BillBoard
22nd January 2011, 05:28 PM
Money—and how it rules our lives
http://www.elegant-technology.com/ETsix.html
“It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford
Money—there is no subject that can more deeply divide predators and producers. For the predators, the manipulation of money represents the final bastion of power in a world where they are becoming utterly obsolete. For the producers, money is, at best, a subject of love and hate.
William Greider, in Secrets of the Temple, his magnum opus on the Federal Reserve System, tells his readers that there was once a time when discussions of monetary policy were so common that they could be heard in small town cafes and barber shops. I know for a fact that Greider is correct because I am just old enough to have heard some of those conversations in my youth.
It has been over 30 years since an old-fashioned prairie Populist first sat me down to explain the workings of money. In those years, I have read every book on monetary policy I could find, watched the Fed religiously, and have written extensively on the subject.
Monetary policy is not an easy subject to follow. There is a saying that "only two people really understand money and they disagree." It may not be that bad--but it is close. Most writers on monetary matters have an axe to grind. Some lapse into convoluted conspiracy theories usually involving a Jewish or Freemasonic plot. Others merely postulate obscurantist apologies for the ultimate wisdom of bankers. But I have found in 27 years that even though my views have become much more elaborate, the basic lessons of that Populist have gone unchallenged.
Understanding money is a liberating experience. Suddenly, everything makes more sense. The widespread confusion surrounding the S&L debacle, the peril of the FDIC, and the recession of 1990-91 means that many who would attempt to understand these economic disasters could profit from those lessons from my youth.
And, it turns out, money is not so very hard to understand.
So even though the debates and assumptions about monetary policy are virtually unknown to modern Americans, they were vigorously debated from the dawn of the Republic until about 1940.
The fifty year hiatus in monetary discussions since 1940 prevents most Americans from understanding clearly the problems of banking in the New Century. Unfortunately, the lack of popular understanding of the issues eliminates the political pressure necessary for a much needed banking reform. This is a tragedy because the current failure of old-fashioned banking provides the perfect opportunity for a critically overdue modernization of the assumptions and practices of lending. Modern banking may be computerized, but the rules and assumptions behind those computer programs are still essentially preindustrial.
An examination of these basic assumptions will show why they are inappropriate for modern societies. Preindustrial international monetary policy has emerged as the key impediment to an industrial-based solution for life-threatening environmental problems.
Preindustrial Assumptions
1) Economics is about scarcity. Money defines this reality only by being scarce itself. Money has value because it is rare.
2) Charging interest is considered the service fee to the banker for the job of managing money. In the Kinderspiel version of lending, a banker is considered a sober citizen who finds money that is not being needed, pays a low rate to induce the owner of this money to deposit it in his bank, lends it to someone else who needs the money at a higher rate, and pockets the difference.
3) Lenders have the right to charge any rate of interest that a borrower will agree to.
4) Small borrowers are risky borrowers and must pay higher rates of interest.
5) Lenders have recovery rights from borrowers. Failure of any enterprise is assumed to be the fault of the borrower (even if the failure is due to natural disasters) who is expected to repay the loan with interest no matter what.
6) Lenders have the right to demand payment at any time even if that action destroys the borrower.
The New Reality
Because the industrial revolution brought into being methods that vastly increased output, it ended the economics of scarcity for the production of goods. With this new reality, economic arguments would center on the problems of over-production and unemployment. The basic monetary assumption became flawed which, in turn, called into question the validity of all the other preindustrial monetary assumptions.
From the very beginning, the industrialists faced the problem of a money shortage. It should be remembered that Wilkinson, considered one of the fathers of the industrial revolution in England, solved the problem by minting coins himself with his likeness on them. The mere fact that he was forced to create money as well as steel foreshadowed a situation where all breakthroughs in production would spark controversies about the nature of money. Must money be a precious metal? Must it have a noble likeness on it? Could anyone create money? What made Wilkinson’s money valuable even though it was quite untraditional? Why should the people who have the power to create money decide which enterprises shall succeed? Why shouldn’t the supply of money grow to match the enterprise of a nation?
Gilded Age America saw the introduction of mass-production techniques combined with a deliberate shrinkage of the supply of money. Producers of all sizes were hurt, but it was the farmers of the prairies, who needed the products of industrialization to succeed, who were hurt the most. There were enough of them to form mass political movements around the question of monetary policy.
From an industrial point of view, the most progressive monetary theory of the age was provided by the Greenback Party. The collapse of the party, however, did not end its influence in monetary matters. Charles Macune and Harry Tracy of the National Farmer’s Alliance, frustrated by financial interests in their attempts to organize agricultural cooperatives, refined the Greenback theories in their brilliant subtreasury plan. The Alliance found that farmers, like any other producer, eventually encountered the money men—people with the power to ruin any effort.
