A Debate Over Monetary Reform
Edward J. Dodson
[Edited transcript prepared by Edward J. Dodson]
[Addresses delivered at
the International Union Confererence, Edinburgh University,
Scotland, August, 2001, including discussion. The conference
papers have been published and are available from the
International Union for Land Value Taxation and Free Trade,
suite 427, London Fruit and Wool Exchange, Brushfield Street,
London E1 6EL]
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MODERATOR: Fred Foldvary
Alistar McConnachie is standing in for James Gibb Stuart, who is
unable to make it. Alistar is based in Glasgow and is a colleague of
James Gibbs Stuart. He has a degree in Agricultural Economics and is
editor and publisher of the monthly four-age money reform journal
called Prosperity. The topic will be "Looking Beyond the Money
Myth."
Alistar McConnachie:
Thank you very much. First, may I give you James Gibb Stuart's
sincere apologies. Due to a very unfortunate mix-up he had a prior
arrangement today and so at this point he is in fact making his way
down the motorway to Leister, where he is going to be attending the
AGM of the National Pure Water Association of which he is the Vice
Chairman. So, that is his apologies. May I stand in for him and
deliver the speech that he was going to be giving to you.
Before I tell you just a little bit about myself let me introduce
James to you. He is a man who has been involved in the money reform
field for about the last 30 years. And as money reformers go, he is
probably one of the most prominent ones in Britain at the moment. Now,
in fact, he was one of the first post-war money reformers as well.
Before the war money reform had a very strong pedigree. After the war
it tended to fade out and it was revived in the late 1960s and 1970s
by people like James Gibbs Stuart and others like Edward Holoway of
the London organization called the Economic Research Council.
James Gibbs Stuart wrote "The Money Bomb" which was
published in 1980 and which was probably the first post-war mainstream
book on money reform. It was the money reform field that had been
cultivated by the Economic Research Council and others such as James
Gibbs Stuart that give rise to in the late 1980s an increased interest
in the whole field and eventually we have seen the publication of what
I regard as the money reform bible, "The Grip of Death" by
Mike Robotom, who I am pleased to say is sitting at the back of the
hall.
Now, in 1996 James Gibbs Stuart and a lady from Solihall called
Barbara Pandle, who is an ecologist, got together and organized the
first meetings of what they called the Bronzegrove Group. It was held
in Bronzegrove, just outside Birmingham, a group which is a loose
association of people - ecologists, environmentalists, money reforms,
academics, religious people - all who are concerned in their own
fields but who are also realize that at the root of their concerns is
the money question. Where does money come from? Who supplies the
money? What can we do about it?
I have been working with James Gibbs Stuart since 1997, and together
we produce a four-age monthly which we call "Prosperity - Freedom
From Debt Slavery" and each month it raises these sorts of
issues, the sorts of issues I am going to be talking to you about
today. We also have what we call the Bronzegrove Statement of Belief,
which is a statement of belief that all the people who are involved in
some way or another generally agreed upon.
The title of the talk that I would like to give to you is "Looking
Beyond the Money Myth." The big issue of how government gets its
money and what we believe is the need for all governments to have a
sure source of debt-free finance, which is under their own control.
Now, what do I mean by that phrase - "debt free finance"?
Almost the entire financial system of all nations today is what we
would call debt-based, meaning that the processes of going into debt
is relied upon almost exclusively to create and supply money to their
economies. Indeed, almost the entire money stock of every country in
the world is supported by debt in four main sectors. And, these are
private debts (such as mortgages and loans and overdrafts); industrial
and commercial debt (which are to the corporations); government
national debts; and, what we would call international or third world
debt.
Money reformers, in general, then, are dedicated to the proposition
that the state through a democratically accountable authority should
create a supply of debt free money, which should be spent rather than
lent into the economy. And it can be done in order to fund public
projects or to pay off previous national debt. Or, ways which place it
directly in the hands of the people such as a basic income.
