"I went to Jerusalem to become acquainted (Gk. istoria) with Cephas" - Paul's words from Galatians 1:18.

The Wizard of Oz and the Flow of Money: An Allegory Illustrating Our Future Economic Collapse

One of my earliest memories as a child is being sick in bed and having my mother read to me The Wonderful Wizard of Oz by Frank Baum, a book most people know by its shortened title The Wizard of Oz. This September Rachelle and I had the privilege of attending the award winning West End theatre presentation of Wicked in London, England, a musical that serves as the prequel to The Wizard of Oz. Fellow Oklahoman and Broken Arrow friend Kristen Chenowith played Glinda the Good Witch of the South when Broadway brought Wicked to the stage in New York City in 2003. Most people are familiar with The Wizard of Oz through broadway or Hollywood's classic 1939 film version starring Judy Garland and not Baum's book.  The differences between the the book, written in 1900, and the later film and broadway versions may at first seem minor, but as is the case in many attempts to bring written material to life through the visual arts, small changes impact the book's overall theme. For example, in order to showcase new improvements in Technicolor, movie producers changed Dorothy's silver shoes in the book version into ruby slippers for the 1939 film version. Unfortunately this small change caused the public to miss the economic allegories in Baum's book. Many today view the The Wizard of Oz as a cute morality play for children. Frank Baum, however, wrote The Wizard of Oz in the late 1890's as a powerful allegory of the economic problems faced by the United States. Frank Baum's The Wizard of Oz is to economics what John Bunyan's The Pilgrim's Progress is to Christianity. If you understand Baum's allegory, you will know why America and European countries are in their current economic crises and why we are headed toward a financial panic in America the likes of which our country has rarely seen. To understand the allegorical parts of The Wizard of Oz, you must have some historical background regarding the economic crisis in America during the 1880's and 1890's. You will not regret reading carefully this post, even if you don't like history or economics. Your retirement savings and your economic future are at risk.

In what is now called The Crime of 1873, the United States government took silver out of monetary circulation and went to gold as the standard for the American dollar. From the formation of the United States in 1776 until the year of the 'crime' of 1873,  the United States had been on a bimetallic standard. In other words, for approximately one hundred years after America's founding as a country, an American citizen could go into a reserve bank, hand over any amount of paper currency (i.e. $10, $20, $100, $1,000, etc...) and be given either gold or silver in return. You would be given about 15 times more silver than gold in terms of weight (for silver traded to gold at a ratio of about 15 to 1), but you could choose the metal you wished to exchange for your dollars. But in the "Crime of 1873" the U.S. government decided to take silver out of monetary circulation. That meant you could no longer get silver for your dollars. The money supply shrank. Beginning in 1873 the only metal that could be exchanged for dollars in America was gold. Beginning in 1873 the government could only issue dollars and increase the money supply in proportion to the amount of gold it held in reserve. Silver was no longer a reserve metal for dollars, and for this reason, the money supply shrank, meaning the collective pool of money available for the exchange of goods in the American economy decreased. A decrease in the available money supply will always lead to deflation. Less money in circulation means lower prices.

Let me illustrate how a decreased money supply lowers prices. Let's say you are on the game Survivor and you and your fellow contestants have not eaten food for 20 days. On the 21st day you and the other 10 contestants are each are given just $20 to bid on 11 different dishes of sumptious food that have been prepared and brought to the camp. You are also allowed to bid on new bedding materials which will make your night's sleep more comfortable.  You see what is available for purchase because it is all laid out in front of you. There's a steak and baked potato, there's a cheeseburger, a chicken salad sandwich as well as blankets, pillows, air mattresses, etc...   You are limited as to what you can buy since you have a limited supply of money. Due to the small amount of money in circulation the price of everything goes down!  However, if you and each of your fellow contestants had actually been given $100 each instead of $20 each, then the price of everything goes up! Why? Because the money supply has gone up, and when more money is in circulation, the price of goods for cheeseburgers and other commodities soars. Prices always eventually go up (i.e. inflation) in proportion to an increase in the money supply, and prices always eventually go down (i.e. deflation) in proportion to the decrease in the money supply.

This Survivor illustration helps you understand The Crime of 1873. The government declared that silver could no longer be used as government money. Silver was taken out of circulation. It's like contestants on Survivor having a large portion of their money taken away before they can bid on goods. The government decreased the money supply and prices for goods across the nation fell as did the demand for those goods by the American public. For the next 25 years, from 1873 to 1898, the United States experienced an average yearly deflation of 1.5%. The people who were hurt the most by the government's decision were farmers from Kansas and the midwest. The prices people were willing to pay for the farmers' crops decreased. Even worse, because farmers were already in debt (as most farmers are), they were having to use the dollars from the shrinking money supply to pay off their old debts.  Think back to Survivor illustration and imagine trying to buy food and bedding materials when you have to pay a past debt with the limited $20 you have in hand. It would be much easier to pay off your old debts if your supply of money is greater. Many farmers in the late 1800's were facing bankruptcy because their debts was high, prices were too low, and there was not enough money in circulation for them to survive economically.

There is an important economic principle that can be derived from the 1873 government decision to remove silver from circulation, a principle that will shed light on today's economic problems and the allegory behind The Wizard of OzThe economic principle simply stated: When people or nations  (governments) are in debt, the more money pumped into circulation (i.e. "inflation"), the easier it is to pay off  those debts. The more massive the debt, the more critical the need for a massive increase in money supply.  If deflation is occuring when there is indebtedness, then the debtor will struggle to pay old debts with scarcer, more valuable dollars. Debtors always need an ever increasing money supply.