Monetary theory became in many ways, the dominant political issue of the age. The National Alliance evolved politically into the People’s Party (Populists) in 1892. By 1895, the monetary lines had been drawn. The Republican party was wedded to the gold standard, the Populists stayed with their paper currency theories, and the Democrats staked out a compromise position around the free coinage of silver.
From the Populist perspective, the silver position was barely an improvement over the gold standard, but in the election of 1896, a decision was made to fuse their party with the Democrats because of the anti-gold sentiments so eloquently articulated by William Jennings Bryan. The Populist-Democratic fusion went down to defeat at the hands of McKinley and with it, the Populist Party.
Even then the issue did not die. In the election of 1912, the three major parties—Republicans, Democrats, and Progressives—all had monetary planks in their political platforms. This political consensus led to the formation of the Federal Reserve System by an act of Congress on December 23, 1913.
The new Fed sought to accommodate the need for a flexible and managed money supply as demanded by the old Populists. The idea of a central bank was sold to the congress by Bryan and took shape during the administration of Wilson, a Democrat.
The essential Republican position on the gold standard was kept intact. So was the dominant role of the New York banks. In fact, the Fed was never the compromise it appeared to be though it was an obvious improvement over the chaotic banking practices it replaced. Possibly the strangest feature of the Fed was that while it took over the functions of a central bank, it was never a government institution and remained under private ownership.
Almost immediately, the Fed mismanaged the currency, producing an agricultural depression that began in 1920 and continued throughout the decade. As Bryan had predicted in his “Cross of Gold” speech in 1896, agricultural problems would always migrate to the city. In 1929, the agricultural depression became the Great Crash. As late as 1976, Wright Patman, the longtime chairman of the House Banking Committee, was blaming the Great Depression on the Fed in his comprehensive study of that institution.
The current question that presents itself is: How did such a turbulent political issue die so completely that virtually every American born after 1940 barely understands that monetary policy is even a subject worthy of study and debate? There are really only two answers:
1) During most of Franklin Delano Roosevelt’s administrations, the Fed was run by an industrial literate from Utah, named Marriner Eccles, who managed it in the interest of the whole country rather than of the New York banking establishment; and
2) Other government programs of the New Deal such as the Commodity Credit Corporation fulfilled needs left untouched by the monetary reform that produced the Fed. The tradition of Eccles and the modifications of the New Deal produced a post-World War II prosperity that effectively eliminated further monetary discussion except for some residual criticism from the political far right.
The basic flaws of the Fed, however, had been merely papered over. It was still structured around the preindustrial monetary assumptions that have misguided lending since the dawn of money. Should the leadership of the Fed fall into the hands of anyone who subscribed to the old-time religion, there was absolutely nothing to prevent a repeat of the problems of the 1920s. In 1979, Jimmy Carter appointed Paul Volcker to be the new Fed chairman. Volcker was a preindustrial monetary fundamentalist if there ever was one. The economics of the 1980s immediately began to look suspiciously like the 1920s.
So far, only the structures of the New Deal such as the FDIC have prevented a total 1929-style economic collapse. Unfortunately, as the New Deal structures themselves begin to crumble, the fundamental flaws of the Federal Reserve System are being exposed again.
A new Marriner Eccles could save the United States from a 1930s-style depression. Certainly, that is what everyone hopes for. Alan Greenspan, the current Fed Chairman, is no Marriner Eccles. He is, in fact, more extreme than Volcker. He actually looks to the period between 1873 and 1896 as a monetary model. Those times were catastrophic for almost all the nation’s population, and Greenspan’s thinking may trigger a catastrophe of a similar or greater magnitude.
The time has come for the rest of us to dust off the monetary response provoked by the thinking he admires so much. Only this time, there can be no doubts as to the nature of industrialization. Maybe it is time to correct the basic flaws in the Federal Reserve System so that loose cannons like Volcker and Greenspan cannot wreck the economy of a whole nation.
Industrial Monetary Policy
Many economists, political thinkers, and social observers have wondered at the contradiction that the great strides in productivity of the industrial revolution have saddled industrial societies with chronic overproduction and unemployment. To a producer, it is not strange at all. Rather it is a matter of preindustrial monetary systems failing to accommodate the potential of industrialization. To realize the full potential of industrialism, producers, like Wilkinson and his successors, must insist on new monetary thinking.
Industrial Monetary Assumptions
Rule #1. Money is only information.