To understand the significance of that you need to understand how
money enters society at the moment. Well, every year the government
fails to collect enough money in taxes to pay for all its spending
requirements. Therefore, it has to borrower the money and the amount
required to borrow is known as the "Public Sector Borrowing
Requirement" (the PSBR) and the national debt is the total which
is still outstanding on all the past years' borrowing requirements.
The way in which the government borrows this money is that it prints
what it calls securities, which is simply pieces of paper which they
sell to individuals, to pension trusts, to insurance funds and also to
banks. It takes the money which is raised by these sales and it spends
it on whatever it wants to spend it on. However, these securities
demand a repayment. You buy a security and you expect the same amount
of money back again plus your interest on it. And these securities are
becoming due all the time.
So, when it comes time to pay back these securities, where does the
government get the money from? It does not have the money to pay back
these securities, that is why it had to raise these securities in the
first place. So, it sells even more securities and it also puts up to
taxes even further to raise that money.
Back in the 1920s, the inventor Thomas Edison put it very well. He
said: "If our nation can issue a dollar security, why can't it
just issue a dollar bill?" Because the element that makes the
security good makes the bill good as well. It is absurd to say that a
country can issue 30 billion in securities but not 30 billion in
currency. So, the essence of the money reformers position is simply
that the government or the state, if you prefer, through a
democratically accountable authority can put this debt free money into
circulation rather than borrowing it from what is generally the
private banking sector.
People will say, well, that sounds inflationary to me, surely. That
is always the first thing whenever we have dealt with the Treasury on
this issue they have come back to us and said that if the government
tried to increase the amount this type of finance beyond current
demand for it, it would lose - Sterling would collapse - and inflation
would take off. That is what Anthony Nelson told us back in the 1990s.
We would challenge that. We understand that the amount of money has to
come in in some kind of graduated fashion. You just cannot flood
society with it. But it has been done before.
Abraham Lincoln, for example, financed the American Civil War on debt
free money as did the Australian government finance their First World
War activities on debt free money. These are maybe not the nicest
things we like money to be spent on but nevertheless they spent it
when they had to and it did not cause inflation then. Brian Gould, who
was the ex-economic spokesperson for the Labour Party when he was big
in his position, he said: "It may be sensible in the precise
circumstances to monetize the debt - that, is to finance it through
government created credit rather than borrowing or taxation. However
shocking this may seem to monetarist opinion it is hard to see why
private sector banks should have a monopoly over credit creation or
why credit creation by government for the purpose of investment should
be inherently more objectionable than credit creation in the private
sector which goes largely on consumption.
Now, the other day when I was looking through some material for this
meeting, I came across a motion that was put in front of the House of
Commons way back in 1965 by Henry Kirby, and summed up what Brian
Gould has said very well also. He put forward a new motion to restore
the power of the issue of money to the Crown. And he said:
"This House considers that
the continued issue of all the means of exchange - be it coin, bank
notes or credit - largely passed on by checks by private firms as an
interest-bearing debt against the public should cease forthwith,
that the sovereign power and duty of issuing money in all forms
should be returned to the Crown, then to be put into circulation
free of all debt, and interest obligations as a public services not
as a private opportunity of profit and control for no tangible
returns to the people, and that the volume of money be controlled
appropriately so as to maintain stable prices."
That put it very well and that sums up generally what we as money
reformers are about.
Now, to relate this back to your concerns and concerns with the land,
James Gibbs Stuart wrote a small booklet a few years ago called Economics
of the Green Renaissance. And in it he described how he believed
that money should be backed not by any notion of gold but rather by
the people, their skills and the resources which are available to
them. And he used the example of being in a desert. He said you can
site the most prestigious bank in all the world in the center of a
barren desert and invite it to monetize the desert's assets in the
form of currency and promissory notes and securities and so on, but
all of these whatever their numbers of denominations would be
worthless bits of paper since they would have no purchasing power in a
land without people or resources. But dig wells, find water, create an
environment in which vegetation can exist and living things can grow,
and multiply, then your currency will have started to acquire a value.
