Deflation Made Simple (Part II)

A falsely vilified phenomenon (Entry 155)

Yesterday, we made it clear how the issue of counterfeit spread the cost of failure across all of society, and minimized the loss to the banker who issued the counterfeit. Further, we showed that the lending of counterfeit encourages failure by making it easier for entrepreneurs to engage in projects that they would not otherwise undertake, if the banker were constrained to lend only real wealth.

When historians write about the Industrial Revolution and the emergence of capitalism they give praise to the British banking system as the great facilitator of the resulting economic growth — growth that surely would have occurred despite corrupt British banking practices. There is little doubt that the growth would have been slower, but it would surely have been achieved with far less human sacrifice and damage to the environment.

Let it be said, that nature, like human habit needs time to adapt, and that the massive extraction of resources in one part of the world and their subsequent reappearance in another via the VOC and other commercial ventures of the day was disruptive of the ecosystem at either end of the resource transfer.

This does not mean that these disrupted ecosystems could not heal or even adapt and transform into new ones. Nature is obviously very flexible, else humanity would never have evolved. Rather, this healing and/or adaption takes time, and in the interim both nature and humanity can suffer enormously as history has repeatedly shown.

Sound money serves as a check on too rapid growth, because the ratio of savings to investment — real resources set aside to be employed in the production of new fixed assets and intermediate goods for the purpose of producing other consumable goods and services are kept in balance. When sound money is present, growth does not occur faster than society as a whole is inclined to grow. Sound money insures that ambitious politicians and corrupt bankers do not disrupt this balance for their own personal gain.

In a system of sound money the rate of growth accurately reflects the willingness of the people to sacrifice today for a better tomorrow. Those who would argue that people must be forced to grow, ignore the natural proclivity of the species to advance its own progeny. Indeed, this sacrifice need not be imposed by individuals seeking to aspire far beyond what society as a whole can comfortably bear. Personal ambition is salutary until it becomes unchecked by those who are sacrificed against their will to realize it.

The real tragedy, however, is not the human and environmental damage that took place in the 18th and 19th centuries, and the enormous political upheaval in which it resulted. Rather, it is that we still have not learned from this experience some three hundred years later. Not only have we allowed ourselves to be duped, but the damage has worsened as money-ex-nihilo has become the principle source of money-ad-prodigo (Images 100-102 and Entries 109-111, 114-117, 122, 131, 136, and 145-146) The state has taken over in the service of itself and the corrupt bankers who provide the money-ex-nihilo that has allowed this take-over to occur. What the state and its corrupt banker friends are doing is neither just, nor Christian. It is immoral and should be stopped.

So long as money remained real the state was constrained by how much it could borrow and tax; there was no backdoor by which it could cheat its citizens and corrupt the free-market system as a whole. If the state wanted more, for whatever purpose, it had to go directly to the people — the owners of the real wealth — whom it purported to serve and demand, if it were so inclined, directly to their face. Indeed, the growth of the state was constrained by the will of the people in direct confrontation with the people.

Now, this does not mean that the state does not have the ability to impoverish its citizens in the absence of a corrupt monetary system. We will observe this in the very near future. However, a corrupt monetary system makes it much easier for the state to do so. Money-ex-nihilo is the great facilitator of state corruption.

Perhaps you have noticed that up until this entry I have not once uttered the word capitalism, and have only used the word capital nine times — less than six times per 100 entries or images on average. Rather, I have used the expressions free market and money-in-use.

The word capital has two common and important meanings within the context of voluntary free markets. On the one hand, capital can refer to the fixed assets and intermediate goods created and employed in the production of other goods and services. On the other hand, it can refer to the money and therefore the real resources set aside for use in the creation of these fixed assets and intermediate goods (Images 18 and 19). Money-in-use refers to this latter interpretation of the word capital. Indeed, the two expressions are synonymous in this context.

Now, I have purposely avoided the use of the word capital to insure that there has been no confusion between money-in-use (real capital) and money-ex-nihilo (phony capital). For, it is this latter that has given the free market system a bad name.

The word capitalism was invented by a communist who poorly understood the free market system and focused on the exploitation in which money-ex-nihilo necessarily results. Karl Marx’s great contribution is that he understood that something was clearly wrong! Unfortunately, he did not know how to correct it and still preserve the miracle of money, relative price, and the voluntary free market system.

Unfortunately, those who would defend capitalism against socialism fail today to distinguish between money-in-use in a real economy and money-ex-nihilo in the corrupt economic system that the free market system has become. As a result, they fail to provide a solid defense against the enemies of the free market system. Rather, they finish by defending a corrupted form of one state against another form of state that promises even greater corruption — namely, socialism.

If we have one lesson to learn from the 20th century, then it is this.

Alas, the underlying free-market system that gave rise to the success of Western world, and that we all should applause, is barely recognizable, but in theory — a theory that is no more an accurate description of reality today than the corrupt utopian future that Marxists are promising our children for tomorrow!

In liberty, or not at all,
Roddy A. Stegemann