We have Richard Nixon, surprisingly enough, to thank for ending any confusion on this subject. Money has taken many forms throughout history from cows to gold, and from cigarettes to paper.
When the U.S. finally went off the gold standard in the 70's, many predicted dire consequences. Without a finite substance to 'fix' the value of money such as gold, there would be uncontrolled inflation--the doomsayers warned. And there was an ugly bout of inflation in the 70's. But with the Fed policies of Paul Voelker, a recession was triggered that was just as ugly as any panic from the days of the gold standard.
Money is now merely positive and negative charges stored somewhere on a computer chip. The physical manifestation of money has changed, but the real nature of providing information has not changed at all.
In fact, since computer chips are the heart of the 'information age,' the issue may be easier to understand now than ever before.
Rule #2 The most interesting information that money conveys is that of value.
There are many computer chips on the planet with very interesting information stored on them, but nothing affects people like the information about the size and quality of their bank balance. If the balance is large, houses, cars, sexual fulfillment, fine food and power are available to the individual fortunate enough to find that information attached to his name. If the balance is small, the same individual can find himself eating out of garbage cans and sleeping under a bridge.
Rule #3. Humans determine the value of money.
Money has value because it can be exchanged for something else. For most of history, economics was about scarcity. Money defined this reality only by being scarce itself. Real estate is the ultimate example of a scarce good. The amount of land is essentially finite even though a few swamps have been drained and land, such as in Holland, has been reclaimed from the sea. But essentially the 'iron law' of money was pretty simple. Increase the supply of money, the price of real estate inflates.
The ancient world had other examples of scarcity such as attractive women, imported goods such as silks and spices, and human labor. An increased money supply would raise the price of each without changing the overall wealth of the society very much.
The Industrial Revolution changed everything. Wherever production was organized industrially, the economic problem became one of disposing plentiful goods rather than rationing scarce goods. The new reality of industrialization did not abolish the old rules--it merely added complications. While increases in the money supply only brought inflation to the pre-industrial societies, it produced new ventures in industrial societies. But even industrial societies had finite supplies of real estate which meant the old rules still applied in important sectors of the economy. Monetary policy must balance the needs of the economics of scarcity with the incompatible needs of industrialization.
With the coming of the industrial revolution came a fight over money. The new industrialists wanted more money in circulation to supply their needs. The fight, however, was really over something more basic--who was creating.
http://www.elegant-technology.com/ETsix.html
“It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford
Money—there is no subject that can more deeply divide predators and producers. For the predators, the manipulation of money represents the final bastion of power in a world where they are becoming utterly obsolete. For the producers, money is, at best, a subject of love and hate.
William Greider, in Secrets of the Temple, his magnum opus on the Federal Reserve System, tells his readers that there was once a time when discussions of monetary policy were so common that they could be heard in small town cafes and barber shops. I know for a fact that Greider is correct because I am just old enough to have heard some of those conversations in my youth.
It has been over 30 years since an old-fashioned prairie Populist first sat me down to explain the workings of money. In those years, I have read every book on monetary policy I could find, watched the Fed religiously, and have written extensively on the subject.
Monetary policy is not an easy subject to follow. There is a saying that "only two people really understand money and they disagree." It may not be that bad--but it is close. Most writers on monetary matters have an axe to grind. Some lapse into convoluted conspiracy theories usually involving a Jewish or Freemasonic plot. Others merely postulate obscurantist apologies for the ultimate wisdom of bankers. But I have found in 27 years that even though my views have become much more elaborate, the basic lessons of that Populist have gone unchallenged.
Understanding money is a liberating experience. Suddenly, everything makes more sense. The widespread confusion surrounding the S&L debacle, the peril of the FDIC, and the recession of 1990-91 means that many who would attempt to understand these economic disasters could profit from those lessons from my youth.
And, it turns out, money is not so very hard to understand.
So even though the debates and assumptions about monetary policy are virtually unknown to modern Americans, they were vigorously debated from the dawn of the Republic until about 1940.
The fifty year hiatus in monetary discussions since 1940 prevents most Americans from understanding clearly the problems of banking in the New Century. Unfortunately, the lack of popular understanding of the issues eliminates the political pressure necessary for a much needed banking reform. This is a tragedy because the current failure of old-fashioned banking provides the perfect opportunity for a critically overdue modernization of the assumptions and practices of lending. Modern banking may be computerized, but the rules and assumptions behind those computer programs are still essentially preindustrial.
An examination of these basic assumptions will show why they are inappropriate for modern societies. Preindustrial international monetary policy has emerged as the key impediment to an industrial-based solution for life-threatening environmental problems.