That value will have been determined not by the awesome dignity of the
bank itself or the acclaimed financial expertise of its governors, of
the imposing calligraphy on its bank notes but by the intrinsic wealth
of the community which had gathered around its doors. And, we live
today in a very rich society -- rich in people, rich in potential
skills and certainly rich in resources; and, there is no reason why
anything which is socially desirable and which is physically possible
should not be able to happen because there happens to be a lack of
bits of paper with which to exchange.
We believe as money reformers that the conventional economic wisdom
states that the monetarization of all resources must come as an
interest-bearing debt from the banking system. We, however, say that
this whole pattern is flawed and that which is physically possible and
socially desirable should be made financially possible.
There is a movement abroad - in France, in the academic world over
there among students who are beginning to become disillusioned with
the conventional economic wisdom. They have formed an organization,
perhaps unfortunately, titled the "Post-Autistics Economic
Foundation" where they regard the present economic system as
inadequate. And they are beginning to question the whole wisdom of it.
And you know not only students but also well-respected journalists
have also questioned it. Our editor of the Scotsman Business
Section is Bill Jameson, who has made some interesting comments
when he left the Sunday Telegraph last year, his final article
as economics editor for the Telegraph said:
"Let me spill the beans about macroeconomics, unvail a truth so
brutal that I could only write these words in my final column. Let me
tell you as I stand at the door marked EXIT and with the get away car
revving up, most of macroeconomics is bunk, bunk as in tosch, bunk as
in hopeless and useless and senseless, bunk as in no use. The
misleading and the partial and the dated and the subject to revision
in pathetic pursuit of truth long gone."
Well, if we could just here that truth from more economists, then we
could start we believe to set our economic system on to a more just
and certainly a more democratic path.
Before I conclude, let me just tell you very briefly about our
Bronzegrove meeting this year. As I say, we have been meeting and for
the last five years
Fred Foldvary:
Next we have Ed Dodson. Ed Dodson became acquainted with the ideas of
Henry George in the mid-1970s, and in 1980 he discovered the Henry
George School in Philadelphia, became a student and then a member of
the school's faculty. He subsequently went on to earn a masters degree
in liberal arts at Temple University in Philadelphia. His professional
career has been in real estate finance, the last 16 years with the
U.S. mortgage investment firm Fannie Mae, where he currently performs
market analyses and develops financing programs for affordable housing
and community development initiatives. In 1997 Ed founded the
internet-based education project he calls "The School of
Cooperative Individualism," where he is building an extensive and
quite impressive library of materials on political economy, history
and political philosophy. His paper, distributed in advance, argues
the case for a system of money and credit quite different from that
which we allegedly enjoy today. His paper is titled "Market
Diseases and a Proposal for Their Cure," or "Promises to Pay
Nothing In Particular."
Ed Dodson:
I thought perhaps that in this group this might have been the most
controversial subject, but this morning I think I was far
outdistanced, and so I feel save to proceed. But, it does take a bit
of courage to talk about money reform in Scotland.
I have distributed the paper, and I do not want to read it. I want to
take about fifteen minutes summarizing it a bit, but then engage you
in discussion to find out your reactions and what you think.
I am afraid that Alistar McConnachie and his colleagues and I part
company fairly early along the way to monetary reform. I restate and
rephrase a comment he made toward the end of his talk about money. And
my comment would run like this: "Money and the abandonment of it
is one root cause of many of our problems." My paper is largely a
history paper, a documentary of how those in power and the state - the
princes, the kings, the ministers, the central bankers, the
treasuries, the Chancellors of the Exchecquer, etc. over history have
seen to it that the wealth we produce is constantly taken from us by
the devious means of substituting money from the exchange process and
replacing that with something else. What is that something else? Well,
let's start with coinage. If the coinage has a standard content of
gold and/or silver or some other composite of materials that the
market understands, the easiest way to counterfeit that process is to
clip the coinage, reduce the metallic content and eventually we are
faced with having to exchange our goods and services with a medium of
exchange that has no constant understanding of what the value it.