 Enter Frank Baum and The Wizard of Oz. Dorothy and her cast of characters represent farmers (the Scarecrow), industrial workers (the Tin Man), and fearful politicans (the Cowardly Lion), and they all need help. They follow the Yellow Brick Road (the gold standard) to the Emerald City (Washington D.C.). Oz is the abbreviation for the measurement of gold (i.e. "ounces" or oz.), and the Wizard behind the curtain represents the politicians pulling the strings to decrease the money supply by using only gold as a monetary standard and not silver,  harming all the weary travelers. What Dorothy and her friends need is the addition of silver back into the money supply. The entire Oz narrative is the struggle between the common man and the powerful Washington elites over the supply of money. In the Emerald Palace Dorothy and her friends enter 7 passages and climb 3 flights of stairs ( 73 representing The Crime of 73). Silver is found throughout the Wizard of Oz as the answer to the problems at hand, including the Tin Man receiving "a new ax with a handle made of gold and a blade polished so that it glistens like burnished silver and a silver oilcan to oil himself," a statement by Baum which describes his belief that the industrial worker will be helped with the addition of silver to the monetary supply. And of course, Dorothy's passage back to her farm in Kansas is to click her "silver shoes" three times together, representing that the power to solve the farm girl's problems was there all the time (adding silver to the currency). There are so many more economic principles in The Wizard of Oz, and for further study I would recommend that you read The Fable of the Allegory: The Wizard of Oz in Economics.

Frank Baum, author of The Wizard of Oz,  was an economic activist. He was considered a progressive, someone we might call 'liberal,' today. One of his political friends, William Jennings Bryan, was the Democratic nominee for President in the 1896 and 1900 Presidential elections. Bryan rocketed to fame at the 1896 Chicago Democratic National Convention where he delivered his famous Cross of Gold Speech.  Bryan, who was a devout Christian and went on to infamy in the Scopes Trial, was also a liberal economist, and he closed his famous speech by declaring,  "Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." Bryan and Baum eventually got their wish of a bimetal standard for the American dollar, for the U.S. government reversed course early in the 1900's and added silver back as part of the American currency. You probably remember paper bills with the words "Silver Certificate" etched on the top.

When the government increased the money supply in the early 1900's, the motive was to help the western farmers, just as Frank Baum and William Jennings Bryan requested. But for the last 100 years the government has continued to RADICALLY and RECKLESSLY increase the money supply in America. Why? Because the U.S. government began taking on massive debt of its own. With World War I and then World War II the U.S. government became a debtor nation. However, with the addition of massive social programs in the mid-to-late 20th century, U.S. government became swamped in debt. The U.S. government has become the Kansas farmer of the late 1800's. Our national debt has crossed the fifteen trillion dollars mark. How do you ever get enough cheap dollars to pay off that kind of debt while continuing to spend for an annual operating budget? Is it even possible? Do you add another precious metal as a standard to the American dollar? No. The United States government did something mind-boggling.

The United States government decided in the 1970's to move the American dollar OFF BOTH THE GOLD AND SILVER STANDARD. What was once an argument in Frank Baum's day over a bimetal standard (silver and gold reserve for the dollar) versus a monometal standard (a gold reserve only), became an argument and an ultimate decision by our government to remove the dollar completely from any gold, silver or precious metal reserve standard.  Frank Baum, William Jennings Bryan and every other 19th century economists--both liberal and conservative--would have never dreamed the U.S. government could or would do such a thing.  But it is exactly what our government has done. Try to go into any bank with a $100 bill today and ask to get paid in silver and/or gold for that $100 bill. It won't happen. It can't happen. There's not enough silver and gold in the world to back the number of U.S. dollars in circulation today. The government's decision to move the dollar off any precious metal standard had its genesis in a highly secretive meeting of bankers and politicans in 1910 as they met on an island off the coast of Georgia called Jekyll Island. You may read about the extraordinary results of the government's decision in a highly readable book entitled The Creature from Jekyll Island: A Look at the Creation of the Federal Reserve. What we now have in America is a system where the supply of money is controlled by the United States Federal Reserve and not by the amount of silver and gold we have in reserve to back those dollars. European countries also have this same kind of currency system. The supply of euros is dictated by European Central Banks, all controlled by European governments. There is no precious metal backing. If governments need an increase in the money supply, then governments simply create paper money. Remember that the people who benefit most with the high inflation caused by an increase in the money supply are those people (or governments) who are in debt. Those harmed by an increase in the money supply are the frugal and the savers. In other words, what Frank Baum wanted in 1900 for western farmers in debt, we now have in spades for western governments drowning in debt. Baum wished to add silver to gold as a metal reserve to increase the amount of dollars in circulation, but he never dreamed of a government currency WITHOUT A STANDARD. Now we have NO precious metal standard. The government cannot have the money supply bound by the amount of gold and silver we have in Fort Knox (if in fact any is still there), because the government needs MASSIVE AMOUNTS of dollars in circulation for the government to pay its massive debts.

