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Instead of the Bailout

The root of the problem is we perceive wealth as coming from credit, rather than from investment and innovation.

by James Leroy Wilson
October 1, 2008

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Instead of the Bailout

Many people, conservative and progressive alike, have been concerned about environmental degradation, the culture of consumerism, and "atomization," meaning the loss of community. These complaints should be taken with a grain of salt; after all, they are frequently made by people living in comfortable homes and posted from laptop computers. But whether particular complaints are valid, or just a projection of one's own unhappiness onto the outside world, there is indeed a fundamental flaw in our System. And it is for this reason that all thoughtful people, left, right, and middle, should oppose the Big Bailout of Wall Street and allow civil society to transform to a more natural order.

All wealth is created by mixing human labor with nature. After all, land is worthless if it is not used, and an apple is worthless if it is not picked. Even artists and intellectuals need their work presented somewhere, such as paper, computer, or assembly hall, which are themselves made from materials found in nature.

Now imagine a society in which the currency is silver. A "dollar bill" is a certificate entitling its holder to withdraw a certain amount of silver from a bank's storehouse or vault. The bills are used instead of the actual silver only for convenience, and the total face value of the certificates in circulation is not allowed to exceed the total amount of silver in the banks.

In this society, all economic exchanges would be from products made by mixing labor and nature. If (for the sake of simplicity), one dollar is defined as one-tenth an ounce of silver, then if you sell a fine watch for $500 and were paid in dollar bills, you become the owner of 50 ounces of silver. You might then use that $500, or 50 ounces, to purchase a cheap laptop. What the silver currency does is, not replace barter exchanges, but make them more convenient; instead swapping the fine watch for the fine bottle of wine, and then turning around and swapping the bottle of wine for the cheap laptop you really want, the 50 ounces of silver, represented by the $500, is used in the swaps instead, eliminating the step of acquiring and trading the bottle of wine. It brings energy and efficiency into the system, but the nature of it is still barter exchange: swapping one mixture of labor-and-nature for another mixture.

In this society, human innovation will cause some things to be created more efficiently than before. An example: one cartmaker comes up with an ingenious design, and figures out out to cut his manufacturing costs by 20%, allowing him to produce more carts overall. At the same time, the difficulty of silver mining has led to just a 5% increase of silver in bank vaults. The price of carts will decline, because there are now more of them relative to the quantity of silver. The lower price, however, makes the carts more affordable to more people, so business volume and profits actually increase for the cartmaker, and the cart-buyers have more money to save or to spend. The cartmaker also has more money to pour back into his business, or to save or spend.

When individuals find they have more money, meaning silver, than they need to spend, they could store it in a bank for safekeeping for a fee. Or they could lend it to the bank with a time-deposit, where the bank would promise repayment with interest with a certain time. The bank could then use the money to lend to others at a still higher rate of interest. Interest, in this society, would be the "price" of time. As an example: I lend the bank $10, and expect to receive $11 a year from now. The bank, in turn, lends you $10, but expects to receive $12 in eleven months; it gives me my $11, and keeps the extra $1 for itself.

But in a land where production outstrips the increase of the money supply (silver), individuals would more likely use their surplus money to form cooperatives, and/or invest it. Capital wouldn't be raised by borrowing from banks, but by individuals purchasing a share in an enterprise. Those individuals would then share in the profits.

In this situation, there would still be no more bills in circulation than silver in the vaults. The economy would grow, and people's lives would improve, through falling prices. But individuals wouldn't over-consume. They wouldn't buy houses they couldn't afford. There just wouldn't be enough credit. More likely, families would live in smaller apartment units until they could afford to purchase a house with all or most of the money paid up-front.

Indeed, most of the population wouldn't have as many possessions as they have now, but they also would not be saddled with debt, for the very reason that there's not enough credit to go around.

And businesses also wouldn't carry much debt, for the same reason. If they have a novel innovation that could yield huge profits but needed money to make it work, they would more likely have to sell the idea to investors, and probably couldn't borrow it from the bank.

But when businesses do expand, when houses are built, and when governments raise taxes to build roads or improve defense, the money spent would still represent an exchange of one mix of labor-and-nature for another.

In this society, the most that a bank with $10 million in interest-bearing, time-deposit accounts can lend out is $10 million.

New production, then, would mainly rely invention, innovation, and the re-investment of the profits and savings from previous production. Only partially would it rely on interest-bearing loans.

And most family units would not be able to consume any more than they produce. There would be more families with two, three, or four children to one bedroom in an apartment, and fewer four-bedroom McMansions for two-child familes.

Would this be such a terrible thing? For whom? The children? The community? The environment? How long can children stay angry with each other, if they sleep in the same room? How distant can the neighbors seem, if they're just a few feet away in the same apartment building? If the family lives in the city, with all amenities within walking distance or accessible through public transit, are they really doing harm to the environment?

In contrast, in our System today, the most that a bank with $10 million in interest-bearing accounts can lend out is . . .$100 million.

This is the law.

And there's no silver behind the money. No gold either. No bundle of commodities. No anything, except a central bank, called the Federal Reserve, and some computer keystokes. There isn't even any relation between the "money" in circulation and the total face value of the Federal Reserve Notes (or dollar bills that you have in your wallet).

According to the logic of our System, which combines "fiat" money (money that can be produced by the government's central bank out of thin air) and "fractional reserve banking" (wherein banks can loan more money than they actually have) is this: credit (borrowing) spurs production and consumption, leading to more money being circulated, leading to more people working, getting paid, and spending all the more. According to this logic, even government deficit spending is good, because the government hires people to build roads, teach  in schools, and kill people in other countries. These people, in turn, spend their earnings, which keeps the economy chugging along.

Except, it doesn't.

What we instead get is an economy drowing in "liquidity" or cheap money. With all that money around, created not by a mix of labor-and-nature, but rather with bureaucrat-and-keystroke (or printing press), prices rise. Indeed, the dollar can today purchase what just a nickel could in 1913, the year the Federal Reserve was created.

But the problem is much greater.

A commodity-backed (like silver and/or gold) currency, or a society with multiple currencies backed by multiple commodities, is one that lives within its means. The government doesn't go into debt to build roads, to make suburban home-buying more attractive, to encourage people to purchase large houses they don't really need with mortgages they may or may not afford.

A society in which fractional-reserve banking is considered fraud, will not see individuals with low incomes carrying multiple credit cards. People will not go to pricey restaurants, or purchase home-entertainment systems they can't afford, in the hope of a future raise.

Artificial money wouldn't spur artificial production. Land wouldn't be developed for real estate, forests wouldn't be cut down, fossil fuels would not be used, unless they could be paid for upfront.

The Big Bailout is the last gasp of the Establishment, of the Ruling Class, to preserve the System which they say relies on "credit" but which really relies on debt, the indebtedness of the people, which is serfdom. The easy credit has perverted our incentives and misplaced our priorities. Well-meaning and intelligent people have been misled about the nature of the System. It is easy credit to government, businesses, and individuals, that has caused the giant federal budget deficits, misplaced government priorities, distorted incentives in business, and encouraged individuals to make bad choices.

The tightening of credit by abolishing the Federal Reserve and establishing a free market in money, combined with the abolition of corporate taxes, tax simplification reductions in personal income taxes, and the easing of regulations, will go a long way toward shrinking the government while placing the country under a surer financial foundation, without encouraging the over-production and over-consumption that is so destructive of the environment and of human community.

To simply abolish fiat money and fractional reserve banking will be the most environmentally-friendly, community-building, culture-imrpoving, and true wealth-building measure we can take. As a first step, that means opposing the Big Bailout.

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