Ok now before we get to the solutions of the problems laid out in my original diary, it’s time to flesh out more of the history of money itself.
At the time of the Norman Conquest of England (1066) approximately 10% of the native population was enslaved. By the 1600’s, this practice was pretty much gone.
As the rulers of England expanded their holdings to include Ireland however, up to and including the rule of Oliver Cromwell (1659-1663), the people of Ireland were forced into slavery, especially in British colonies overseas in the Caribbean.
From there on out, outright of slavery of foreign peoples (mostly Africans but also indigenous peoples of the New World) was forbidden (by 1840’s in Britain). But the “workhouses” as described in Dickens novels existed in Britain. People with debts or who were otherwise too poor to survive otherwise were forced into a system similar in many ways to the Soviet gulags.
Concomitant to this abolition of slavery (and the complete dissolution of feudalism) was the rise of capitalism. But first let’s rewind a bit.
A lot of people know Henry VIII from history due to his many wives but what’s less known about him is the “Act of Supremacy” which gave him legal permission to disband monasteries and confiscate their property. In essence, he looted them for their wealth – grabbing their gold and selling off their lands.
Edward I did something similar on a lesser scale in 1303. And several pogroms against Jews during various reigns of British/English monarchs were instigated for similar reasons – to seize wealth.
Prior to capitalism, wealth was something tangible – mostly either land or gold. The only way for a ruler to increase his or her wealth was to either force people to work for free (outright slavery or the tithes of feudalism) or seize someone else’s wealth. This was usually done by invading another country (war) but could also be stealing it from the monasteries or Jews or whomever else had it.
Capitalism however creates a second mode of money – credit. Wars and sacking monasteries were fine when they “succeeded” but if a ruler invaded a country and lost then they would soon be relatively broke (ironically the British Parliament came into existence precisely for this reason – the king needed to borrow money from his nobles). In 1694, the first central bank (The Bank of England) was created precisely to lend the King of England money to fight a war (in what is now today Holland).
From then on out to the present day, every war (by the major powers) has been fought this way – borrowing credit money. Whether a person supports a particular war as “just” or not, it’s imperative to realize that the money to finance all wars today (by the major powers) are done on credit.
The U.S. government is currently about 9 trillion dollars in debt and doesn’t have enough money of its own to fight a war in a toilet stall.
Since 1694 then all major countries have entered into the same “scheme” or arrangement – a bank lends the government money that it doesn’t otherwise have. In 1694 there was both “real” money (i.e. gold, silver etc.) as well as credit money but this “credit money” has now superseded all “real” forms.
Today you can certainly buy/sell and own gold but it’s absolutely useless in a real sense as money unless you can pay off your debts with it. Most critical of these are your taxes (i.e. payment due to the government). The only way you can pay the U.S. government today (whether income taxes, business taxes or customs duties, etc.) is with Federal Reserve dollars, which were created out of thin air in the first place as debt.
So if money (which is now 100% debt) is a spiderweb, with the center being the central bank with the power to create money (Federal Reserve in the U.S.), then the next layer out would be the central banks, the next layer the national banks and the various “financial services” industries and the outer edge of the web would be companies and ordinary people.
The problem with this system is that the closer you are to the center, the more money you make from simply “handling” money because everyone gets a “cut” – there’s a lot of “middlemen” between an ordinary citizen holding a one dollar Federal Reserve note and the actual issuers of that money.
Prior to capitalism, those who had wealth were those who had the military force to take it from others and keep it hoarded. If a peasant could somehow break into a noble’s castle and load up the gold in a sack and escape with it, then he would have the wealth.
But there’s no way to “break into” a central bank. The vast majority of money is entirely in computer circuits and doesn’t exist in any tangible form (paper or coins) at all. And you can’t start up your own bank unless you have special permission from the legislature. You can open up your own shoe store or start a blog or just about any other form of commerce by paying a fee for some paperwork – but a bank? Only by the passage of legislation of the government can you start your own bank.
The modern banking system therefore is the backbone of capitalism (aka “free market” economy) but ironically is itself not competitive – it is a monopoly in every sense of the word. There was a time in U.S. history had free market competition amongst banks but this ended up being a disaster for many complicated reasons.
Essentially this boils down to a system today where a private entity (Federal Reserve in the USA) creates money that you yourself are obligated to use (to pay taxes if nothing else). And since all the money now created is itself debt, this means you are forced into debt solely by the status of your citizenship.