The next step, of course, is to issue paper currency backed by
nothing in particular. And this has been the case, in my view,
practically all of history of currency. We would do ourselves a great
service if we did not use the term "money" when we talk
about what it is we are spending or exchanging in commerce. I do not
have any money in my pocket. I have some bank note. They are not even
promises to pay any more. I am not exactly sure what they are. They
are accepted in the market place to a degree subject to every holder
of these in a bank account or some other method of accounting
constantly hedging against the diminishing purchasing power that is
guaranteed on an ongoing basis. And so, in the United States, for
example, to prevent people from protecting themselves from the
discounting of these paper currency notes there is a law that says you
cannot index contracts to the rate of inflation. The government,
realizing that the market would respond to its powers of self-creating
credit simply passed a law that says you cannot index contracts to
inflation.
In the 1970s the idea of indexing contracts to the rate of inflation
grew out of OPEC and a long history of deficit spending, We were in a
period of serious stagflation. When the markets started to respond,
the government stepped in and destroyed the market response. Some who
know economic history better than I do can remember that the same
process occurred in the late 1920s in Weimar Germany. When inflation
started to take off, a system was introduced that, I think Irving
Fisher brought over, and one or two cities issued their own currencies
that had expiration dates stamped on it, so that you had to spend it
quickly or it would not be redeemable. And, very quickly prices
stabilized in those cities until the Weimar Republic outlawed the
currencies. The same thing happened in the United States, I believe in
Chicago. As soon as the new currency began to work the Roosevelt
administration intervened and outlawed its use.
When did we have an honest system of money? In my opinion, there is
only one period of time and it is very short. And, that is when the
Bank of Amsterdam was initially created as a bank of deposit. The
world had gold coins of various origin that were brought to the Bank
of Amsterdam, which melted them down and issued new coins that
everyone understood had a standard metallic content. Most of the coins
were kept in the bank's vault. Merchants did not want to carry all
these coins around. What the bank gave out was a certificate of
deposit that said the bearer of the certificate owned the coinage held
on deposit at the bank. Those certificates circulated in the global
economy very efficiently, were accepted everywhere, global trade
expanded and there was relatively stable prices.
Now, of course land markets were reacting to the expansion of trade,
to the increase in gold and silver coming from the Americas and the
rise in population. And, then, unfortunately, the directors of the
Bank discovered the fact that not everyone came to get their coinage
or bullion at the same time, and the bank began to issue bank notes
that looked suspiciously like certificates of deposit but were backed
by nothing in particular. And that, in my view, was the beginning of
the decline of honest money in the global economy.
After a long period of history, we get to depressions and recessions
and economists and planners and the government officials and all sorts
of interventionist ideas to achieve relative stability. Anyone who
saves and invests better be looking to hedge against inflation because
the purchasing power of whatever you have in a nominal savings account
is declining in exchange value every day.
I do not know enough about our friend Alistar's alternative proposal
to suggest it has or does not have any stabilizing influence. But, in
my view, it does not get to the heart of the matter, which is less of
an economic matter and more of a moral matter. That is, government
should not be allowed to steal from us what we produce. And that is
what is happening on an ongoing basis.
Garry Nixon:
Supposing the Bank of Amsterdam is destroyed with all of the coinage
and bullion in its vaults.
Ed Dodson:
If there is an effective auditing process and public disclosure, that
explosion would not have gone undetected for a very long time. Yes,
the supply of money would have declined and so we would have a bit of
a problem, but that is where an insurance company comes in. The
insurance company guarantees the supply of money. The insurance
company then has to have contracts out to purchase goods that would
replace that particular supply of money. Remember what I am talking
about is "money must be wealth." Money is wealth taken out
of - in a major way - the exchange process for use as a storehouse of
value, and the medium of exchange is the electronic account balance or
the certificate of deposit that is in circulation. How you do the
calculus to determine the velocity and the money multiplier I will
leave up to the economists. My concern is basically the morality.
Garry Nixon:
The money supply is mostly gold and silver, and no one can use gold
and silver.
Ed Dodson:
Almost every manufacturing process you can think of today that
involves high technology makes use of these metals.
Fred Foldvary:
Silver is a widely-used industrial metal.
