Topic: Economics
Look! It's the Holy Grail! I guess we all search for something of rare interest to us at one time or another. But we're not all lucky enough to find it. When that moment comes, it can even bring tears to our eyes.by Master C
(liberal)
Thursday, November 20, 2008
"Come here quickly, Arturo!" he shouted from deep in an archive of dusty books and magazines; a single bulb in a socket dangled from an electrical cord suspended barely above his head as it singed the stale, unmoving air in the basement where he held an aged and weathered manuscript on his lap.
"Why? What have you found, Master Walt?" his faithful Filipino servant answered as he shined a flashlight ahead of him, walking closer.
Looking up from the manuscript, with a full grin on his face that would have made Indiana Jones envious, he shouted: "It's the HOLY GRAIL, Arturo! I've found it!"
He began taking pictures with the small spy camera he held up to his eye. The flash going off brightened the room with each pulse of the camera. Arturo stood next to him, looking over his shoulder at the musty manuscript.
"But, what does this prove, Master Walt?" Arturo asked, wanting to show interest but clearly unsure of the significance of the discovery.
"It's proof that paper money isn't a commodity," he answered triumphantly.
Arturo was still a little confused. "But what does that mean?" he asked.
Walt straightened up from the hunched over position he had been sitting in while photographing the document and rubbed his chin ponderously as he replied.
"I don't really know yet, Arturo. But, I'm sure it means something." And he got out the notebook that he always kept in his shirt pocket, and began making notes about the event.
What he had found was an archaic reference about money in a publication called "Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion". It was first published in 1961 and had been revised several times over an approximately 40 year period by the Federal Reserve Bank of Chicago. Apparently, it had ceased to be published a few years ago, but what the passage said that he had found was earthshattering:
"In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries."
My God! This really IS important stuff! Finding a rather casual reference to what was clearly intended to merely draw a distinction between those nuts and bolts items that can be banged into cement or welded into angle iron as "commodities" and those more subtle, artful items like clouds, poetry, and MONEY that can't, some bureaucratic scribe at the Federal Reserve had closed the door on a controversy that was as bitterly argued as whether there is life after death or not.
As he read further it said: "What, then, makes these instruments -- checks, paper money, and coins -- acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so."
As Walt wrote at a later time: "Even though I was already sure of my evaluation, I can't tell you how thrilled I was to find this smoking gun. Can there be better evidence of my claim than a written confession by the Fed themselves? No, there can't!"
And what all this digging and discovering led to was the deep, dark, dangerous, and prophetic warning that: "This should lead readers to pause and think: If the only thing that gives fiat money any value is the confidence that people have in it, what reason do we have to believe that such confidence is misplaced and that the value might be lost? The answer is obvious. We have every reason to believe it, as evidenced by the current financial crisis, which is all about a loss of public confidence in the banking system."
Well, I guess that about covers it all. It's kind of like losing confidence in those levees that failed in Louisiana when Katrina hit and wondering if they would hold again after they were rebuilt. Or losing confidence in that bridge we have to drive across that might collapse because of all the reports we've heard about insufficient maintenance. Or losing confidence in whether the ozone layer is going to continue shielding us from the Sun's blistering rays so that we don't get melanoma. Or whether we still have confidence enough to drink the water that comes from our taps that might be slowly killing us.
This is frightening stuff!!! We don't see the ability to SURVIVE these challenging events as a GOOD SIGN, we are being told that these are reasons we should PANIC and TEAR DOWN the monetary system before it destroys... well, the WORLD!
Personally, I thought everyone knew that FIAT MONEY has no asset backing it. It certainly has not been kept a secret. It is money by DECREE, that's why they call it LEGAL TENDER. And, while some people may say that it relies upon CONFIDENCE for its value, that seems a little to me like saying that that BRIDGE relies on the confidence of people to drive across it, otherwise it won't be crossed. The bridge will still be there, and those drivers who have confidence in it will still drive across it, but for those who FEAR IT, who don't LIKE IT or don't have CONFIDENCE in it, they're going to have to find another way to get where that bridge would otherwise take them.
The fact that the US economy has been around for about 232 years (perhaps even longer if we look back to the Pilgrims as our origin) and has survived many different money and banking systems should ~ I would think ~ give us ample evidence of our strength, tenacity, and resourcefulness to solve any dilemma that confronts us. But, for those nihilists who want to tear down the structures of what we have because they don't like it or don't agree with it, waving the flags of HYSTERIA, MELTDOWNS, and NO CONFIDENCE is the same to them as waving the flag of LIBERTY. "Burn the Fed to the ground!" "Replace that horrid FIAT MONEY with 'real' money!" "Throw those GOVERNMENT CROOKS in prison!" "Everything is UNCONSTITUTIONAL!" Ha! Ha! Ha! You really don't know how ridiculous this looks from a different perspective! Like the guys protesting outside Ben & Jerry's yelling "BRING BACK THAT FUDGE RIPPLE DELIGHT!"