I should mention here that Communism and the economic policies of Karl Marx were an attempt to escape this system. The Communist solution was to make the government fully in control of the money supply and centrally plan the economy. This ends in disaster for a variety of reasons but the two biggest ones are 1) free market forces are much more dynamic and robust and will end up defeating a centrally planned economy wherever they compete and 2) centrally planned economies are unwieldy and bureaucratic and collapse under their own inefficiencies.
So I’m definitely not advocating a Marxist economic theory here. But there are viable solutions that ARE free market (capitalist) that address the major problems with the current models.
Most people are aware of the “Robber Barons” and know that a government which is mostly “hands off” a capitalist system will inevitable lead to monopolies and the concentration of wealth. It’s worth noting that this happened several times even back when the U.S. had a “real” currency that was based on gold (and not credit money like now).
So how to avoid that? Well the current system is not much better. Essentially big corporations have tremendous political power and influence over the government although there are some limitations in play and using a roughly Keynesian strategy, the central bank injects money into the economy at large (including an increase of government spending) to help “balance” that out.
But it’s a clumsy system and there is still a lot of concentration of wealth and a glance at the current tax code shows just how unwieldy the whole system is. The more “socialist” system such as what somewhat applies in Britain and especially Scandinavia is just to increase taxes on the upper levels of wealth and hope this balances things out.
It seems like there’s a very difficult balancing act in modern economies – on one hand government intervention to try to even things out for as much of the population as possible (anti-trust, tax policies, customs duties) and on the other hand letting the markets be free and dynamic as this is the engine of new wealth and economic growth.
But is there a way to let the free markets be as FREE as possible, i.e. to maximize new jobs, new businesses and new investments WITHOUT wealth being accumulated by the select few who either have the political connections or influence or regulatory standing (i.e. banks)? And is there a way to do it without 40,000 pages of tax codes and seasonal political promises and pork and cutbacks to lobbyist groups, etc?
Actually there is. A man named Silvio Gesell noticed that capitalist economies use money as a kind of “life blood” that it has to keep circulating for an economy to be healthy. The main problem is that when people have an incentive to hoard it (or not spend/invest it), economic growth comes to a halt (as in the Great Depression).
So how can money be made to keep flowing? By providing an incentive. And a small town in Austria named Worgl took up Gesell’s ideas to see if they would work.
In 1932, during the middle of the Great Depression (1,500 people out of 4,500 residents were unemployed) the government of Worgl created a second currency. The regular currency at the time was the Schilling and Worgl printed and distributed 32,000 “Free Schillings” to people to use in the same ratio as regular Schillings.
To make people have faith in this new currency, 32,000 regular Schillings were deposited in a bank and the new currency could be swapped out at any time for the old (“regular”) one.
The difference with the “Free Schillings” is that at the end of the month, whoever had physical possession of the currency had to buy a stamp equivalent to 1% of the note’s value and stick it on the note itself for it to continue to be valid currency. This is essentially a 1% “fee” on possession of the money.
So what did people do? Largely they SPENT the Free Schillings before the end of the month to avoid that 1% fee. After one year that batch of 32,000 Schillings had circulated through the local economy 463 times (for a total payout of over 14 million Schillings) while ordinary Schillings were circulated just 21 times.
The fees collected by the government (the 1% stamp) for use of this money allowed the town to pay for a number of public improvement projects (road construction, bridges etc.). The unemployment rate dropped drastically. And people even paid their taxes early just to avoid that 1% fee.
Worgl prospered and other towns in Austria were extremely interested in the new money system and were moving to adopt it when the central bank of Austria stepped in and using its political clout had the “Free Schilling” outlawed. And Worgl went back to a high level of unemployment (more on Worgl’s experiment here).
The Worgl system worked so well for a variety of reasons. One is that the more often money changes hands (is spent) the more the economy grows (known as “liquidity” in financial speak). Secondly and extremely important, the new currency was valid for paying off government debts – no exchange into another currency or form of payment was needed. And because it was the government itself which issued the money (as opposed to a private bank) it was the government which received the revenue off the USE of money.
The ordinary citizen of Worgl received payments and income in a mix of both the regular Schilling and the Free Schilling but because of the 1% fee spent all their Free Schillings first. And aside from general living expenses (food, water, etc.) this incentive to get rid of cash meant that people were naturally inclined to trade it for things of actual worth.
But why would people want money they have to pay to use rather than ordinary money which you can hang onto and receive interest payments for? Because of inflation. When I was a kid the tables at Wendy’s had a facsimile of old newspaper advertisements for products and the prices were all amazingly low – 2 cents for this and 50 cents for that. Inflation is pretty easy to see within your own lifetime.