Ed Dodson:
One comment is, the bank of deposit earns a fee for the service it
performs. In other words, the bank of deposit is successful only to
the extent there is faith in what it is doing - and that is guarding a
portion of the money supply. It is not a lending institution, and I
would suggest that part of government regulation would be that banks
of deposit not be permitted to become lending institutions. The only
thing they might be permitted to do is save up their fees - which are
themselves money - and then spin off a subsidiary that could become a
lending institution, but there would be no use of depositor assets in
order to accomplish this. The lending institution would have to raise
money from investors, which would be deposited in the bank of deposit
and credited to the account of the lending institution. That is one
point.
Another point is that I see no reason why small communities that are
cash poor cannot establish a local currency system with the security
of the currency in circulation being some commodity valuable in that
particular community. The E.F. Schumacher model, what is being done in
the United States in various small communities like Great Barrington,
Massachusetts, or the LETS system - all of these alternative
currencies are service or commodity-backed. But they are basically
based on the bank of deposit concept, and those pieces of paper in
circulation are promises to pay something in particular. We are
dealing with today is legal tender currency that promises us nothing
but constant discounting and loss of purchasing power. I have much
less confidence in government entities to maintain an honest system
than I have in the market and the participants in the market to look
after one another and make sure that anyone who is fraudulently
operating will soon be out of business.
Fred Foldvary:
Could you explain a little more. How is a bank of deposit get its
fee? What is it being paid for?
Ed Dodson:
Its fees are for storage and converting (i.e., minting) coinage. The
market is going to determine what commodities will grow to be the most
relied upon storehouses of value. Let's pick Russia, for example.
Russia does have a fairly large gold supply. The could be banks of
deposit that take in gold. And the same bank could trade in forest
products or oil.
Fred Foldvary:
Why do you call it a bank and not a warehouse?
Ed Dodson:
Convention, really. If you want to call it a bank with warehousing
capacity. The bank may not need warehousing capacity in all
circumstances.
Fred Foldvary:
It is a vault that makes its money.
Ed Dodson:
Or a claim on future production. So that if you have oil for forest
products the goods could be circulating within the bank's assets but
the bank would have claims on future production and delivery of its
claims would be insured by contracts and by private insurance, so that
if for some reason the producer would not deliver the forest products
the insurance company would step in under a sort of business
interruption loss policy that would protect the depositors and give
them confidence that the certificate of deposit they have has a
constant purchasing power.
Tony Vickers:
I am enormously excited about this coming together of Georgists and
monetary reformers. I was at a meeting back in April, and it was
similar to what Alistar quoted.
The power is somehow related to
the ability to back money.
Alistar McConnachie:
Yes, I know James Robertson and he and two or three others have been
working very closely promoting that paper, "The Creating of New
Money," which dealt with the whole question of seigniorage. One
of our people in [Halins?] helped to bring James Robertson to the
understanding he has now.
I have always thought that money reformers and Georgists were
basically one and the same thing anyway, although as it happens I have
not been much involved with the Georgist movement. But, yes, I agree
entirely and I believe that the real wealth of society is not found in
gold or silver but is actually found within the people themselves -
the human based concept that the wealth is in the people and their
skills and their materials and the supply of money should relate to
these physical facts rather than to the supply of gold, which it
sometimes may as a gentlemen said disappear one day because there an
explosion and it all goes up in the atmosphere. I would hope to see a
coming together of the Georgists and the money reformers, and it may
be that is the way to do it.
Ed Dodson:
I don't propose that gold and silver be the only backing for paper
currency or for whatever currency is in circulation. However, as a
starting point it has been an historical backing. Many people have
confidence in it. However, in order to reduce the volatility of its
exchange value I suggest that a composite basket of metals would
serve. Gold, silver, platinum - would be three. But they are not the
only ones. And, as I say, any commodity or even service that a local
community would accept would be fine.
