Let's End the Money Racket (Part IV)
Looking the Serpent in Its Face
Today we will examine the the third of the three difficulties with which our nation’s founding fathers were confronted, and that were “resolved” with the introduction of statutory counterfeit — namely, the perceived shortage of real money.
What Is a Market Shortage?
According to the laws of supply and demand a market shortage occurs when, at the prevailing market price, there is too little of a good or service to meet market demand for that good or service. The key word in this statement is prevailing, for it is at the prevailing (or current — the words are interchangeable in this context) market price that a shortage, or for that matter a surplus, is deemed a shortage or surplus, according to the laws of supply and demand.
The prices of goods and services are forever changing. A good example of this movement is what occurs when a merchant places a SALE advertisement on a good or service and marks it down from the previous price. The advertisement and mark-down is to encourage you to purchase the product. The goal of the merchant is to make space on his shelf for either a different product, or a newer (in the case of groceries fresher) version of the old product. Price increases work the same, but in the opposite direction. No merchant wants that his store shelves are empty. So, when he sees that a certain product is moving faster than he can replace it, he will increase the price in an effort to slow customers in their purchase of his product. Store owners only have so much space, and it is the flow of goods through this space that determines whether their business succeeds or fails. A successful business enjoys a rapid flow (including sale and replacement), and a less successful business only a lethargic flow. Important is that the price of what these merchants sell is an adjustment to insure that the flow is steady — not subject to huge fluctuations that make the cost of doing business more expensive for a variety of reasons. The store owner is not a Wall Street speculator who thrives on deep market fluctuations. Indeed, the store owner’s price adjustments insure steady cost and revenue streams that together produce a steady income for the storeowner and his family.
With the above in mind a shortage can be caused by either a decrease in the supply or an increase in the demand of the good or service in question at the prevailing price. When demand is the cause of the shortage we typically refer to the shortage as excess demand. In either case there is upward price pressure on the good or service. This price pressure causes demand for the good or service to fall, on the one hand, and an increase in the supply of the good or service, on the other hand.
With this in mind what happens when demand for the good or services is always increasing, but the supply of the good or services cannot keep pace with the increase in demand? Hopefully, it is obvious that the price of the good or service keeps increasing.
By the time of our founding we were already a rapidly growing nation. Accordingly, with each new born American, European immigrant, Indian convert, or slave there was an increase in market demand. This ever increasing demand for goods and services also brought about a steady increase in demand for new real money (specie — gold and silver coin) and upward price pressure on the value of the money already in circulation. Unless there were an increase in the supply of money to relieve this upward market pressure, the value of the current money supply continued to increase.
Understanding why the real money supply was unable to keep up with demand is historically speaking both interesting and important, but not crucial to our understanding of the dilemma that it brought about.1 For the moment, all that we need to understand is the dilemma that was created, how this dilemma contributed to the introduction of statutory counterfeit into American mainstream society, and what we can and must do to eliminate this abominable form of money.
The Dilemma
Because money is the standard against which all goods and services are traded in advanced, voluntary, free markets — namely, markets in which the buyer and seller are clearly distinguishable from two traders who engage in barter — we do not typically think of the price of money. Rather, we think of what our money can buy — in other words, its purchasing power. It is everything else that has a price!2
This said, because real money is a good, just like any other, it has its own price, and is subject to its own supply and demand. As demand for it increases those who supply it — namely, the miners who extract the precious metal from the ground — are likely to demand a higher price for its sale. In other words, the miners will expect more of the already existent coin in return for their ore. Similarly, the precious metal refineries that purchase the ore and convert it into bullion (silver, platinum, and gold bars) will demand more for the sale of their bullion, and expect more gold and silver coin in return for their sale. And, when the bullion arrives at the mint where it is turned into coin, those who purchase the resulting coin from the mint will have to provide something more in value than what was previously received for the same amount of coin. In other words, the relative market value (or price) of what they provide to the mint in exchange for the newly minted coin decreases. Accordingly, those with the new coin demand more goods and services for the same amount of coin when it is presented to the producers and suppliers of other goods and services. This demand forces these other producers and suppliers to lower their prices or lose the trade. Alternatively, those who hold the new coin would be reluctant to buy as much as they did before. But, why then would these latter purchase the new coin in the first place? Alas, another, likely alternative, is that they would not bother to purchase the new coin, and everyone else would complain that there is not enough coin to go around. In effect, the mint would go out of business, or not be created in the first place.
It is at this point where the banks and government step in to perform a crucial role. On the one hand, bankers provide a ready source of demand for new coin. For the more coin that they own, the more coin that they can lend, and with each new coin lent greater interest can be received. Further, because there will always be those who are willing to borrow, the increased cost of coin production can be passed on to those who borrow the newly minted coin. Obviously, this will slow investment, but someone with a truly good idea, will always be able to find investors, and the competition for invested money will necessarily force the best ideas to the top. What is more, there will be less wasteful investment, and the environment will be spared.
On the other hand, government, because its income arises from the revenue that it collects in taxes, rather than the sale of what it produces (most people have little desire for, or cannot afford to purchase the services of a standing army, for example), can force other goods and service providers to pay for the cost of producing more coin by raising the amount of taxes that they must pay. Accordingly, if the government owns the mint, it can also afford to pay the miners and the refineries the additional amount required to extract and refine more precious metal. The newly government-minted coin can then be sold into the economy when the government purchases whatever it needs to furnish its army or build new infrastructure.
As you can readily see, government and bankers make a good fit when it comes to money (real or counterfeit).
At the time of our founding nearly all borrowing and lending took place between merchants who lent and borrowed from each other. With the exception of a few failed land banks — that is an issue all of its own, and that is also covered in Mount Cambitas - The Story of Real Money — there were few who wanted to purchase newly minted coin. The only alternatives were the colonial governments who preferred to deal in bills of credit, and the Bank of England — the epitome of dishonest government-bank collusion. What has eventually led us to our current malaise.
Unfortunately, there was more to the dilemma of our founding. So, I hope to see you next time. And then, one more still unspoken matter, and on to a modern solution with a truly ancient commodity.
In liberty,
Roddy A. Stegemann, First Hill, Seattle 98104
Author of Mount Cambitas - The Story of Real Money and “A Call for the Restoration of Monetary Order”.
If you are interested in why supply was unable to keep pace with demand, then I invite you to read Mount Cambitas - The Story of Real Money, as soon as it returns to the internet in a better formatted web-application that is, generally speaking, more accessible. I am working on this better formed presentation as I right.
In the distorted world of statutory counterfeit the price of borrowing and lending — namely, the prevailing market rate of interest — has become known as the price of money. In a real market economy with real money, the price of money and the price of borrowing and lending represent two different indicators of two different markets each each with different market factors (determinants) of supply and demand.