The American dollar today is what is called a fiat currency. The government prints it. People trust it and use it. If the government wishes to increase the money supply, they do so by simply allowing the creation of more paper dollars, in a process called fractional reserve banking, where the 'reserves' are paper money deposits, not metals!  The only thing that guarantees the fiat money has value is the trust of the people in the currency. What happens when people begin losing trust in government currency? It becomes worthless. This is beginning to take place in Europe as people flee the Euro. One day people will lose trust in the U.S. government and turn away from the government's fiat currency if our debt continues. When that happens, the U.S. will face bankruptcy like Italy, Greec and other European countries face it today. The worst possible case scenario is for a government to be forced to pay back their debts in another government's currency. When this happens the money supply of the debtor government shrinks because the debtor country's currency is considered worthless by the lender country.  The indebted government is then forced to pay its debts using another country's stronger currency (think China). This is why people find protection in precious metals or a stronger government's currency when governments are swamped by debt. The massive expansion of the supply of money which has no metal standard behind it is recklessly endangering a country's freedom and future. To say what is happening in Europe and America today is ultimately highly inflationary is a gross understatement.  Unless massive and painful spending cuts occur, there is coming a collapse of bankrupt governments and national economies. One day soon people will lose complete confidence in their indebted governments.  There will either be riots because governments try to get their fiscal house in order and shut down social programs, or in the worst case, governments will collapse. As the Bible says, "The borrower is a servant to the lender" (Proverbs 22:7).

Our problem today is the very opposite of the one Dorothy faced in The Wizard of Oz. Dorothy needed an increase in the money supply. Deflation was ruining the economics of the Kansas farmer. The farmer couldn't get a good price for his crop, and he couldn't pay off his past debts with a shrinking money supply. But over the last forty years we have received as a nation far more than Dorothy (Frank Baum) ever wished. We have had a grotesque growth in the money supply because silver and gold have both been REMOVED as a reserve for the American dollar. With the Feds doing everything in their power to fight off DEFLATION in order to keep money cheap to pay off government debt, there is coming very soon a rate of inflation the likes of which America has never seen. Where are the economic John Bunyan's of our day? Where are the Frank Baum's of our day? Where are the people with enough sense to know that America is in need of being taught lessons that are much more profound than cute children's fables suitable for Broadway and the big screen?

42 comments:

rixshep said...

Wade,

Very good article. I am pleased to see the mention of the "Creature from Jekyll Island", a very good expose of what has been done by our government, originally in secret. Imagaine today if George Soros, Warren Bufffet, Obama, Harry Reid, Chris Dodd, and others high up on the European scene met to craft a global economic policy!

By the way, there is a short paper by Cleon Skousen (he wrote "The 5000 Year Leap"), entitled "An Urgent Need for Monetary Reform", that essentailly gives a short overview of the details that Griffin later covered in the Jekyll ISland book. It can be found at http://www.nccs.net/monetary_reform.html

Another book you might like (it is out of print) is "Inflation: The Ultimate Graven Image" written in 1982 by James Ferris.

Lastly, you might want to browse http://www.mises.org to see what they offer on the various economic concerns of past, present and future.

Rick

Johnny D. said...

"There's now not enough silver and gold in the world to back the number of U.S. dollars in circulation."

Sure there is. You just have to value the metal accordingly. To back the money in circulation to a gold standard, gold would have to sell for about $10,000 an ounce.

The price of gold is still being manipulated through margin calls, but even that is beginning to wear thin. We are witnessing gold replace the dollar as the reserve currency of the world.

What your post captures so well is how fouled up things get when our government abrogates its responsibilities to the wealthy bankers that run the Fed. Our government should follow the constitution and issue debt-free money. The fractional reserve banking system should be destroyed. The Federal Reserve is a private banking cartel and should be abolished. Andrew Jackson fought this battle and won, once, but a "Bank of The United States" has always been the dream of the wealthy that truly control things in this country. So, they managed to get it pushed through again early last century. It's all been downhill since.

Increasinly, people are seeing how the Fed's manipulation of interest rates and the supply of money are destructive and result in boom-bust credit cycles.

Steven Stark said...

Wade,

Thanks for the excellent reminder of the economic basis for Frank Baum’s book, and it’s connection to the famous “cross of gold” speech. Great stuff! I think your description of the Kansas farmer’s plight in the late 19th century is right on.

Fortunately, I think your fears of hyper-inflation are unfounded. A few points:

“An increase in the money supply always leads to inflation.”

An increase in the money supply only leads to inflation if the money is spent. Spending is what leads to inflation.

Your Survivor scenario doesn’t take into account what happens when people will not spend - for instance, if too much money is in too few hands then those people do not need to spend it, because they can satisfy their needs with some money and save the rest. Also, a lack of confidence caused by recession can lead people to spend less, worsening the recession - because all spending equals income. Every job anyone has is the result of someone else spending.

So increasing the money supply does not necessarily lead to inflation. This is evidenced by our current situation. Massive increases in bank reserves have not caused inflation. Why? Because we have such a lack of spending resulting in a weak economy. People and companies and organizations who have money are still hoarding it instead of spending it because of the weak economy, and the economy is weak because they won’t spend, etc. in a spiral.

“The government will go bankrupt if deflation lingers.”

The federal government can never go bankrupt. As you said, it can always print money (in fact, that’s what it does every time it spends, and it destroys money when it taxes). Too much inflation is the only true constraint on government spending, so deflation is not a fear for the government, even if it is in debt.


“Those harmed by an increase in the money supply are the frugal and the savers.”

Or the rich. Those holding cash. Those who loan money. But luckily one doesn’t need to keep money in cash form to save. And, as mentioned, the poor - the debtors - are the ones who are harmed by deflation. And the general economy is harmed too because people tend to hoard money as it gains value, which causes even more deflation, lack of sales, job losses, etc.

“and the only thing thing that guarantees the fiat money has value is the trust of the people. “

This is partially true, of course. But one huge reason that dollars have value is that the government requires taxes to be paid with them. One can have all the gold in the world, but he must sell some to pay his taxes. This is a main way that any government establishes its currency - especially a fiat currency.


