monetary symbology that [sometimes] works
By basd on Feb 5, 2009 153 views | In predators vs. victims
Continuing our analysis of money as a symbol, a mental construct -- let's look again at a link in my post yesterday.
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There we find a discussion of the steps taken in Germany prior to WWII to pull it out of its massive economic meltdown.
The reason this is interesting and instructive is that (if the article is correct), the "symbol" had no connection with anything of tangible value. And yet, worked flawlessly. How could that be?
In one of my examples, I suggest we can explain money by the heuristic of two potential "workers" and a meteorite. A meteorite falls from the sky. It has no intrinsic value. Two farmers reside adjacent to one another and do not have the social courtesy to assist each other with projects that would benefit from four hands instead of two.
One farmer finds the meteorite and shows it to his neighbor. They both think it's really "neat" as a matter of curiosity value. Farmer Smith needs some help working on building his shed. He can't put a beam in place by himself. Farmer Jones could help but has no motivation to do so and "society" has not yet invented money.
Farmer Smith tells Farmer Jones, "say ... I'll give you the meteorite if you help me put the beam up in my shed." Farmer Jones, having nothing else pressing to do at the moment, agrees to help out. Together, they accomplish something neither could accomplish alone. They have increased their productivity, so that the "total output" is greater than either could accomplish alone. The simple transaction has accrued a net gain.
Later, Mr. Jones thinks it would be great to have Mr. Smith help him with a project. He offers to give the meteorite back to Mr. Smith -- who agrees. The exchange has a set value -- because Mr. Jones is asking Mr. Smith to give him about the same amount of assistance that Jones gave to Smith in the last transaction.
The success of these two projects leads them to pass the meteorite back and forth on a nearly daily basis. Working together, their two farms flourish beyond what either had been accomplishing before the advent of the meteorite.
Of course, they then give the meteorite to Nelson for safekeeping. There being no "symbol" in circulation any longer, the productivity stimulated by the meteorite rolls to a stop.
Now ... in this context, let's look at the German solution. The government issued brand new currency in return for fixed amounts of work on infrastructure projects. This currency circulated and produced great productivity.
But, the currency was akin to our meteorite. It had not intrinsic value of any sort. With a commodity-backed currency, there is the vague promise that you can have, for instance an ounce of gold. With debt-backed currency, there is the vague promise that someone actually owes "work" to pay the debt.
In practice, these are both entirely illusory. For instance, when the US had gold-backed currency, it also made it illegal for citizens to hold any gold. So, the wording on the certificate notwithstanding, you could not trade it in for an ounce of gold. It nevertheless continued to function as an adequate "symbol" of exchange.
But, let's look again at the German currency. It was not an "IOU," a promise to do work in the future. It had no commodity backing. It represented work already performed.
The exchange was, "I worked for the government, now you should work for me!" Of course, there was presumably a bit of a coercive factor as well -- at the end of the year you are going to be taxed. The tax will be payable in the new currency, so it would be a good idea to have some.
But, the currency also accomplished two important things. First, it instantly evaporated the existing "fake capital," much to the chagrin of the banking establishment. This may seem surprising, but if a nation is going to tell the entire world it has no intention of paying its paper debts, perhaps it should build a very big war machine to back up its position. (Which is precisely what Germany did -- though as we know, the gambit was not entirely successful.)
And the second thing it did was tie the issuance of currency to a specific quantity of work. No work, no money.
The problem with fiat money is not that it falls from the sky like a meteorite, but that once the "guys in charge" turn on the printing press, it becomes impossible for them to turn it off. And, pretty soon, the world is flooded with fake currency while the printing-press owners wallow in ill-gotten gains.
Commodity-backed currency solves this problem by requiring a specific quantity of commodity to exist in order to justify issuance of currency. Unfortunately, this has two specific down-sides: First, it puts gold producers in the driver's seat as far as determining the amount of currency in circulation -- which can make them very wealthy, as they now control the printing presses; and second, if a nation does not have any gold, where is it going to get the gold from in order to issue currency in the first place? A ridiculous situation.
But, German leaders knew that they did not have any gold, so a gold-backed currency would be insane (and not a solution). They came up with a reasonably sane solution instead. (Though we may question whether a social system that requires vague symbology to function is sane in the first place.) By tying the issuance of currency to work performed by the public, the currency issued bore a passing relationship to the available human resources and productivity. The printing run was "finite" and not subject to capricious whim; but at the same time it was "expandable" by adding more public works to the intended projects.
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On a side note, isn't it amazing how people who created the fiscal problems are suddenly full of wisdom about what not to do? So, today I get an email from "my" Congressman, regularly voted one of Congress' biggest sleazes, explaining the defects in the stimulus plan. And, of course, decrying "big government."
In a fact-based society, such statements would have his constituency rolling on the floor with laughter and mirth. Could we please compare the size of the US deficit between when GWB entered office and when he existed it? Hahahahahahahahaha... And notably, there is no mention of the most gigundous elephant in the room, the bloated war budget -- especially since my Congressman believes the war budget is way too small.
(He may be right, since the rest of the world is going to be none too happy when the US announces it has no intention of making good on the gazillion dollars in obligations it has floating around the world. Ie, the German solution ...)
But, those out-of-power have been handed the perfect opportunity to sound like enlightened soothsayers, due to the fact that the Obama government is pursuing the very same ill-advised policies, controlled by the same players from the banking industry -- as were pioneered by the GOP during its waltz in power.
Are we having fun yet?
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Later addendum:
This post talks about how US banks create money out of thin air (as opposed to basing their money creation on "reserves.") Such analysis dovetails precisely with my thesis here. The interesting part of the analysis is that efforts to "recapitalize" the system have actually led to shrinking monetary supply -- precisely the opposite of what needs to happen. But the more interesting question is why world citizenry continues to tolerate a monetary system that allocates the benefits of this entirely "illusory" system to private banking interests, when the same benefits could be allocated instead to the public.
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