At a level of the large community it would be more difficult to get
people to enter into a bank that has a commodity that is only used
locally. So, may oil or gas would serve well. But, my real strong
point is again: real money is material wealth produced by human labor
and the use of capital goods. And that real wealth is set aside
temporarily or for a long period of time as a storehouse of value for
the medium of exchange. It doesn't mean it has to be a stagnant
quantity. It can be constantly replaced as an existing storehouse is
used, but the mechanism that I propose would stabilize the system and
allow for the market to have the flow of goods and services moving.
Godfrey Dunkley:
Alistar spoke of spending money into circulation. The ancient
investment in Stonehenge is today still paying a dividend in land rent
so you cannot force money from a land tax or collecting the rent of
land. If your government produced the money and spent it into
circulation there is never a need to pay it back. Because what is the
wealth of the nation? It is everything that has been produced over the
whole period of time going back to Stonehenge and not either destroyed
or consumed. So, as your government printing money spends it into
circulation it never has to be withdrawn provided it is being used for
various civic projects like mass transport, roads, water schemes,
whatever. And that in turn will back your currency.
When you have as we do in South Africa where 50 percent of the people
are unemployed and there is a lot of destruction taking place, the
wealth of the nation goes down and you can see it in the exchange
rate. You cannot divorce money from land taxes.
Ed Dodson:
The two reforms go hand in hand. Neither one will work effectively
without the other, in my view.
Bruce Michaels:
My own opinion is the system does work. Money as we see it does work.
The problem is how do you hold the politicians' feet to the fire to
keep it honest? Government defines money. We are talking bout money
without defining things here. Government defines money as being the
only item which it will accept in payment for its needs. So we are
stuck with that sense of it. Now, all of these other things - the idea
of exchanges, of a credit to have services performed - can all be
accomplished on a computer of some sort on agreed exchange rates. But
the government defines money and its needs are what creates this
problem, and it creates more debt than it has the power to take back
from its citizens.
Ed Dodson:
Or chooses to take back, Bruce. There has never been a war that has
been fought that has been paid for by the wealthy in any society.
Issue bonds, tax the workers, and when the war is over the wealth
owners - the landowners, primarily - go on as normal while the rest of
the people experience declining conditions and loss of purchasing
power and have to wait for the next great technological revolution to
get their standard of living back up.
Bruce Michaels:
But it is going to take a better mathematician than I am, but it
seemed very simple that nay time I have examined the total amount of
debt of the United States government and the rate of inflation was in
direct proportion to the unfinanced debt compared to the total amount
of money circulating.
Karl Williams:
Following up on what you said, Ed, about the LETS scheme -- and for
those who don't know, it is like a local currency kept circulating
through group. This is a system that builds up debits and credits
among participants. And it has been extremely successful and it really
gets local economies going. But I will tell you why. It is successful
not because this monetary scheme is unique, because it is the simplest
of monetary schemes, it is because if we exchange dollars of value we
don't have someone else step in and say, "Thanks. You both owe me
$10." If the LETS scheme becomes subject to income tax that will
be the death of it.
Fred Foldvary:
In the United States, barter is legally subject to the income tax.
Whether it collects it is another matter.
Nic Tideman:
I wanted to expand on the idea of the relationship between the land
question and the money question. It seems to me that the connection in
my mind is they are both examples of monopoly that is extended
that is there is somebody grabbing something and preventing general
use of it. We know how the land monopoly works. The money monopoly
works in somewhat the same way. The Bank of England had a monopoly on
printing bank notes and between the bankers and the government they
managed to divide up the value that is available by providing some
monetary system and in a just society we would allow the government to
do it only if we really wanted them to do it. We certainly would not
let them give most of the value to some group of rich people who are
the only ones allowed to have banks.
Michael .......
I just want to build on the point that was made earlier on. I have
written on monetary reform, and I have been interested in the issue
for a really long time. In doing the research for it, I was struck by
the statistics. People will be amazed to know that in the modern
economy it is not just in the United Kingdom but it in all the modern
and developing economies - the amount of money actually circulating
debt free is only 3%. 97% is debt created, and that 3% created debt
free is created by government in terms of public service - the 97% the
great bulk of monetary holdings in the modern economy is created by
commercial banks and it requires a debtor to pay down the debt that
will create a credit and that credit will then circulate. And, the
argument of monetary reformers is that this tension between debt and
credit which is so enormous in the modern economy produces a
dysfunctional form of credit debt, a tension across the economy
producing unnecessary shortages of money.