“What is coming soon is inflation the likes this world (collectively) has never seen. “

Luckily not. There is not near enough spending to even keep our economy at full employment. If more spending occurs, productivity will rise. If inflation does kick in, it would be a good thing, because it would mean that our economy is pumping on all cylinders, with full employment, and we are no longer able to make enough products to keep up with demand. Then the Fed can raise interest rates, or the government can even raise taxes to drain excess demand from the system, cooling off the economy.

We may see some inflation if gas prices rise, if OPEC suddenly dropped production for instance, or from sharply rising demand in India and China. But that’s a supply side issue. In the 70’s, OPEC suddenly raised prices dramatically. Then the money supply expanded, so inflation (rising oil prices) caused an increase in the money supply more than the other way around. Of course, big spending on the Vietnam War and other domestic programs may have led to inflation as well.

So inflation is not money-supply driven, it is demand driven. And right now we are suffering from a lack of aggregate demand.

Steven Stark said...

Johnny D,

I sympathize with your frustration over money creation from banks who charge interest.

However, money itself is debt. A dollar bill is an IOU.

I am curious what you mean by "debt-free" money.

Anonymous said...

Wade:

Very thoughtful article. Good job.

Economics and markets are so mysterious in many ways. The simple concept of money, and what stands behind it seems simple, but it is really complex.

The creation of the Federal Reserve after the destruction of the Second Bank of the United States is a fascinating story, as is the discussion of fiat money, the gold standard etc.

Economics is not by forte. I am in sympathy with more conservative arguments and policies against massive debt.

But these arguments are very technical, and I suspect and hope that some things have been learned since the Federal Reserve Act was passed.

I am not convinced that we have to tie the dollar to Sliver or Gold. That idea seems antiquated.

But that does not mean that we should have massive debt and profligate spending.

I suspect that modern times have shown that we may need more flexibility from a money supply standpoint than being tied to gold or sliver would allow. But what we have had has been reckless.

I wish I knew the solution. I don't.

I suspect a good solution is nothing drastic in any direction. We probably need to get the nose of the plane pointed in the right direction so that we can slowly climb out of this. I am not sure there is the political will in this country for that.

The only other option is bankruptcy of some sort. I don't know how that would happen or what the consequences would be. I suspect it will be bad.

But one thing is for sure - I am against a continued policy of massive spending and debt, and I am against an increased federal power to tax to take money from earners (wealthy or not) to spread around to create prosperity. I suspect that may eventually lead to wholesale taking of massive amounts of income and savings.

These are uncertain times.

Thanks, again, for being willing to address such a difficult and complex topic.

There are not many pastors who would have read any in this area or be willing to discuss it. If you were my pastor, we would have many good discussions, I think. If only you were a long distance runner, we good do a 10 or 15 miler at the convention next year together. By the end, we would have all the world's problems solved.

Take care.

Louis

wadeburleson.org said...

Johnny D,

Of course, you are right. I should have said, "Not enough gold in the world to match the historic value of the dollar vs. gold as it was set in the early 1900's."

Thanks for the correction.

wadeburleson.org said...

Steven,

Good points, however, you write:

"If too much money is in too few hands then those people do not need to spend it, because they can satisfy their needs with some money and save the rest."

You are a smart cookie!! However, I could no more agree with the above statement than a man on the moon!! :) In a true capitalist society, those "few" with too much money INVEST it, by creating companies in a free enterprise economy.

wadeburleson.org said...

Louis,

Thanks for the kind words. One of these days we'll share a cup of coffee.

Rex Ray said...

Wade,
You asked:
“Where are the people with enough sense to know that America is in need of being taught lessons that are much more profound than morality lessons from children’s fables?

Like Jack Wheeler, former aid to Ragan and Bush, some of them might be in a landfill as reported by:

http://www.google.com/hws/search?hl=en&client=dell&channel=us-psp&ibd=&q=jack+Wheeler&Submit=Google+Search

I’m sure Jack didn’t make friends with this article:

http://www.tothepointnews.com/content/view/3227/44/

Rex Ray said...

What happens to copy-paste?

Thy this: Google, Jack Wheeler
And Snopes.com, Jack Wheeler

wadeburleson.org said...

Wow, Rex. Interesting reads.

Steven Stark said...

Wade,

If you care to provide any reasons for disagreement, I would be happy to hear them! But I understand time restraints.

Once again, an increase in the money supply will only increase inflation if the money is spent. Imagine the Fed buying a trillion dollars in bonds, but all from one person. Then he puts the money under his bed. Would it cause inflation?

"In a true capitalist society, those "few" with too much money INVEST it"

But this is not happening. And it's not happening because of a lack of confidence in a weak economy. Business surveys support this. Small businesses are suffering particularly because of weak domestic demand. They can't rely on rising demand in India and China like the multinationals (like GE and others) for business.

Why would businesses expand and invest when business is weak?

And the cash sitting in reserves in banks is not lent out for investment either. That's not how the banking system really works. They can always borrow money to cover reserve requirements. You will never be turned away from a bank because they don't have enough money. Loans create deposits rather than the other way around. What banks lack is credit-worthy loan applicants.

John said...

Once i thought surely this is going to end well, but what if they want a cashless society. I dont like it, and it scares me just the thought.

I subscribe to the FFT guy in Australia over at http://www.forecastfortomorrow.com his economic stuff is killer and scarily accurate too, well worth a look if you have the time.

Rex Ray said...

Steven Stark,
You said, “What banks lack is credit-worthy loan applicants.”