Preindustrial Assumptions
1) Economics is about scarcity. Money defines this reality only by being scarce itself. Money has value because it is rare.
2) Charging interest is considered the service fee to the banker for the job of managing money. In the Kinderspiel version of lending, a banker is considered a sober citizen who finds money that is not being needed, pays a low rate to induce the owner of this money to deposit it in his bank, lends it to someone else who needs the money at a higher rate, and pockets the difference.
3) Lenders have the right to charge any rate of interest that a borrower will agree to.
4) Small borrowers are risky borrowers and must pay higher rates of interest.
5) Lenders have recovery rights from borrowers. Failure of any enterprise is assumed to be the fault of the borrower (even if the failure is due to natural disasters) who is expected to repay the loan with interest no matter what.
6) Lenders have the right to demand payment at any time even if that action destroys the borrower.
The New Reality
Because the industrial revolution brought into being methods that vastly increased output, it ended the economics of scarcity for the production of goods. With this new reality, economic arguments would center on the problems of over-production and unemployment. The basic monetary assumption became flawed which, in turn, called into question the validity of all the other preindustrial monetary assumptions.
From the very beginning, the industrialists faced the problem of a money shortage. It should be remembered that Wilkinson, considered one of the fathers of the industrial revolution in England, solved the problem by minting coins himself with his likeness on them. The mere fact that he was forced to create money as well as steel foreshadowed a situation where all breakthroughs in production would spark controversies about the nature of money. Must money be a precious metal? Must it have a noble likeness on it? Could anyone create money? What made Wilkinson’s money valuable even though it was quite untraditional? Why should the people who have the power to create money decide which enterprises shall succeed? Why shouldn’t the supply of money grow to match the enterprise of a nation?
Gilded Age America saw the introduction of mass-production techniques combined with a deliberate shrinkage of the supply of money. Producers of all sizes were hurt, but it was the farmers of the prairies, who needed the products of industrialization to succeed, who were hurt the most. There were enough of them to form mass political movements around the question of monetary policy.
From an industrial point of view, the most progressive monetary theory of the age was provided by the Greenback Party. The collapse of the party, however, did not end its influence in monetary matters. Charles Macune and Harry Tracy of the National Farmer’s Alliance, frustrated by financial interests in their attempts to organize agricultural cooperatives, refined the Greenback theories in their brilliant subtreasury plan. The Alliance found that farmers, like any other producer, eventually encountered the money men—people with the power to ruin any effort.
Monetary theory became in many ways, the dominant political issue of the age. The National Alliance evolved politically into the People’s Party (Populists) in 1892. By 1895, the monetary lines had been drawn. The Republican party was wedded to the gold standard, the Populists stayed with their paper currency theories, and the Democrats staked out a compromise position around the free coinage of silver.
From the Populist perspective, the silver position was barely an improvement over the gold standard, but in the election of 1896, a decision was made to fuse their party with the Democrats because of the anti-gold sentiments so eloquently articulated by William Jennings Bryan. The Populist-Democratic fusion went down to defeat at the hands of McKinley and with it, the Populist Party.
Even then the issue did not die. In the election of 1912, the three major parties—Republicans, Democrats, and Progressives—all had monetary planks in their political platforms. This political consensus led to the formation of the Federal Reserve System by an act of Congress on December 23, 1913.
The new Fed sought to accommodate the need for a flexible and managed money supply as demanded by the old Populists. The idea of a central bank was sold to the congress by Bryan and took shape during the administration of Wilson, a Democrat.
The essential Republican position on the gold standard was kept intact. So was the dominant role of the New York banks. In fact, the Fed was never the compromise it appeared to be though it was an obvious improvement over the chaotic banking practices it replaced. Possibly the strangest feature of the Fed was that while it took over the functions of a central bank, it was never a government institution and remained under private ownership.
Almost immediately, the Fed mismanaged the currency, producing an agricultural depression that began in 1920 and continued throughout the decade. As Bryan had predicted in his “Cross of Gold” speech in 1896, agricultural problems would always migrate to the city. In 1929, the agricultural depression became the Great Crash. As late as 1976, Wright Patman, the longtime chairman of the House Banking Committee, was blaming the Great Depression on the Fed in his comprehensive study of that institution.
The current question that presents itself is: How did such a turbulent political issue die so completely that virtually every American born after 1940 barely understands that monetary policy is even a subject worthy of study and debate? There are really only two answers:
1) During most of Franklin Delano Roosevelt’s administrations, the Fed was run by an industrial literate from Utah, named Marriner Eccles, who managed it in the interest of the whole country rather than of the New York banking establishment; and
2) Other government programs of the New Deal such as the Commodity Credit Corporation fulfilled needs left untouched by the monetary reform that produced the Fed. The tradition of Eccles and the modifications of the New Deal produced a post-World War II prosperity that effectively eliminated further monetary discussion except for some residual criticism from the political far right.
