Saturday, November 8, 2008

So talk about the other kind of money…

Let's start this way. Which nations have Sound Money?

The short answer is none. To my knowledge there are no nations on the planet which use Sound Money today.

If no one uses Sound Money, what sort of money is in use?

There are 4 basic types of money.
  • Commodity (or natural) money
    • Gold, Silver, Butter [This is Good!]
  • Receipt money
    • Receipt for Gold, Silver, Butter [This is Good!]
  • Fractional money
    • “Checkbook” money. A Bank with $100 in Assets can loan $1000 in “checkbook” money. [This is Bad!!]
  • Fiat money
    • Value is enforced through legal tender laws. No backing. If you need more, just run the printing press. [This is Bad!!]

In simple terms, most nations use FRACTIONAL money in an upside down pyramid on top of FIAT money. This means that FIAT money is considered an “ASSET” in the reserves of a bank.

A bank is required through regulation to hold “ASSET” reserves of 10% (or sometimes less). Therefore if a bank has one million dollars in “RESERVES” the bank can loan to its customers ten million dollars in “FRACTIONAL” money, also called CHECKBOOK money.

Most people are unaware of this fraudulent scheme. At this point one may ask: “So why should I care?”

The short answer is because you are being literally robbed of your property through this system.

(There is one other possibility; the net effect at the end of a period of time is that you are either robbing others or you are being robbed. It makes no difference how much integrity you have or don’t have. We will explain this in another post.)

Supply and Demand

Most of us have heard of the law of supply and demand. Generally we understand this law to explain that as supply increases, price decreases. There are also other attributes to this supply and demand relationship. For example, there are distinctions between charting supply and demand curves, as compared to individual behavior in the market, given variations between supply, demand and price. For our purpose we will stick to a simple definition; i.e. as supply increases, price decreases.


If a man sitting beside a wilderness river in the year 1800 attempted to sell water to travelers, he would be wasting his time. However, if the same man had water that was his private property and his storefront was in the middle of a parched desert, he would have a good prospect of selling water to these same people.

Notice that supply and demand are determined not simply based on “world supply”, but based on available supply, at a specific time and in a specific place, under specific conditions. Water cannot be sold at all by the river. Water can be sold for a potentially unlimited price to a thirsty man in a desert.

Purchasing Power / Supply and Demand

At this point let us note that money is also affected by the law of supply and demand. This is true and can be expressed in different ways. A common way of describing the value of money is PURCHASING POWER. For our example, suppose we know that a car in 1965 cost about $3,000 and today costs about $30,000.

In 1965 $3,000 had enough purchasing power to be exchanged for a new car. In 2008 $3,000 has enough purchasing power to exchange for one tenth of a new car. (Price change is not the whole story of what we have lost, but it will do for our purpose here.)

If the money supply had been stable since 1965 (1965 is an arbitrary date) we would be able to purchase a new car for less than $3,000. There are two basic reasons: 1. The overall increase in products and services would cause prices to go down. 2. The increase in productivity would cause prices to go down.

In other words, in a Sound Money system, if you saved $3,000 from 1965 until 2008 you could purchase a new car and have money left over.

Back to Supply and Demand and Money

What can we conclude from the above comments… based on our simple observations?

We said, in simple terms, that “as supply increases, price decreases.” Then we saw that water can be exchanged for either nothing or perhaps a man’s entire fortune, depending on supply and demand at a particular place and time.

We also saw that our money has lost purchasing power over the years because the money supply has increased.

(Note: This increase in the money supply is called inflation. Our dollar today is worth between two and four pennies compared to a 1933 dollar. Inflation of the money supply is the reason that the Continental notes issued by the Continental Congress became worthless. They flowed in the streets like water in a river and became useless as a store of value for use in exchange.)

So if the supply of money increases (i.e. someone inflates the money supply) then the value of all other money already in existence decreases. This is a simple case of supply and demand.

Increasing the money supply

Therefore, in a fiat system, if someone adds one thousand dollars of money to the money supply, then the rest of the money, held by all the people, will be decreased in value by one thousand dollars.

In a fiat system, if someone instantly doubles the money supply without cost, then the value of all money in existence loses half its value.

But is there a difference between paper and gold; between Mr. FIAT and Mr. COMMODITY? Is there a difference between a Fractional or Fiat money system and a Sound Money system?

If either one of two our men double the money supply in one day, then your old money loses value. He may have just transferred half of your purchasing power into his possession. The only question is whether he worked for the new money.

If this is Mr. FIAT, his money comes into existence because he ran a printer and printed hundred dollar bills for two pennies each; he has stolen half the value from holders of old money. He has contributed essentially nothing in exchange for real assets.

However, if Mr. COMMODITY operates a mine and repairs equipment and pays labor and secures and transports gold, then he has incurred costs while adding the new money to the market. Mr. COMMODITY is then a producer and not a thief. Much more can be said about the relationships between his mining operation and the economy as a whole, but the important point is that he has to produce in order to increase his holdings in money or other property.

Printing houses

Think about it this way: Suppose you were a builder. What if you had to compete with another builder who could simply and literally run a printer to instantly produce exactly the same house that, for you, required time, labor, capital and risk to produce? That is a good picture of our monetary system. Printing equity. Printing assets. Printing labor. Printing houses. The paper money is just a step in the middle.

Theft through costless money

Following are two of my preferred explanations of how we are pillaged:

Creating costless money is robbery because, in the first use after creation, the new money implies an exchange of value, when in fact the exchange would be impossible if not for the law of supply and demand, which guarantees that the value of all the money previously in existence is decreased in an amount equal to the face value of the new money, thereby fraudulently transferring value created by actual productivity into the hands of those who use the new money first. In addition, all early users of the new money enjoy a value advantage during the lag between creation of the new money and upward adjustment of prices in the marketplace.

The purpose of inflation is to use NEW MONEY to purchase REAL ASSETS at OLD PRICES, thereby causing a wealth transfer from the people who get the new money last toward the people who get the new money first.

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