When a central bank (or government) keeps creating money out of nothing, this devalues the money that’s already in existence. This means that over time a dollar or euro or anything else intrinsically becomes worth less and less.
But with a Worgl system, if it were to be implemented on a larger scale, the theory is that the more fluid the money flows through the economy (liquidity) the less likely it is to be hoard or “held back” (for much more on this, see here) from being spent and therefore the money supply would be roughly finite. This means that the sustained value of the money itself would be worth more than debt money is (assuming lent out at interest to someone else) with its inherent inflation.
With the current system of money we have, there is more money to be made by lending it than there is in investing it. The financial services industries and the banks profit from the fees in every transaction while an investment (say in a new business) is not just less profitable in the sense the income may not be realized (the business fails) but that the money gained in the long term will be worth less than it is today.
A Worgl-type system works the opposite – holding money causes you to lose wealth in the short-term while investing it in long-term projects ensures that they’ll be worth more in the future (or roughly the same as the present) due to the LACK of inflation. Worgl is an area of Austria where it made sense for people to plant trees for timber during the “Free Schilling” era because if it had continued, the rate of return for that investment would have been MORE than holding onto the money itself.
Our current system is plagued by credit cycles which lead to widespread problems. I’m sure everyone is familiar with the subprime mortgage issue. But before that there was the LTCM bailout, the “dot com” bubble bursting, the Savings and Loan crisis, the 1987 stock market crash, the Great Depression, the Panic of 1907, etc., etc. Not to mention the East Asian financial crisis, the Russian financial crisis of 1998, the Argentinian economy collapse, etc. And by God let’s not forget Enron, who was “somehow” able to fool the SEC into thinking it had properly balanced its books but 6 students from Cornell realized they were lying in 1998.
All of these crises and bailouts and bubbles and subsequent collapses are paid for by you and I – the ordinary people. People have their pension funds or investment vehicles (401K, IRA, etc) get wiped out. And then the people pay twice because the central bank has to inject money that causes inflation. And on top of this there is all the money the government spends (which we pay for) in actual bailouts of these companies.
Besides enduring poverty (debt enslavement) this also leads to a host of things which a quick look at the news will make readily apparent:
The Bank of America is buying out Countrywide and this will be partly financed by the American taxpayer.
And recent British Prime Minster Tony Blair is going to make over two million dollars as a “part-time adviser” to an American bank which coincidentally was recently “chosen” to run the new Trade Bank of Iraq which coincidentally will handle Iraq’s oil contracts.
And of course let’s not forget the entire subprime mortgage mess.
Now time for some quotes:
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
-Thomas Jefferson
And:
“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.”
-Abraham Lincoln
And:
You are a den of vipers and thieves. I intend to rout you out, and by the Eternal God, I will rout you out… If people only understood the rank injustice of the money and banking system, there would be a revolution by morning.”
-Andrew Jackson
And:
“I have unwittingly ruined my country… We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”
-Woodrow Wilson
Now there are some people who are trying something similar to the Worgl experiment right today. One of which is the Chimgauer (German only) in parts of Germany (more here and here in English), as well as the Toronto dollar. These are known as “complimentary currencies” because they are not legal tender for debts. They do help the local economies a lot and are worth looking into.
But let’s wrap this up by getting back to Ron Paul. As I said, he’s not an economist but at least he has tried to do something to fix this broken system.
A company created something called the “Liberty Dollar” made out of silver (with Ron Paul’s image on them) as an alternative to the Federal Reserve dollar. Creating a competing currency is a crime and people have been arrested for this.
But Ron Paul did successfully get legislation passed (in 1985) to get the government to produce legal currency (coins) of silver, gold and platinum. What’s so ironic is that a 1 ounce gold coin has the value of “50 dollars” stamped on the face but is worth today about 850 dollars.
A businessman in Nevada used this loophole in a very novel way and ended up winning a court battle with the IRS. As far as I can tell this loophole still exists.
And last but not least I have to commend Ron Paul for introducing legislation to allow competing currencies (ala the Worgl system) to become legal.
For a short history of Ron Paul’s beliefs on the subject of money as well as a good introduction to modern monetary policies I highly recommend this link.
So there we have it – a long diary but this is an issue that’s fundamental to every citizen of the United States, not to mention the entire world. Very few of us are old enough to remember the Great Depression but if the current financial system crashes the next depression will be far, far worse.
There are viable solutions to this mess and together we can do something.
Pax
