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MONEY
MONEY
A guide to the economy
by Ian Green
Copyright 1989 by
Ian Green
Box 973
Vancouver, BC
CANADA V6C 2P1
All rights reserved.
Permission is granted to distribute this document in
unmodified form on a not for profit basis. All others must obtain
prior written permission from the author.
Money by Ian Green Page 2
INTRODUCTION
INTRODUCTION
Do you own your own home? If you do you are almost certainly
one of those so-called baby boomers or their parents. Consider
yourself extremely lucky, because if you tried to go buy a house
today you probably couldn't afford it, even if you made twice
what you currently do. The reason is simple, the cost of
borrowing money has risen so high that it has completely
outstripped the earning power of the average young family. The
real question is how did this situation come to be? Sit back and
read on, I will tell you exactly what is going on. Some of the
things I will present are likely to shock you, but everything
contained in this essay is THE TRUTH!
There are two major components driving the economy of today.
The first and most influential is the supply of dollars. Contrary
to popular belief, the supply of dollars has grown dramatically
over the decades since the FIRST WORLD WAR. Prior to the war, the
number of dollars was solidly controlled by international
agreement. This was the last period of the gold standard. Gold
has, along with silver, remained the 'official' money of all
nations. Dollars, yen, marks, pounds, etc. are all nothing more
than money substitutes. Unlike the dollar, the supply of gold has
risen only modestly over the centuries.
The second major force driving the economies of the world
today is debt. The United States of America has emerged as the
leading debtor nation, far outstripping the total debt of all
the 'third' world nations combined. It continues to grow by
hundreds of billions of dollars each year.
Combined, the two factors of debt and inflation operate
synergistically to erode the purchasing power of the average
family. Now you may ask, confronted with these forces against us
is there a way out? I would be an out and out liar if I said
there was. There is hope but time is quickly running out.
Money by Ian Green Page 3
THE RECENT PAST
THE RECENT PAST
One of the leading themes of the numerous financial reports,
that sum up the '80s, is the 'unparalleled' growth in the
economy. What they don't tell you though, is that the expansion
is due entirely to inflation; the fact is that real earnings have
declined considerably. In 1984 for example the Dow Jones
Industrial Average was around 850. Today, five years later, it
has broken 2700 or more than triple it's 1984 value. Other stock
exchange indices reflect similar performances. I can not help
wondering if your earnings did as well.
In 1984, when I still smoked cigarettes, a package of twenty
cigarettes was around $1.60. Now prices of around $4.00 and even
more are common-place. Other products tell similar stories.
Unfortunately the official 'consumer price index' doesn't reflect
realistic levels of inflation.
In 1978 the start of the major downturn in the economy was
well established. Inflation was rising to unprecedented levels.
In 1979 a major increase in the price of oil was to finally push
the world economy over the edge of the abyss. Paper dollars
reached all time lows nearly reaching 1000 to the ounce gold.
Interest rates exceeded 21% and inflation was out of control.
Only the collapse of 1929 exceeded the extremely high levels of
unemployment that resulted from unprecedented numbers of
corporate bankruptcies. Things finally reached a crescendo in
late 1981. That Christmas was the bleakest I had ever seen; a
five dollar toy was the big 'hit'. You remember the Rubic's cube.
If we look back a few more years we find a situation that
is almost as bad. It was around 1972 that President Richard Nixon
(America) instituted wage and price controls in an attempt to
control double digit inflation. Many other leaders around the
world followed suit. It was market conditions (in 1973 the first
of a series of huge increases in the price of oil shocked the
world) more than anything else that controlled increasing
inflation, although President Nixon took credit for the improved
situation (a reduction in the increasing inflation). Almost
immediately after controls were abolished inflation resumed
reaching double digit levels. Many reacted by immediately raising
prices (or demanding large wage settlements) largely out of fear
that controls would be re-imposed shortly.