If Walt, or anyone else, wants to say that money is not a commodity, GO AHEAD -- even though FIAT MONEY can be stacked, stored, saved, printed, traded, copied, bought, sold, divided, invested, stolen, hidden, exchanged, converted, counterfeited, and redesigned. For the misguided or the ultra rich, FIAT MONEY can be used as wallpaper, insulation, to light a fire, to stuff in a mattress, or on the toilet for those who disdain it. And, for those of us who use it properly, it can be used to build a building, obtain a yacht or a new car, to have the leaves raked from our yard, or even to buy some of that Ben & Jerry's ice cream that's still available.
Not only that, but FEDERAL RESERVE NOTES are the ONLY currency that must be accepted at restaurants, movies, horse races, grocery stores, and anywhere else in the US. To say that money isn't a COMMODITY is like saying that Pluto isn't a planet because it isn't big enough, a chicken isn't a bird because it can't fly, or a credit card isn't currency because it has no specific value.
To say that money is not a commodity is a SEMANTICAL distinction that has no basis in FACT, and it's an attempt to thread a LINGUISTIC NEEDLE that neither increases our knowledge, nor sews together any torn or missing fabric.
Maybe it wasn't the HOLY GRAIL that was found after all. It might just have been something in an OLD BOOK that someone still felt was relevant. It wouldn't be the first time THAT has happened!
The views expressed in this
article are those of Master C only and do not represent
the views of Nolan Chart, LLC or its affiliates. Master C is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
Technically even though by law, the only currency that "must be accepted at restaurants, movies, horse races, grocery stores, and anywhere else in the US" as you said, in reality, that is not the case.
In tough economic times and high taxation time, tax evasion through barter and the less usage of the currency becomes very popular among small business owners and ALL businesses will accept barter if they feel they get a good deal.
My business is no exception to that. With my business I have done plenty of barter. Using barter I have had my car fixed (parts and labor), eaten at lots of restaurants (local and corporate), purchased wine, beer, hard liquor, groceries, fine art, electronics, movies, had Chiropractic services for my son's bad posture, had allergy treatments, prescription drugs, laser eye surgery for my wife, laser hair removal for my face, haircuts, limo rides, car washes, CPA services, computer services, attorney services, cleaning services for my house, daycare services for my kids, lawn mowing, snow removal, landscaping, electrician and contractors services, and even had a vasectomy .... all of that and more without using the U.S. Currency nor any other fiat money and without paying those disgusting taxes.
Whenever I hear from a client: "I don't have any money" My reply: "No problem, what do you have?" and the barter begins. It is much more fun that dollars and I get everything closer to wholesale and get goods or services that I would not normally consider buying with cash. It is a lot of fun, you should try it some time.
The power of barter is alive and businesses are willing to do a big portion of their income in barter than U.S. Dollars. Go to a car dealership with several gold coins instead of U.S. Dollars to buy a car. Most likely they will take your gold for their car.
Barter is not unique to small businesses. About two months ago, Cerberus, who is the owner of 80% of Chrysler and 51% of GMAC wanted to do a barter with GM. The deal was to give Chrysler to GM in exchange of GM giving them their remaining 49% ownership of GMAC. In essence, Cerberus was saying "I will give you one of my problems in exchange for one of your problems." The deal did not go through. But if it did, the deal was going to be made without U.S. Dollars exchanged and would have been completely legal.
So there it is, even if you are supposed to do everything in U.S. Dollars, you don't really have to.
Arturo believes that country can run purely on confidence.
But in fact even confidence is a limited resource, and actually in this case depends on the belief that whatever is represented as money (when it itself if not a "real" commodity) actually will be respected and treated as some of value in trade.
The fact is, whatever the average user respects as money, it will be eroded as to the confidence people have in it if enough of it is created out of thin air. No matter how you try to obfuscate it, money is based upon real commodities, albeit maybe many time removed.
If enough money is reproduced, w/o a proportional quantity of a commodity to back it up, then the unit (practical and perceived) value of the money will be degraded. Blind faith (i.e., confidence) will only go so far, eventually even the dumbest user of the currency won't be able to avoid the obvious - that their money is as common as dirt, and worth as much.
Posted By: Steven A. Rosile
Date: 2008-11-26 00:47:28
Hey C, the thing about FIAT MONEY is that it is not of any REAL VALUE in and of itself. I liken it to a bus token. It will get you a ride on the bus while the bus company is operating, but when the bus company goes out of business it will just wear a hole in your pocket while you walk.
Unlike REAL MONEY, which is a set amount of weight of precious metals, has INTRINSIC VALUE and the tendency to appreciate over time, FIAT MONEY is more readily subject to manipulation, uncertain in value and has the tendency to depreciate over time.
By the way, I read Modern Money Mechanics over 25 years ago.
Just as a side note, Edison's light bulb didn't work. He was using a paper filament that burnt itself out too quickly to be useful, that's ironic. It was Lewis H. Latimer who invented the carbon filament bulb that was patented while working for Edison. So, maybe you want to give credit where credit is really due.
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