Ed Dodson:
Can I just respond to that particular point. If we collect the annual
rental value of locations and natural resource lands at something
approaching 100%, the theory says that market prices will come way
down and, perhaps, approach zero eventually. Take the land cost
component out of the purchase of a home and what are you purchasing? A
home. Take the land cost component out of the economy in that way,
labor costs fall, material costs fall and all of a sudden the house
that now costs $150,000 will, perhaps, cost $60,000. And that will be
a price which labor can afford to pay in a few years instead of 30
years. So, we get a much different dynamic if we have the land market
solved.
Michael .........:
The fact that the house price is influenced by the land value
component is a key point. But don't forget those actually about 30%
generally is the land value component of property. You buy a house,
30% of the price of building the house. That is an average. The point
I wanted to make is again and again when monetary reformers propound
this idea of the government creating money there is a hostile reaction
because it is seemed this is an element of power the government would
have but that is not the case. Government creation of credit is seen
as the primary responsibility of the government. Once that money is
created and passed into society either through negative taxation
basically passed to people or through spending through public
services, the government has no automatic claim on that. Now, just
compare that with the present moment where we have 97% of the money
stock in the economy, the ultimate claim on that money rests with
commercial banks. And, that is the issue monetary reformers are
seeking to address. As the gentleman earlier pointed out, we have two
very complex and very powerful monopolies - one in land and one in
money and banking.
Fred Foldvary:
Ed, how to you respond to the fact that 97% of the money creation is
by private banking?
Ed Dodson:
Again, I do not believe money is created by the government or by
banks. I side with E.C. Reigel on that point. He said that what
government does is create counterfeit money if it creates anything
close to money. Government does not produce goods. If government
produces goods and those goods go into a bank of deposit and they get
a line of credit, then government becomes part of the system and so
they can extend credit to other based on their assets under their
control.
Certainly, fewer and fewer people are able to purchase assets based
on cash that they have readily available out of current income. So,
almost everything that people buy today is mortgaged.
UNIDENTIFIED ATTENDEE
Land is one of the most reliable securities for debt.
Ed Dodson:
Land is the first piece of collateral likely to lose value when the
cycle hits the downturn point. And, I can tell you that one of the
reforms in the United States to mitigate the failure of banks has been
to restrict the banks from making acquisition and site development
loans to developers up to a point. A developer now in the United
States has to come to the table - and this may be something to do with
softening of the recession - come to the table with his own cash.
Developers will borrower and build whether or not there is a market
for what they build so long as its is someone else's cash that is at
risk. As soon as you ask a developer to put up 35% into the
acquisition of a piece of land, all of a sudden a lot better market
forecasting studies are done and the construction won't begin until
you have a key anchor tenant signed up and ready to go. So, the market
has reacted, regulation has reacted to soften these problems but I am
still arguing for real reform.
Michael ........:
What I am concerned about is that if you do not address monetary
reform
although the land and property assets will not belong to
the people but will remain in the ownership of the commercial banking
system.
Now they comprise 38% of the United Kingdom housing, 52% of the U.S.
housing and real estate. That is ownership that doesn't belong to the
people.
Bob Andelson:
I am all for monetary reform but people want public services, people
want government jobs. If you let the government simply print money to
pay for these jobs and services pretty soon it won't be worth
anything. This is not an objection. This is an historical fact.
Michael ......:
At the moment the money stock increases by 60 billion a year under
the commercial banking system, extending inflation. Why should
government printing a more stable form of money looking to locate it
on community value, why should that be more inflationary than a debt
credit monetary system which is increasing by 60 billion a year?