I could go on and on and on, citing examples of inflation,
financial panic and more. What I have yet to reveal is why there
is inflation and all this other crap. All of the so-called
reasons that are offer to explain inflation are in reality simply
symptoms of a deeper underlying problem. What we need is to do is
get to the root of the problem. First though we need to learn a
bit about the evolution of our economic system.
Money by Ian Green Page 4
EARLIER INFLATIONS
EARLIER INFLATIONS
For as long as there have been rulers there has been
inflation. In archaic times it took the form of coins of slightly
reduced purity or weight. Because early coins were not exactly
uniform in shape, these inflated coins could circulate side by
side with one of full weight and fineness. Other reasons for
their success was that the difference was very slight; the coins
were officially certified to be of full weight and purity, i.e.
the guy in charge decreed they be accepted without question. It
was also reasonable that the recipient could pass them on at par
with full weigh/purity coins.
As time moved on, coins would go through a cycle of
replacement until some time later they were ultimately and
intrinsically worthless. All the time however the value of the
coins would erode and eventually no one would accept them in
exchange at all. It was about this time that a change in
management would occur.
In medieval timers, it was customary for the goldsmiths to
act as depositories for the safe-keeping of money (gold). When a
client wanted his money he had to go down and get it, or at least
take the guy he was doing business with down to witness the
transfer of accounts.
Once paper finally became readily available, it didn't take
long for the goldsmiths to begin providing receipts for gold
deposited. These could then be endorsed (not unlike today's
checks) over to a third person to complete a transaction. This
third person could then go and redeem the receipts and get the
gold. Ultimately goldsmiths began offering 'bearer' receipts
which were the earliest bank-notes (in the West anyway, the
Chinese were way ahead of us by several centuries).
Money by Ian Green Page 5
FRACTIONAL RESERVE BANKING
FRACTIONAL RESERVE BANKING
Goldsmiths, in issuing their receipts, came into direct
competition with the guy in charge over the supply of money.
Rather than abolish these receipts, some monarchs became
intrigued by the fact that the masses preferred their goldsmith's
paper over his often underweight and impure metal coins. It was
also readily apparent that it was far easier to make counterfeit
paper receipts for gold that could circulate along side
legitimate receipts.
Naturally under even the simplest of legals system, conning
thine neighbor is not allowed, unless of course you are the one
who makes the rules. Details are scarce but it is clear that some
greedy king, along with the cooperation of a dishonest goldsmith,
started the system of fractional reserve banking. The guy in
charge would protect the goldsmith from anyone who complained in
return for the goldsmith's financial backing.
Using the old standby propaganda, both the goldsmith and the
guy in charge would continually reassure the public that it was
all right to have more receipts outstanding than there was gold
because there would always be more than enough gold on hand to
meet redemption demands. As long as those responsible didn't get
too greedy, the erosion of value of the receipts was barely
noticed (although people did eventually catch on).
When things did get out of hand a 'run on the bank' would
occur. Sometimes the goldsmith became 'bankrupt'; he could only
pay out the 'fractional reserve'. The rest of the outstanding
receipts were worthless (at last the counterfeits were flushed
out, usually along with the counterfeiter). Sometimes the guy in
charge foresaw the run and closed the goldsmith's shop before
disaster struck. Needless to say that remaining receipts would
decline in value rather precipitously. If he had 'connections',
sometimes the king could borrow some money (gold) and re-open the
goldsmith's shop and meet the rush head-first! Eventually people
would see that the notes were being redeemed and would eventually
refrain from redeeming their holdings. In fact these people would
start bringing their gold back to the goldsmith's to get the
newly acceptable receipts. A fool and his money are soon parted.
I guess you can see the obvious. Once the situation cooled
off it didn't take long for the guy in charge to start the old
game again, all the while eroding the value of the receipts more
and more. Eventually the whole thing would fall apart and once
again a change in management usually occurred.
