomenon. It can hurt us. It can also tell us how successful has been our investment.

Inflation may indicate that communal investors made bad investments. A project that fails can cause inflation even if paid for with cash in hand. While the cash-in-hand project creates no new money, it does redistribute, use up, or alter resources. When the project fails, the old amount of money now chases after fewer available goods and services. Inflation will haunt a nation that achieves its fantasy balances year after year but fails to produce and protect wealth with the meager investments that it does make. Frugality at the expense of wisdom will decrease wealth.

Inflation may indicate that the marketplace does not accurately reflect real wealth formation and loss, that successful investments have not produced sellable goods and services fast enough to match the expanding currency circulating in the marketplace. Some benefits and costs do not reflect themselves in the markets or are slow to do so. Just as money should never be mistaken for wealth, the marketplace should never be mistaken as the only conduit for wealth, and monetary inflation should never be taken as the sole measure of successful investment. The low rate of inflation that modern marketplace countries tend to experience even in the best of times may reflect this divergence between total benefit and marketplace benefit.

While inflation never indicates that there has been too little monetary recall or too much fantasy deficit, it is an important concern for managers of money-based economies. We had best avoid inflation. We avoid inflation best when we invest well.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 69. Yes, Inflation Is Real ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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70. Consider the Cost of a Holiday.

Consider the Cost of a Holiday.

Bob Komives
::

Consider alternate views of a 4th-of-July holiday. Whether caused by law, by spending money, in-kind contribution, or price manipulation, a 4th-of-July holiday has virtually the same economic impact. The cost to the economy is the same, and the benefits are the same.

Ignoring for a couple of paragraphs the spending alternative, each of the other alternatives can cause its own monetary impact. Whether created by law, in-kind contribution, or price manipulation, the holiday affects the productivity of most businesses in the country and creates new businesses catering to the holiday itself. The marketplace reflects and facilitates these effects.

The net result might be negative --the holiday reduces national production, causes inflation. How? Since our chosen alternatives do not directly change the supply of money, if production of goods and services falls, each dollar could buy less than it could were there no holiday. Prices would rise as the same number of dollars chase fewer goods and services. Perhaps the holiday brings real benefits, such as reaffirmation of democracy and communal effort, but they do not reflect themselves in the marketplace.

The holiday might, however, be deflationary. Workers might respond to the goodwill and relaxation with increased production that more than makes up for the lost day. The 4th-of-July industry that caters to the celebrating public is a bonus. As a result, the marketplace would see an increased supply of goods and services to buy without any reciprocal increase in money to buy them. The market benefits outweigh the market costs; prices fall. 

Now, let's consider the other tax alternative for creating a holiday --government buys the 4th-of-July holiday from employers. The pure economic impact of the holiday would tend to be the same, the costs and benefits the same. However, the financial --monetary-- impacts would differ. In the worst case, if production of goods and services falls the resulting inflation would be greater. Even more money would chase after fewer goods and services. In the best case, the holiday and post-holiday increase in goods and services would be greater than the pre-holiday value of the money invested. That would produce some deflation.

Monetary taxation carries added risk, but it must also carry added potential benefit. Otherwise, only our stupidity could explain our continued fascination with the use of money to finance government. Once a monetary system is in place, monetary taxation may be the simplest, most practical way to achieve a goal. A bit more inflationary pressure might be perfectly acceptable if the non-monetary benefits are high and if it is impractical to set up price taxation, in-kind taxation, or taxation by law.

A tax in money offers potential benefits the other alternatives do not. In our monetized societies, the private economy generates a huge demand for money. As the economy grows money supply must grow. If money supply does not change with economic growth money becomes rare. Prices go down --which is nice for those who hold the money-- until there is so little money that it is not useful as a common means of exchange. To prevent collapse of the monetary system, the caretaker of money must find ways to meet the demand for money. Government spending is an understandable, direct, and valid way to infuse the private investment market with money it needs. Thus, money spent to buy a 4th-of-July holiday can both finance the holiday and help fill a general need for money. Because needed money is demanded money, and because it enters at the 4th-of-July, the economy goes to the 4th-of-July to get it. This "going there to get it" is the essence of monetary taxation.

One way or another, by one tax or another, if we want a 4th-of-July holiday, if we think it is good for us, we will tax ourselves to get it. 

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 70.  Consider the Cost of a Holiday ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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75. Deflation Is Peril.

Deflation Is Peril.
Bob Komives
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When Economists see that the borrower will pay more for getting what she wants one month early, and the lender will let her have it provided she compensates him for the month that he will not have access to her payment, they say that time has value. The interest tacked onto the loan by the lender compensates him for that value. The interest paid by the borrower demonstrates the better-now-than later value for her. As the value of time goes up, interest rates go up. With higher interest rates, more people see value in lending, but fewer see value in borrowing. Reduced interest rates have the opposite effect. This simple description correctly portrays the dynamics of loans from the points of view of lender and borrower. Interest reflects the value of time and dynamically regulates the amount of borrowing.

From the perspective of the overall economy, interest serves a different but compatible function. To see that, we must return to the marketplace.

Imagine a simple marketplace with many participants who have businesses of equal size. The marketplace expands ten percent per year. Every participant, anticipating continuing success, borrows money at ten percent interest. Suppose that the borrowing exactly equals the total of money in circulation. Further suppose that the government did such a good job last year that it has a holiday this year. It will neither spend nor mint nor lend more money. Finally, suppose that all borrowers succeed in increasing their production ten percent as they had promised.

Everyone is happy at first; wealth has expanded ten percent. However, when it comes time to pay there is a financial crisis! Money has become scarce. People cannot find enough money to pay back their loans. Deflation sets in. Prices go down about nine percent as buyers now find much more to buy for every coin they hold. More than ten percent of the debtors lose the battle over scarce money and declare bankruptcy.

While the economy and everyone in it had done what was promised, the financial structure failed. It had not pumped in a ten percent increase in money so that monetary expansion could faithfully parallel economic expansion.

Deflation is peril to the monetary system. From the perspective of the overall monetary economy, we charge interest on loans to create financial pressure to expand the money supply --to prevent deflation. The interest attached to a loan is a purchase order from the real economy to the money economy requesting more money.

Keynesian economics recognizes the role of interest rates as seen from the perspective of borrower and lender. Raise interest rates and people will tend to borrow less. Lower interest rates and they will borrow more. Such financial manipulation works from time to time, but the practice ignores an economic current running in the opposite direction.

Higher interest rates may discourage investment, but their real purpose is to discourage only unproductive investment while accommodating a surge in production caused by a period of successful investment. This is a big difference. While the economy would charge higher interest when good investment presents a danger of deflation, economists have wanted to raise interest rates when there is a danger of inflation. Is it any wonder that national banks find their inflation-fighting and recession-fighting tasks difficult?

In my imaginary example of a simple but expanding marketplace interest fails to prevent deflation and bankruptcy because my assumptions do not allow it. That is not the real world. A national government that is not on vacation can infuse an economy with needed cash by minting and spending money. However, the public need to spend and the private ability to make productive investments do not necessarily coincide. A national government needs another way to get money directly into the private investment market. Typically, through some kind of central bank, government infuses more money by becoming a lender. In U.S. America the Federal Reserve and Treasury lend to private banks that invest in the expanding economy. Through direct investment and indirect lending the federal government avoids the peril of deflation.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 75. Deflation Is Peril.  ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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