About a mile from here is a farm known as the ‘Ray place’.

My grandmother had 8 children. The oldest was 15 and the youngest 6 months when her husband died. She sold the ranch in Indian Territory, and bought the farm.

My father was the only one living with her. He mortgaged the farm to buy cows. When the ‘great depression’ hit the bank took the cows plus the farm, house, turkeys, and chickens. They placed the furniture on the side of the road.

“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” Robert Frost

Tears would come to my father’s eyes every time he heard the song, “Mother, queen of my heart’.

I didn’t know till Wade’s post about the Wizard of Oz.

Christiane said...

'"In a true capitalist society, those "few" with too much money INVEST it" '

"But this is not happening. And it's not happening because of a lack of confidence in a weak economy. "

I think that the jobs are being created big-time . . . in India and China among other places where labor is cheap. Apparently a large profit IS flowing in to investors in this country. These 'job creators' have been under-written by our people with support for ten years now.

I think that manufacturing needs to return to our country. And rewarding job-creators who send jobs over-seas needs to stop.

I don't think that 'bribing' THOSE job creators with more incentives is good policy . . . it hasn't worked for the last ten years, and still they have their hand out.

People in this country are hurting.
It is time to re-evaluate who is making all the money,
and who is giving them big breaks without the result of a corresponding investment in our OWN country.

We are rewarding the wrong people with big breaks . . . that needs to stop.

Anonymous said...

Christiane:

The world is a much smaller place today. It's easy for people who want to start companies to tap into labor markets all around the world - China, India, wherever.

I don't see a way to stop that really.

Also, capital flows to countries where people can make the most on their investments. Hong Kong is a great example.

Hong Kong has no natural resources. It had good harbor, but lots of places have that. But what Hong Kong had was the most robust market, free of tariffs and all the other governmental regulations that strangled many other places in the East.

So people from that entire part of the world tried mightily to get to Hong Kong for economic freedom.

And Hong Kong grew into a great city. And none of this was done by government rules or planners who said, "Let's build a city..."

Allowing people to be free is the greatest engine for human happiness and development.

It is very tempting for governments to want to engineer the markets, impose restraints and high taxes, but that hurts more than it helps.

The countries with that are the most taxed and controlled by central planning experiments are the least free economically, and over decades that takes a toll.

Louis

Johnny D. said...

Steven, thank you for your question. Please go to youtube and search out "debt free money" or "fractional reserve banking." Basically, under our system of fractional reserve banking, issuance of credit results in the creation of more money. For example, if you borrow a thousand dollars, $900 is created and added to the system on top of the loan you just took.

Congress is, by our constitution, charged with issuing money. They have given that privilege to the federal reserve banking system where money is issued under fractional reserve as debt. Money should just be issued into the economy - free of debt. The current system is set up for one purpose - to charge interest and make money for bankers. And now, they have become so powerful, our government doesn't even let them fail. They actually take tax money out of the future and bail out the bankers! Amazing system, unfortunately, you and I ain't in the club.

Steven Stark said...

Hey Johhny D,

Yes, I am familiar with the fractional reserve system. Banks write loans onto their books, credit accounts accordingly, and borrow what they need to meet their reserve requirements if necessary.

I am curious as to what the mechanism is to introduce "debt free" money into the system. Money always will be debt. If you mean eliminating the fractional reserve system, I am afraid that would freeze credit markets quickly, something we are already suffering from. Besides, banks could still borrow money from each other and the Fed - their reserve requirements would just be huge. If they couldn't borrow, then, as I said, the entrepreneur or potential home owner may not be able to get a loan, despite high qualifications, and this would be bad.


Rex Ray,

Thanks for the story. That is amazing and sad. I agree that banking is a business with potentially high moral hazard. When i said "credit-worthy", I meant by the banks' own standards. The point is simply that they do not lack money, they lack customers, people willing to invest.

Johnny D. said...

Let's start here. (I'm sure Wade will love this.)

http://youtu.be/7qIhDdST27g

And here's another, shorter look at some good ideas.

http://youtu.be/wOacViyCMhQ

cheryl ray said...

This link might also be of interest.

http://www.moneyreformparty.org.uk/

One Salient Oversight said...

Just a few things to interest people.

The first is that fiat currency and fractional reserve banking has existed for hundreds of years if not more than two milennia. The idea that a currency be linked to a precious metal has also been around for a long time. Governments for a long time have toyed with one or the other.

It is entirely possible for a nation with fiat currency to have low inflation. This is Japan at present. The Eurozone is also an example of this.

It is also entirely possible for a nation with currency linked to a precious metal to undergo inflation. This is what happened to many nations (including the US) in the mid-late 1960s.

The difference between the two is this: the issuance of fiat currency is controlled by the Federal Reserve (or, in the case of other countries, a central bank), while the value of a currency linked to precious metal is determined by the supply of this metal to the market.

The problem with central banks is whether they control inflation properly or not. If a central banks allows a large amount of fiat money to be created and to enter the money supply then the effect will be inflationary (though the severity of the inflationary effect will differ). Bad central banks will allow inflation to wipe out savings and the purchasing power of the currency while good central banks will not.

AS for a currency based upon a precious metal (eg gold or silver) then mining companies become the world's defacto central banks. If gold production begins to decrease, then the price of gold will go up, as will a currency. The result will be deflation, and people will reduce their use of currency as an exchange for goods and services because of an expectation of better prices later on. This would damage the economy. Conversely, if a mining company discovers a huge gold deposit and begins refining it and selling it on the market, then the price of gold will drop and so will the currency, resulting in inflation.