Money by Ian Green Page 6
CROOKED CREDIT
CROOKED CREDIT
Not long after the abuse of paper receipts started, the
practice moved over to the loans business. In earlier times the
goldsmith 'loaned' money (gold) to certain customers for a small
payment. Certain other customers provided gold on long term
deposit for which they were paid a small amount. In the beginning
it worked out well. Loans outstanding never exceeded deposits.
A new method of book-keeping, known as the 'double entry'
ledger system emerged. It was fair and accurate and it kept track
of the goldsmith's business and everybody was happy.
Later though goldsmiths would loan money that was in excess
of the amount on deposit. In order to cover the discrepancy, a
dishonest goldsmith would 'depositing' an equivalent amount to
keep the books balanced. Needless to say such practices are
completely and utterly fraudulent, but with the protection of the
king what could be done?
Although this kind of abuse is not readily visible, it did
have an effect on the money supply and inflation continued to
gnaw away the purchasing power of the receipts.
Combined with counterfeit receipts, these fraudulent loans
combined to destroy more economies that you can shake a stick at.
It kind of makes you wonder what is next. What can be worse than
counterfeit money?
Money by Ian Green Page 7
FIAT MONEY
FIAT MONEY
Somewhat more recently the value of the world's currencies
has moved to the logical extreme of the fractional reserve
system. If you go down to a coin dealer and look at the
historical bank-notes (American) you will notice the are marked
'silver certificate' or 'gold certificate' as at one time these
were redeemable in precious metals. Coins were actually still
made of precious metals.
Genuine paper money is fully redeemable. Counterfeit paper
carries the promise of redeemability (which the issuer knows is
fraudulent). Paper money which doesn't carry even the promise of
redeemability is even worse - it is a fiat money.
Fiat money is what is left of the fractional reserve system
gone broke. It is a money substitute that has no backing
whatsoever. Dollars became fiat in August 1971 when President
Nixon declared that the dollar would no longer be redeemed for
gold (although in effect this was evident as early as 1968). In
fact ALL currencies of ALL nations today are 100% irredeemable
fiat money with NO TRUE BACKING whatsoever.
Dollars have become increasingly worthless, yet curiously
they have become redeemable again (albeit at a substantially
reduced rate). You can now go and buy gold bullion one again (It
used to be illegal to own gold bullion in America). The paper
dollar has declined, is declining and will continue to decline
relative to the gold dollar until eventually it is absolutely
worthless. The path will be erratic but it is well established on
its way down.
Money by Ian Green Page 8
DEBT
DEBT
Finally we come to the debt problem. So far all those
deficit dollars (yens, pounds, etc.) are increasing by leaps and
bounds. Sooner or later this debt will have to be paid. The
crucial question is how?
Well if you took the American situation as an example the
debt there is $3 trillion ($3,000,000,000,000.00) or so. If we
simply printed it up and circulated the notes it would devalue
the presently feeble dollar by at least 90%. Not to popular with
all those holders of dollar denominated assets like bonds and
treasury bills. So what else can be done. Well the supply of
dollars can be increased more slowly but it has the same effect
of depreciating the present value of the dollar. If we look at
the Canadian situation, it is even worse. Here the debt is
currently around $350,000,000,000.00 and only a small population
of 25 million people to pay.
Suffice it to say inflation is going to get worse because of
the double whammy of counterfeiting and debt. A gloomy scenario
but accurate. Worse is the fact that there is more to come.
Another consequence of this debt is that it siphons up money
there by removing it from the overall credit pool. This drives
interest rates higher which in turn drive the deficit higher
which drive interest rates high in a vicious cycle. In Canada,
for example, the federal budget deficit stands in the $30-35
billion range. Curiously that figure is about what the interest
payments are on the total debt. Any increase in interest rates
simply raises the budget deficit which in turn drives the supply
of dollars ever high. Consequently the debt simply feeds on
itself growing uncontrollably.
Another peculiar aspect of debt lies in America. It is
variously known as the Savings and Loan crisis. When the industry
was first created S & Ls were confined to financing housing.
