Saturday, July 2, 2011

Unplug the Money Machine (or: Honest Money is the Answer)

Guest Post
by Pat Fields

We seem to naturally want to ascribe nefarious underpinnings to the pivotal economic events that have led us to our present condition. As an exercise in contrarian examination, I’ve intentionally omitted the standardized conclusions arrived at by the great bulk of economists, to rather arrive at far different appreciation than other observers. Moreover, this alternative perspective reveals a surprisingly simple and non-cataclysmic solution to our conundrum.

I begin at the common notion that debasement and ‘clipping’ of coin was a procedure to commandeer value. When, however, the force of what I’ve deemed the ‘Population Demand Factor’ is brought to bear on the scenario, in combination with notional accounting, there appears instead, an honestly reasoned practice intended to normalize the prices of goods in the face of constantly appreciating coin.

While there are extraordinary periods in history, when abnormally large discoveries (or ‘acquisitions’) of money metals are introduced into economies, the average of their recovery is slightly lower than the growth trend of human population. Thus, my ‘Population Demand Factor’ yields the effect of slightly increasing the co-ordinate value of money. But, a utility imposed upon money is as a rudimentary accounting mechanism; ‘counters’, if you will. Consequently, one learns to perceive one’s self as ‘prosperous’ by the … number … of coins gathered, when their true worth is in their averaged trade ratio against the grand spectrum of goods.

Nevertheless, it’s well established that though these ‘monetarists’ may have altered coinage to suit their earnest conceptualization of accounting, participants in the markets counteracted so that still no more or less trade was accomplished than the weight and fineness of coin accommodated. The ‘Population Demand Factor’ was responding to the quantities of metals, not the numbers of coins. Clearly, to allay price depreciation of goods and static or declining accumulation of coins, a different means would need to be devised to automatically depreciate … money.

Here again, I divert from presuppositions as to the motives of the earlier bankers (leaving their current reputation to stand without challenge). This, it here seems more logical, is when the notion of banknote ‘money’ arose as the solution to the quandary of coin’s indomitable appreciation. The decision to counterbalance media in tandem with the ‘Population Demand Factor’ was already very long established. Debasement, however, had proven, time and again, to fail the task. So, it was not the bankers’ object to ‘fleece the sheeple’. It was to keep the accounting function intact. It seemed plausible, that if the depreciation of ‘money’ could be accomplished at the same rate as coin would normally appreciate, prices would not erode commensurately and the psychological accounting effect of ever more  ‘counters’ would be preserved as well. The only roadblock remaining was to control rates of ‘money’s price’, or interest and that necessitated the notion of co-operative ‘central banks’.

What those bankers and their sponsoring government operatives neglected to foresee, was that the coinage, trading pari passu with their banknotes continued to respond to the ‘Population Demand Factor’ regardless to their countermeasures and was withdrawn from circulation. Once it was all removed, no other ‘money’ could alleviate the drain on circulation due to interest service funding. Thereafter, the interest service needed to be borrowed in addition to the banknote principal. In essence a ‘perpetual money machine’ came into being. Still confident that their control of the interest rate would keep the ‘thing’ from becoming ungainly, the bankers and governments considered the ancient ‘barbarous relic’ to be buried forever. How wrong they were. How utterly wrong.

If I’m not mistaken, I believe America was last to acquiesce to the ‘gold standard’ and the last to relinquish its de facto silver currency. By about 1967, when all silver was removed to private holdings, charts of ‘money’ growth began to reveal a demonstrable parabolic rise. It is at this juncture where the ‘money machine’ became an insatiable Maw. With no other currency to function as interest service funding, there was no other source for the currency but from the sole source of the principal itself. Plainly, the ‘old’ interest became further principal at ‘new’ interest … all compounding on itself. Still, the bankers believed that this infinite co-generation of currency and interest was manageable through the facility of rate controls. Today’s astronomical growth of currency, despite abysmally low rates … while responsible banks, businesses, governments and individuals frantically scramble for amortization of principal … and … interest service funding; mortified at the thought of entangling themselves in still more debt, is like a huge bulbous Zeppelin come loose from its moorings in a fiscal gale like none ever before witnessed and serves as proof of how terribly wrong this long train of ‘socio-economic engineers’ has been for millennia.

When schemes to divorce ‘money’ from the panoply of other goods at market, along with its own supply-demand qualities, the mechanism for accurately gauging rational pricing along the entire spectrum is rendered moot. Fundamentals of particular items or categories of goods can be suggestive of their prices, but rarely so firmly as to smoothly run their course through the markets. Better that money gradually rise in value and goods coincidentally fall in price, than to suffer the awful fate of fiscal cacophony rapidly bearing down on us.

Yet, without an iota of confusion or discord, the event can be easily and smoothly averted. Banknotes still embody a real residual purchase power remaining from their inceptions. The solution, then, is to ‘harden’ them at that expression without resort to the names and fiat numerations despoiling coin from before the Roman Republic.

In the case of the American example, its remaining purchase power is 3% of its original.  Three 1912 cents equal a 10 gram copper piece. Thus, if all American banknotes were de-legitimized for trade and recalled in direct exchange for 10 gram coppers; then all current prices, wages, account balances and financial superstructure would carry on unabated except perhaps for rounding to the nearest quarter copper due to sizing.

As copper money from the time of the 18th Dynasty of the Egyptian Pharos to the present has hovered within a 100:1 ratio to silver, trade in amounts greater than 10 coppers can be so accommodated in silver while the free market determines silver’s proper current ratio to gold (and so forth through rhodium). Assiduous savers would again be rewarded for their self-sacrificing frugality, interest be damned; their resulting capital formation would again furnish grist to the most complete and meticulously conceived plans of productive entrepreneurs; bankers would return to their proper function of fiduciary bailors; and, politicians would return to their prime obligation of protecting the Public’s Liberties. All overnight, without a drop of blood, sweat or tears.