So the question is whether you place the ultimate money creation power into the hands of a government agency or the free market.

For the United States, the constitution explicitly gives power to congress *to coin Money, regulate the Value thereof, and of foreign Coin*. The Federal Reserve acts to determine the value of money by congressional edict (ie congress has the ultimate power over money value and has delegated this authority to the Federal Reserve). But previous to 1973, congress had determined that the value of money should be linked to gold.

So which should it be? Fiat money or a gold standard are both within the power of article 8 of the Constitution so neither are unconstitutional.

My preference is not a return to the gold standard, but fiat money issued by a better regulated, more judicious and more accountable Federal Reserve.

wadeburleson.org said...

One Salient Oversight,

Great points, and frankly, I agree with you--except for one caveat.

I don't trust man.

I don't trust leaders.

The standard must be objective for "the heart of a man, who can know it."

:)

Steven Stark said...

One Salient Point,

Good points. The gold standard, in the words of Keynes a "barbarous relic", is not something we should aspire to return to. Any time we have been on that standard we have abandoned it when it did not serve our purpose any longer - such as during The Great Depression, World War II, and the Vietnam War.

And of course, there is nothing objective about gold. It's value is something that is completely reliant on human value. I suppose it's shiny. But it's only objective value is as a conductor of electricity. You cannot eat gold. And you cannot pay taxes with it. If humans lost their faith in the value of gold, then we would see it like any other element. Like potassium, K? ;)

I suppose, to be fair, the gold standard's "value" is restraining the expansion of money, but once again, the expansion of money is something that must be done at times. And as you said, what happens when some mining company hits the mother lode?

Inflation is caused by spending that outstrips supply, not simply by the amount of money in existence. Credit cards and other easy debt instruments make it impossible to keep track of potential purchasing power anyway. What matter is actual, kinetic purchasing. And our economy would be much better off with more of that!

High unemployment is public enemy number one right now, not possible inflation. Unemployment threatens the security of families, puts negative pressure on wages for workers still with jobs, and it threatens the US's future ability to compete (since we are allowing a massive amount of our work force to sit idle, when we could be publicly investing in infrastructure, technology, energy, etc.)

Thy Peace said...

A good place for people to learn about economic concepts in real time is Paul Krugman's Blog. I understand conservatives and republicans may not like his writings.

Johnny D. said...

I suggest each of you watch this short video.

http://youtu.be/CQVAabQ0JcM

I agree that a gold standard is not the answer - for just the reasons Wade pointed out - humans are wicked.

Steven, you're putting the cart before the horse. Purchases can't be made before the money is available to make the purchase. As a thought experiment, imagine what would happen to prices if the U.S. government decided to give everyone $100,000.

Thy Peace, I will always like and respect you, but in my opinion, Krugman is one the worst people anyone could listen to. Yes, I'm aware he's an economic prize winner. Yep, and Obama won a peace prize.

Johnny D. said...

And if you just can't stand the idea of spending a few minutes watching a vid, please fast forward to about 5:45 where Bill starts talking about the gold standard and debt free, government issued money.

Steven Stark said...

Johnny D,

"Steven, you're putting the cart before the horse. Purchases can't be made before the money is available to make the purchase. As a thought experiment, imagine what would happen to prices if the U.S. government decided to give everyone $100,000."

You are misunderstanding me. Of course people need money to spend. But the question is, what if there is plenty of money, yet people do not spend? That is what happening now. Corporations are flush with cash, the stock market isn't great but it isn't bad, banks are pumped with reserves - yet we are suffering from low spending and hence high unemployment.

The problem in a nutshell is this - too much money in the wrong hands.

For a generation, the wages of the middle class have not risen - in fact, they shrank dramatically over the last decade. 15 percent of our population lives in poverty and more than that have no health insurance.

Instead of paying more money to the middle and working class - at least enough so that they could afford to buy enough products to keep the need for their own jobs - they system went to easy credit - credit cards and home equity loans. That has propped up demand in the face of stagnant wages for a generation. Now we are paying the price for our lop-sided income/wealth distribution.

Thy Peace, Krugman's blog is a wealth of information.

Gene S said...

I am not a financial theorist, but a real live citizen who started as full time minister, changed to Ministers Life Insurance (now Minnesota Mutual owns it), to my current ownership of a Tree Surgery Company.

In each capacity the power of money was evident. Certain "powerful people" could run a church and without their blessing, you could quickly be in trouble. In 2 churches those "powerful people" didn't like my attempt to bring the Bible into terms they could clearly understand. There was corruption and pretension galore as well as a social club atmosphere.

In Insurance it was the same. The President of the company was reveling in great sales numbers. The only trouble was that we were not generating new income---only taking old cash values and buying more coverage as new variable interest products came in. The death benefits were still paid, but reserves were weakening. That's why many life insurance companies have moved from "mutual" to "stock." They are taking the risk off the insured and putting it onto investors or re-insurance.

To be economicly viable, all must participate in risk and reward. The basic definition of insurance is "the sharing of risk."

I think that success relates more to "security" than to how much money one has as a "false security." The basic importance of people helping one another is the key to success!

wadeburleson.org said...

Just like in politics, economics is divided by conservative and liberal theorists.

The liberal theory of economics maintains deficits don't matter, government should print as much money needed, wealth should be evenly distributed, and the government is responsible for the growth in the economy. A conservative theory of economics maintains that deficit spending does matter, the government should print money using a precious metal standard so that there can be no temptation to go into debt and cheapen money to pay for past debt, that wealth should be given to those who work for it (and charity towards only those who are disabled and can't work), and free enterprise should be in charge of the economy, not government. As you can tell I am a conservative in economics.