Deposits were all insured and the situation was stable (or so it
seemed). As time moved on however increasing federal debt began
to drain money from the private sector. S & Ls responded by
raising the interest offered on deposits to maintain adequate
reserves as required by law. The problem was that large amounts
of money had previously been loaned out at comparatively low
interest rates for long periods of time. Stuck with these low
paying mortgages and spiralling interest rates it didn't take
long before the whole industry to fall into turmoil.
In a quick fix the American congress decided it was
expedient to allow the S & L's to invest in higher yielding
ventures to help improve their financial health. Unfortunately
such a change in policy did nothing to ease the situation. As
interest rates continued to climb more and more these alternate
investments (mostly in commercial real estate) fell into
bankruptcy and once again the industry was on the verge of total
collapse. Only this time the situation was quickly becoming
hopeless.
What happened to exasperate the problem is nothing short of
incredible. In a frenzy to maintain viability S & Ls started
competing heavily to attract depositors to the point where
Money by Ian Green Page 9
interest rates were becoming unrealistic compared to earnings.
None of this mattered though because the deposits were all
insured. This meant that savers could simply go to the S & L that
paid the most, there was no risk so why not go to the highest
bidder. The Federal Savings and Loan Insurance Corporation
(FSLIC) was the one stuck to pay all this money. Once an S & L
was bankrupt (most were well past that stage years ago) the
entire burden fell upon the FSLIC. Estimates of the current
amount needed to 'bail out' the industry range into the hundreds
of billions of dollars. And still the congress has done nothing
alleviate the problem. Shutting the industry down seems to be the
only viable solution. It cannot continue to function the way it
does now. One thing is certain the accumulating debt will have to
be paid.
In Canada the pension system is run on a pay as you go
basis. Pension payments are paid from general government
revenues. Unfortunately demographics will make this program very
expensive for younger persons. The reason is simple, in Canada
fully one third of the population is over the age of 50. In only
15 years the number of persons claiming a pension will skyrocket.
The 'problem' of the declining birth rate is manifest.
When this pension program was introduced decades ago, the
number of persons that were eligible was relatively small.
Advances in medical technology have however increased life
expectancy of the average individual substantially. This results
in ever increasing numbers of persons living long enough to
collect a pension for longer periods of time. Unfortunately the
pension plan has not been modified to reflect this fact.
This unfunded liability is sure to drive up the debt as no
government has the political will to deal with the problem.
In Canada a deindexing (decoupling the program to inflation) was
tried but the government rescinded the proposal after numerous
protests. Instead one can expect that this liability will add to
the already massive debt driving inflation to higher and higher
levels. It is even possible that the pension plan may be phased
out completely (because of bankruptcy).
In America the national pension system is forced to invest
in government securities which is effectively means the same
situation as Canada's only disguised. In order to pay the pension
the Federal government has to pay off some debt. But the debt
continues to grow and grow. A paradox that must be corrected.
Money by Ian Green Page 10
THE FUTURE
THE FUTURE
What I have described above is all true. Inflation has so
eroded the dollar that it is now almost intrinsically worthless.
On top of that is a huge supply of additional deficit dollars to
further dilute the remaining value.
Recently M2 (an index of the dollar supply) has been growing
at an annual rate of some 15% (three times the official inflation
rate) and no slowdown is likely. Where does it lead? It simply
means that government policy continues towards the inflationist
view. As I outlined in earlier chapters continued inflation in
the money supply is sure to cause the ultimate downfall of an
empire.
Recently housing has become short in supply, a symptom of
the high cost of money. The shortage drives prices up and up. If
the cost of money wasn't so high then the housing supply could
keep up with the ever increasing population. Construction of new
homes is slowed when the cost of money rises. Worse, local
governments are reluctant to provide building permits
exacerbating the problem.
Sooner or later, all of those deficit bills will have to
stand up and be counted. You can be sure that inflation will run
right through the roof when they do. Look at Argentina right now.
