Money is the barometer of a society's virtue
After glancing at someone else's post on the Federal Reserve, I think it is time to recall Francisco d'Anconia saying,
"“Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. Money is so noble a medium that does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot”.
What do you have to say about where we are now?
"“Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. Money is so noble a medium that does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot”.
What do you have to say about where we are now?
People who I've known well enough to know how they run their business and household finances tend to keep less than 20% of their net worth in cash accounts. They certainly exceed that briefly if they sell something and they know they want to buy something else and pay the tax bill for their gains on the previous deal. So it sounds like histrionics to me when people say the medium of exchange is the single most important business decision people can make.
The risk to that 20% of net worth in cash positions is nothing compared to the risk of a bad decision on our part taking a huge toll.
The other problem is that instead of 10% reserve banks,
we had mortgage companies with only a 2.5% - 3.5% reserve
back during the housing bubble.
Do you remember Countrywide?
Just for those who might be reading this and don't understand how this comes about. A bank receives deposits and makes loans - paying interest to the depositor, and charging interest to the debtor. For a 100% reserve bank, the deposit is held 100% by the bank. There is little ability for the bank to make money as the majority of their reserves must be held in trust for the depositor. This does little good for either the depositor (as they get little interest), for the bank (as it cannot loan out the funds it is holding and thus charge interest), nor for the community as much of the capital lies unused in a bank vault.
Most banks operate on a fractional reserve system - they are only required to keep a fraction of the deposits on reserve in the bank or as collateral. So, for a 10% reserve bank the $1000 comes in as a deposit, and $900 of that is used to provide loans. The money used by those loans is used to purchase capital goods or real estate, the beneficiary of such purchase then depositing those proceeds in the bank. Thus, at the end of the first round, we had $1000 from the original depositor, a loan valued at $900 as an asset, and a second deposit of that same $900 from the purchase of the capital good or real estate. This process continues in cycles with the second round providing for $810 to be loaned (with the 10% or $90 being retained in reserve), and so on and so on until all money has been loaned that can be loaned, and all original money deposited is actually held in reserve by the bank, but instead of backing only the original $1000, it is backing the original deposit, and each subsequent deposit. This is very beneficial for the bank, as it is charging interest on the same money multiple times (the original $900 loan is paying interest, the additional loan of $810 is paying interest, the next loan of $729 is paying interest, etc. etc. etc.). Now let's sum up the "money" in the system. We have the original $1000. We have a loan obligation of $910. We have a second deposit for $910 and another loan obligation for $729, and then the deposit of that money, and so on and so on. This grows to a value of $10,000. So that original $1000 has "created" an additional $9000.
This would be OK so long as the payments on the loans happen on time and faithfully and so long as no one wants their money early. Once the payments on loans stop, or many depositors want their money now, then this system collapses.
So, how does that affect our current situation? We have a federal reserve that has been pumping more and more cash into the system trying to keep things moving forward. To do so, they have taken the place of the borrowers - thus the Fed has "purchased" goods and in so doing "deposited" funds into the banks, which then in turn loan those funds out to others. But soon, when inflation inevitably begins, people are going to want to take their deposits out to purchase goods today that are deemed to be less expensive than they will be tomorrow. And then the collapse will begin. The first round will be limiting the amount of cash that depositors will be allowed to take out at in some period of time (the thinking being that they will then go out and purchase more capital goods or real estate and the benefactor of such sale will again deposit those funds back into the bank providing the funds for subsequent withdrawals). That could conceivably work if the withdrawn money were merely being plowed back into more capital and real estate. Unfortunately, it is likely to be invested in hard currencies. So, the dollars will be converted to gold, silver, platinum, etc. As less cash is available, the price of those hard currencies will rise, which will necessitate even more withdrawals from the banks to purchase hard currency, which will further deplete the reserves requiring the loans that back the deposits to call due the money owed, requiring those holding the loans to extract whatever savings they have to pay off the loan.
It will be a vicious cycle and only those who were prescient enough to see it coming and converted notes to hard currency will survive.
No, they want money (or an instrument that can be easily translated into money) so that they can tax and take their share.
I think she doesn't mean money but rather wealth. That why she talks about getting richer by graft then by work. This is correct and a problem for the US.
What we use to trade is not important. We have more media of exchange than in other times. No medium of exchange is free. We have to lug it around, protect it, keep track of it, and monitor its changing value. No medium of exchange on Earth maintains a constant value, so we have to update our pricing regularly. It's easy today to change our menus and edit our contracts. The important thing is having control over our wealth: our equity in companies, our real estate, our personal property. If I want to sel an apartment building and use the money to buy a contract manufacturing business, it doesn't matter what I use to exchange. If I use USD, I will lose a few thousand dollars over a few months while the money sits in the bank. No medium of exchange is free. I would use some obscure thing like some famouswork of art if I knew the apartment buyer hand it and the CM seller wanted it. In this case, I'd probably spend a few thousand appraising it and storing it under guard. Media of exchange aren't free. I'd rather use USD b/c more people will accept them in trade.
It would be a mistake to have a government (legal tender) gold standard. If we repeal legal tender laws, then we would have a good start towards real money and ending the FED.
As Ayn Rand said, it would be a mistake to try and return to a gold standard in these times since we just end up going off of it again and gold and capitalism will get the blame.
My article distinguishes between the government that is undermining money and the Fed that is not -- which Milton Friedman agrees with. I suggest that we end the Fed's mandate to fight unemployment and end their ability to control the fed funds rate, the only interest rate they can control.
This would be a first step in a transition back to a gold standard which will take a major transformation in economic and politics. As I said in my book "The New Gold Standard", we will return to the gold standard on the wings of capitalism -- and not before.
Thanks for that wonderful quote.
Paul Nathan