Johnny D. said...

Well, Wade, we're about to find out how well Keynesian economic theory plays out.

When it fails, of course, there will always be those that will say we didn't spend enough. "If we'd only spent ourselves into twenty trillion of debt, we'd of made it work!"

It has become clear that the U.S. has decided to print its ways out of the debt, so they may as well go whole-hog and print up a few trillion more. I think "Helicopter Ben" Bernanke should do as he once touted and fly over neighborhoods and throw money out.

What could possibly go wrong?

Christiane said...

I am for solidarity with the poor. And for decent working conditions for people, and for safe products, and for protection of our natural resources, particularly water supplies.

I am for supervision of the food supply and our medicines, so that we can protect our people.

I don't mind paying taxes, if our infrastructure can be built up again, but I don't want to see my taxes go to support 'job creators' who are creating jobs overseas,
and I don't want to give tax 'breaks' to any more billionaires and millionaires who have been receiving them and NOT CREATING JOBS, these last ten years. That needs to stop.

As for labor unions? If working people have no voice collectively, we can find out the result of that from our American past . . . and the result of that is not pretty, or humane, or safe.

Freedom! Yes
Response-ability, too.

One-third of our country is in poverty.

The income disparity is enormous now between the middle class and the top one-percent.
But the enriching of the rich has not yielded job-growth. They want 'more money' to feel secure?

Americans are waking up and standing up . . . even Senator Coburn of OK has decried welfare for the rich.
(very proud of him I am . . . shows integrity to do that, in this political environment)

Don't look down on the people who are standing up for economic fairness. They are suffering and they are your countrymen.

Johnny D. said...

"Don't look down on the people who are standing up for economic fairness. They are suffering and they are your countrymen."

I must have missed the post where this happened.

Christiane said...

Sorry, Johnny D.

Wade's posts have never looked down on anyone, far from it.

I was watching FOX news recently and some of the comments about the people protesting all over the country were . . . a bit 'negative', you could say.

I supposed that most conservative people are in agreement with those FOX news commentators.

Thank you for your comment. It helped me to sort this out.

Steven Stark said...

Wade,

“The liberal theory of economics maintains deficits don't matter”

Not totally true - the liberal idea is that deficits don’t matter when there is an enormous amount of slack in the economy, such as now. Finance exists to serve the real economy, not the other way around. If our economy was hopping along with low unemployment, then large deficit spending might be very unwise.

“government should print as much money needed,”

Yes, the government should print as much money as needed. Does anyone think the government should print less money than is needed? Remember, all money is debt. That’s what it is. And all government spending is "printing money".

“ wealth should be evenly distributed”

No, rather it should be fairly distributed, not equally. And the invisible hand of the market cannot be trusted without some degree of regulation and planning.

, “and the government is responsible for the growth in the economy”

Once again, not totally true. However, the government should invest in ways that gives the private sector the fuel it needs to thrive. Roads, education, military, science, etc. And since the government is the sole creator of our currency, it should spend more when the private sector is failing to spend enough.

Remember, all public spending ends up as money in the pockets of the private sector. It doesn't disappear.


Johnny D,

A true Keynsian attempt has not really been made. The stimulus involved a lot of safety net funding and shoring up budgets at the state and local levels. Basically, it helped programs already in place maintain their funding. And huge levels were in the form of tax cuts rather than spending.

If you want to see a true Keynsian attempt, look at WWII. When the US finally dumped the deficit paranoia of the 30's and spent whatever we had to to defeat the Axis powers, unemployment disappeared, and the economy ran on that stimulus for a couple of generations. I wish we had that kind of vision and focus, but without the threat of Nazis. I often joke that our only hope of getting out of this depressed economy quickly is an alien invasion! ;)

As for austerity measures - the government spending less in times of recession - we can see how that is working for Britain and Ireland, where unemployment has risen.

Contractionary policies are actually contractionary. And it’s the poor, the unemployed and the under-employed who suffer.

Johnny D. said...

Christiane - no need for an apology. I was just wondering if I had missed something. I don't watch Fox news. In fact, the only news I ever watch is local. I prefer to get my international news off the web.

"A true Keynsian attempt has not really been made. The stimulus involved a lot of safety net funding and shoring up budgets at the state and local levels. Basically, it helped programs already in place maintain their funding. And huge levels were in the form of tax cuts rather than spending."

OK, Steven, you can continue to believe that making more debt to deal with a debt problem is the answer. And exactly as I pointed out in a previous post, someone (you, in this case) will say we haven't spent enough. Anyhow, you are going to get your wish. They will attempt to print their way out of this. This is why I continue to buy gold and silver. I am exchanging almost worthless paper for a real asset. But that is not all I exchange my fiat paycheck for. I am on the "Heavy Metal" savings plan.

The difference between now and World War II is that our government did not have $65 trillion in unfunded liabilities waiting around the corner. And that is just one conservative estimate. Some folks think the real figure is north of $100 trillion. I speak of promises to veterans and seniors.

Did you watch the Bill Still vid about government issuing debt-free money? By the way, I agree, under our current system, all money is debt. It is created that way by borrowing every dollar into existence. This is not a function of our economy, but a function of banking.

Steven Stark said...

Johnny D,

Social Security is not really an unfunded liability. The whole thing is an accounting fiction. SS is a system where we spread out the responsibility of caring for the nation's seniors. We take money (or the ability to spend) away from workers today and give it to seniors today.