It is in the hyperinflation stage right now. Prices are doubling
ever day or two, the government is out to lunch (there were
recently a change in management there, but the new president has
nothing with which to rebuild the economy, inflation has eaten it
all up). At times there were riots as people fought to get basic
food (it has been priced out of reach by inflation). This will
happen here, I just cannot say when.
One things is clear, previous generations have been living
beyond their means, and now the present and future generations
are going to have to pay and pay and pay and pay and pay and pay.
Money by Ian Green Page 11
SURVIVAL
SURVIVAL
I guess you kind of expected something of a survival guide
to this dilemma and lucky for you there is a faint glimmer of
hope. Basically put you have to change your mentality regarding
the health of the economy. Instead of valuating assets in dollars
(or whatever) use gold dollars or my personal favorite sovereigns
(they are coins that contain .2354 ounces of fine gold each, made
by the British Empire, they are still legal tender to this day).
A sovereign is easily recognized by the image of a reigning King
or Queen on one side and a scene of St. George slaying the dragon
on the other.
Now move to liquidate dollar denominated assets like T-bills
certificates of deposit and the like and redeem them for gold and
silver. Bulk coins (old silver dimes and quarters) are still
around and these make a good vehicle for hold 'money'. Bulk
silver is also nice (the troy pound is 12 ounces) as it weighs
down the strongbox so that thieves (Break & Enter is very common
crime) cannot just simply take it with them; it comes in a
variety of convenient sizes ranging up to and including 1000
ounce bricks. Bulk gold is available in sizes ranging up to 400
ounces. Fractional sizes are also available.
Precious metals rise in value as inflation rises. This is
simply because gold cannot be artificially increased. Nature
severely limits the amounts that can be mined each year to a
minuscule fraction of the total world supply. Consequently they
are extremely resistant to inflation. Another convenient aspect
of gold is that it is recognized world wide. No hastles with
paper money changers, gold buys goods and services everywhere.
One last piece of advice, should a dealer ask your name when
making a purchase do like I do, simply use a false name. This
avoids attracting attention to yourself lest certain 'official'
money grabbers try to put the grab on your 'money'.
Money by Ian Green Page 12
THE AUTHOR
THE AUTHOR
I was born on September 10th, 1958 in the Grace Hospital
(now known as the Children's Hospital). I was raised in New
Westminster and attended a variety different schools because of
the politics of divorce (that my parents undertook).
Once I reached high school a degree of stability finally
reigned and my academic abilities reached their peak in grade 11
when I was granted Academic Student of the Year. The prize was
modest, a one year subscription to Scientific American. I
graduated with honours in 1977.
After completion of high school I was able to attend the
University of British Columbia for one year. The only reason I
was able to achieve this was simply because I won a scholarship
to attend, my father would not assist me in any way (I even had
to pay for most of my books and supplies). In 1978 I was unable
to win another scholarship (as the economy faltered so did the
supply of funds for education) so I was forced to enter the work
force.
My early years as a worker taught me a great deal about the
realities of economics. I entered the work force just as the
economy went to hell in a hand-basket. Still I was able to secure
work if you consider working in toxic waste dumps work. Such is
my lot I suppose. At least I could pronounce all the names of the
chemicals I was cleaning up. Later in 1981 I got another job in a
chemical factory, my lungs still bother me from the alkaline dust
that permeated the air (mostly soda ash, but phosphates and more
complicated organics were also present).
Lately I have found myself working at poorly paid 'service
sector' jobs. I manage to survive. Curiously I do better to
indicate an inferior level of qualification than to present my
full academic credentials. (I successfully challenged many
courses at UBC and was taking one 3rd year math course all in my
first year). Needless to say it makes me that much more cynical
to see hordes of morons in places where they shouldn't be.
My personal survival depends on you, because I don't have a
steady job. If you can afford it why not send $5 or $10 to the
address on the cover, I could sure use it. Keep your eyes open,
I plan to publish many more essays as time moves on, both on the
topics presented here as well as others.
Perhaps if the venture works out I will be able to complete
my academic goals. I was pursuing a program based on mathematics.