Deflation Made Simple II

The Story of Real Money (Entry 122)

The distortion in the balance between savings and investment created by the use of money-per-furtum (Entry 121) had mixed results at first, but in time subverted the integrity of the entire Dutch economy.

One may argue, as the city fathers of Amsterdam surely did, that the building of the new city hall added prestige to the city, attracted new depositors to the Wisselbank, and encouraged greater investment in the city. After all, wealth attracts wealth. Unfortunately, however, this new, sudden appearance of new wealth was not obtained through new taxes or even money-ad-prodigo that needed to be paid back. It was stolen.

The increase in the use of money-per-furtum by the Wisselbank grew increasingly rapid as time passed, and the overall effect on the economy of Amsterdam, the province of Holland, and the Dutch Republic, would be substantial. Let us explore this growth in crime in stages as we develop our understanding of the final epoch (1689-1713) of Holland’s long-century (1579-1713). In particular, let us begin by focusing on the necessary ramifications of the building of the new city hall.

In order to build the hall wealth and labor that was previously devoted to other economic activities had to be drawn away from those activities. This additional demand resulted in a temporary shortage of material and labor that was matched with rising prices, as competition for the same number of goods and services increased. These rising prices meant more money income (liquid wealth) for the suppliers of the materials and labor used in the construction of the hall and a drawing down of their available inventories (illiquid wealth). In effect, the ratio of liquid-to-illiquid wealth for these market agents increased, and they would be compelled either to reduce their amount of liquid wealth or increase their illiquid wealth. Wise businessmen — what we must assume that most Dutch suppliers were — would use their newly acquired liquid wealth to replenish their diminished inventories and restore the balance. Wise workers, primarily skilled labor, would surely increase their personal inventories. And, there was, of course, some liquid wealth left over in the form of windfall that was spent on celebration and the destruction of others’ wealth (Image 8) — the natural outcome of money spent on consumption.

As Dutch suppliers sought to replenish their inventories, demand for the goods and services used by the suppliers whose output replaced these inventories also increased. In effect, the suppliers to the suppliers would then be faced with the same problem of an increase in their liquid-to-illiquid wealth ratio and would surely engage in activity similar to that of those closer in line to those contracted to build the city hall. In effect, prices rose further and more wealth was destroyed.

This same effect repeated itself over and over again as it reverberated across the entire supply chain, as well as any and all markets that fed into the chain. In the short-run business activity increased, but in the medium there was now less wealth and a new city hall. The long term had yet to play out.

Now consider those who had only their labor to offer and whose only illiquid wealth (inventories) was what they consumed when they were short of cash (liquid wealth). Higher prices meant a more rapid depletion of their liquid wealth, and a consequent depletion of their illiquid wealth, as they sought to retain a balance between these two forms of wealth. In effect, the workers who were not at the head of the supply chain would be impoverished, if they did not work longer hours.

Working longer hours necessarily resulted in less time for sleep and leisure, greater stress, and more disease. In effect, every worker except those drawn into the new construction with higher wages suffered the brunt of the new spending while those in city hall and the Wisselbank enjoyed the luxury of their newly constructed building. In summary, there was a general transfer in wealth from the poorest to the thieves!

In contrast, the Dutch peasants fared well, because the value of their produce increased, and those who engaged in cottage industries could now charge more for their labor.

Further, because the Dutch economy was an open economy, Dutch traders profited from the general price rise by selling their imported wares and commodities at the higher local prices while paying the same at their point of origin. How they spent their money was crucial. For, if they used it to supply the Dutch economy with even more goods, prices would be driven down, and everyone would be better off — even the disenfranchised workers.

In the end, most workers were at the mercy of their employers in the short-run, and so long as the church remained strong, their suffering was surely minimized. Then too, one could always find new employment — what is the beauty of being a voluntary agent in a free-market with real money savings.

Still, the pandora’s box of late 17th century Holland had been opened.

In liberty, or not at all,
Roddy A. Stegemann, First Hill, Seattle 98104