The establishment of the Social Security trust fund began the government taking more away from workers now than is needed to care of seniors now. The government stows the money in bonds and pays itself interest. But since the government is the creator of currency - creatio ex nilo - then the government holding its own money is kind of like saying the NBA is storing points in between games. It's an accounting fiction.

The real question about Social Security is - will we be able to make enough goods and services to cover the needs of seniors in the future? And with a huge number of our potentially productive citizens sitting idle, it makes sense to do what it takes to get them working again.

If spending on Social Security were to being too large in the future, then our economy might overheat and inflation might kick in. Then we might need to do something about it - reduce benefits, raise taxes or interest rates, etc.

Once again - finance should serve the real economy, not the other way around. It doesn't make sense to say we cannot afford "future liabilities" when we are under-producing today.

Steven Stark said...

And no, I haven't watched the video -sorry! I will try to get to it at some point. I like interacting directly, but taking time to watch an external link is something I may or may not be able to do right now. I am interested, however! Thanks for the recommendation!

Christiane said...

some thoughts about our seniors

many companies had 'pension plans' for their retirees . . . and we know what happened to them, don't we, although the company executives ran off with huge retirement bonuses

our seniors often saved in funds that were invested in the stock market . . . and we know what happened there

our seniors who were more cautious invested in CD's (Certificates of Deposit) but those aren't a good interest-producing investment any more

and many seniors counted on their home ownership to increase in value, but it has declined . . . a lot

The one thing they could count on was Social Security. It was protected from private profiteers, and from the vagaries of political scheming. It was a stable entity . . . dependable.
But the tigers have come to prowl . . the private investment world is hungry for that money . . . and 'privatizing' is the new drum-beat among those who are supported by their lobbyists.

Our seniors . . . a 'burden' on an unproductive society?

Or just people whose lives have been decimated by the greed of powerful people?

Muff Potter said...

Thank you Steven and Christiane for bringing out points that are contrary to conservative ideology. In fact I'm completely surprised they're even allowed on a blog known for its unabashed conservatism.

In short, you both point to a financial sector which has been allowed to run amok for the past 30 yrs. or so. It has trashed and buggered the once thriving and vibrant manufacturing sector we had. It made sure the last remnant of restraint (Glass-Steagal) was swept away so that it could gamble with our savings and homes.

When it ran out of other people's money (Oh Maggie Thatcher the irony is rich! yes?) it demanded a bail out and got it. If there ever was a beast rising out of the sea, this is it.

wadeburleson.org said...

Muff,

I welcome disagreement, and believe all of us are better when we listen to others with differing viewpoints. Stephen and Christiane always have excellent points.

Wade

Robert Kahne said...

I have read your blog for a long time and never commented. I very rarely agree with much of what you have to say, but you provide a needed perspective for me--you keep my progressive faith in check and provide a needed counterpoint to some of the issues I think about.

However, I also have a BA in Economics and a Masters degree in public finance, and I just have to chime in on this issue. You are quite completely wrong about this issue and very painfully misread some very important issue about monetary policy. First--you provide no evidence to support your theory of people's inevitable loss of faith in the dollar. This, to me, is a huge leap of faith on your part. Dozens of countries have currencies valued in dollars. A massive amount of reserves held by public and private citizens and corporations are held in dollars. When S&P downgraded the credit of the United States (wrongly, in my opinion) people feared markets would sink, so they moved lots of money to the most conservative asset they could find--US Treasuries. AKA, dollars. The theory of people losing faith in the dollar just doesn't have any weight, because it doesn't have any evidence to back it up.

Furthermore, you point to Europe's monetary union's peril as a potential harbinger of the United States' future. However, this fails the smell test as well. Europe has a monetary union, but does not have a fiscal union--meaning they cannot coordinate their policy like the United States does. The issue with Europe is that Germany, which has a strong fiscal balance sheet, does not want inflation; while PIIGS (Portugal, Ireland, Italy, Greece, and Spain) need inflation to keep their balance sheets from exploding. If this were the US, and, say, Alabama was running a massive deficit while, say, Massachusetts had a massive surplus, the federal government could simply make transfer payments from one state to another. This exact situation happens every day. If a similar situation could emerge in Europe, they would not have nearly the problems they have today. Even if you disagree with that opinion, it is a fact that Europe's monetary policy and the monetary policy of the US is significantly different.

Finally, you do not take into account the extreme danger of setting monetary policy based on a real good. Real goods have markets other than money--those markets have supplies and demands associated with them. How grand a disaster would it be if the demand for statues of golden calves skyrocketed at the same time that the United States entered into a recession? This would tighten the money supply at a time when it needed to expand, exacerbating the problem greatly. Fiat currency ensures that the market for money is just that--money.

Fiat currency is not without its flaws, but it is an incredible and massive improvement over metal backed currencies. It should been seen as nothing but progress that the US moved to a fiat currency. And, in my opinion, you should stick to writing about spiritual issues. BUT, it is your blog. You are free to do as you choose.

Robert

wadeburleson.org said...

Robert,

You make some very good points, and I appreciate you taking the time to write.

As in all things, I could be wrong, so please know that I appreciate those who disagree with me.

I understand what you are saying about the peoples' trust in the money. I grant that I am making a huge assumption that we will one day lose faith in the dollar. I plead guilty.

However, my assumption is based on one small little factoid.

I actually know how gigantic a trillion is. I also know that fifteen trillion is beyond most peoples' comprehension. It's just a number.

One day that fantasy number (fifteen trillion dollars of national debt) will sink in--when all goods and services are CUT OFF.

That is when reality sinks in. :)