The basic flaws of the Fed, however, had been merely papered over. It was still structured around the preindustrial monetary assumptions that have misguided lending since the dawn of money. Should the leadership of the Fed fall into the hands of anyone who subscribed to the old-time religion, there was absolutely nothing to prevent a repeat of the problems of the 1920s. In 1979, Jimmy Carter appointed Paul Volcker to be the new Fed chairman. Volcker was a preindustrial monetary fundamentalist if there ever was one. The economics of the 1980s immediately began to look suspiciously like the 1920s.
So far, only the structures of the New Deal such as the FDIC have prevented a total 1929-style economic collapse. Unfortunately, as the New Deal structures themselves begin to crumble, the fundamental flaws of the Federal Reserve System are being exposed again.
A new Marriner Eccles could save the United States from a 1930s-style depression. Certainly, that is what everyone hopes for. Alan Greenspan, the current Fed Chairman, is no Marriner Eccles. He is, in fact, more extreme than Volcker. He actually looks to the period between 1873 and 1896 as a monetary model. Those times were catastrophic for almost all the nation’s population, and Greenspan’s thinking may trigger a catastrophe of a similar or greater magnitude.
The time has come for the rest of us to dust off the monetary response provoked by the thinking he admires so much. Only this time, there can be no doubts as to the nature of industrialization. Maybe it is time to correct the basic flaws in the Federal Reserve System so that loose cannons like Volcker and Greenspan cannot wreck the economy of a whole nation.
Industrial Monetary Policy
Many economists, political thinkers, and social observers have wondered at the contradiction that the great strides in productivity of the industrial revolution have saddled industrial societies with chronic overproduction and unemployment. To a producer, it is not strange at all. Rather it is a matter of preindustrial monetary systems failing to accommodate the potential of industrialization. To realize the full potential of industrialism, producers, like Wilkinson and his successors, must insist on new monetary thinking.
Industrial Monetary Assumptions
Rule #1. Money is only information.
We have Richard Nixon, surprisingly enough, to thank for ending any confusion on this subject. Money has taken many forms throughout history from cows to gold, and from cigarettes to paper.
When the U.S. finally went off the gold standard in the 70's, many predicted dire consequences. Without a finite substance to 'fix' the value of money such as gold, there would be uncontrolled inflation--the doomsayers warned. And there was an ugly bout of inflation in the 70's. But with the Fed policies of Paul Voelker, a recession was triggered that was just as ugly as any panic from the days of the gold standard.
Money is now merely positive and negative charges stored somewhere on a computer chip. The physical manifestation of money has changed, but the real nature of providing information has not changed at all.
In fact, since computer chips are the heart of the 'information age,' the issue may be easier to understand now than ever before.
Rule #2 The most interesting information that money conveys is that of value.
There are many computer chips on the planet with very interesting information stored on them, but nothing affects people like the information about the size and quality of their bank balance. If the balance is large, houses, cars, sexual fulfillment, fine food and power are available to the individual fortunate enough to find that information attached to his name. If the balance is small, the same individual can find himself eating out of garbage cans and sleeping under a bridge.
Rule #3. Humans determine the value of money.
Money has value because it can be exchanged for something else. For most of history, economics was about scarcity. Money defined this reality only by being scarce itself. Real estate is the ultimate example of a scarce good. The amount of land is essentially finite even though a few swamps have been drained and land, such as in Holland, has been reclaimed from the sea. But essentially the 'iron law' of money was pretty simple. Increase the supply of money, the price of real estate inflates.
The ancient world had other examples of scarcity such as attractive women, imported goods such as silks and spices, and human labor. An increased money supply would raise the price of each without changing the overall wealth of the society very much.
The Industrial Revolution changed everything. Wherever production was organized industrially, the economic problem became one of disposing plentiful goods rather than rationing scarce goods. The new reality of industrialization did not abolish the old rules--it merely added complications. While increases in the money supply only brought inflation to the pre-industrial societies, it produced new ventures in industrial societies. But even industrial societies had finite supplies of real estate which meant the old rules still applied in important sectors of the economy. Monetary policy must balance the needs of the economics of scarcity with the incompatible needs of industrialization.
With the coming of the industrial revolution came a fight over money. The new industrialists wanted more money in circulation to supply their needs. The fight, however, was really over something more basic--who was creating.