Alistar McConnachie:
I would also like to respond to the inflation thing because people
say that to me all the time. I would ask: "Which is more likely
to be inflationary?" What we have got at the moment - which is a
supply of bank created debt based money which amounts to hundreds of
billions which if over the next two decades are assumed by industry,
then it is going to add to costs and it is going to depress their
incomes and its is going to lead to demands for higher wages. That is
what we are going to get under the present debt based system; so,
alternatively what we are asking is a supply of debt free money should
come into society that won't register the costs and it reduces the
need for wage rises and it can be used to settle old debts and that is
far less likely to be inflationary.
Ed Dodson:
I am not opposed to incrementalism, although I said to Fred one of
the terms I remember from graduate school is that public policy has
been made in the United States and probably the rest of the developed
world by "disjointed incrementalism." It would rise if it
was incrementally less disjointed. One of the proposals I think has a
great deal of merit is that as the portion of national debt come due
for refunding that they be refunded with fully amortizing bonds. If
this was done over a generation the national debt of every country
could be repaid. A fully amortizing bond is simply a mortgage loan to
the government in which principle and interest is repaid out of
current revenue. If that current revenue could come from user fees and
a tax on land values we would have a very nice way to stabilize
purchasing power and take the national debt driven government demand
on the credit markets out of the system, and do it permanently with
the least disruption. So, think about what they would mean having
fully amortizing bonds invoked as the way to refinance each of the
bonds coming due now.
Mark .........:
The problem I would like to pick up with is what happens when
somebody goes to take a loan. My son, who has a good working life
ahead of him, and he will get a 30 year loan. I go -- and I lost my
job 2 or 3 years ago - for a 30 year loan and they will start to could
my gray hair
Ed Dodson:
Credit is available to you without regard to your age. Or your
prospects for living longer.
Mark .......:
I don't think you believe that, anyway, but there you go. The other
point is the amount Ed will lend me will depend upon what the interest
rate is. And, that is a point you haven't discussed here. And the
amount a lending organization will provide will in a sense turn me
into a wage slave.
Timothy Glazier:
If the interest rate changes and I have purchased some goods or land
or whatever, I may find that at some point in the future I may lose
equity. And certainly in 1990-91 this was something that hit this
country and they had never realized that it would happen before. We
had always had enough inflation that it hid the problem from view. So,
the interest rate is a component as to how serious this "wage
slave" situation is. And, part of it is because of usury, which
is forbidden in various parts of the scriptures. At one point in time
instead of actually working across the changing values which apply to
the changing values of land or goods or income.
Ed Dodson:
That is not the way the credit markets are working generally. In the
United States at least, the credit markets are extremely efficient.
The secondary mortgage market brings liquidity to the market at the
market rate of interest at all times. But, also giving people an
opportunity through protection under law to refinance when interest
rates fall. So, if I am a shrewd investor and rates are at 10% and I
have a sense that rates are going to fall, I might buy my house at
$200,000 at 10% because I know that as soon as interest rates fall to
8% or 6% then not only will the collateral value of the property go up
but my interests costs will go down. I can refinance and get an
increase in land value -- capitalized into land price -- and put $300
or $400 in my pocket every month. So, we have had this in the United
States -- wave after wave of refinancings.
How do banks make money? Banks sell some or most of their loans in
the secondary market. They are not holding them as assets, generally.
So, they earn income on volume. They make narrow fee income but they
make it on hundreds or thousands of transactions over and over again.
Hardly any commercial banks make money originating a loan to you. They
make some money servicing the loans, and they make it on the
expectation that people are not going to stay in a house for 30 years
but will move to another house every 8-10 years.
SECOND SESSION
MODERATOR: Frank Peddle
I am pleased to introduce Fred Foldvary. Fred teaches economics at
Santa Clara University in California, and he is a prolific author. His
most recent books are Public Goods and Private Communities and Beyond
Neo-Classical Economics. He has been active in the "Geogist"
movement since 1980 and is also one of the pioneers of what is called
"Geolibertarianism."
Fred Foldvary:
I am going to be responding to the two speakers' talks and also have
some of my own comments on money and banking. When I teach economics,
I have been conducting classroom experiments in which for one class
session I simulate an economy. I divide the class into three
districts, one which has no rent (and that is the margin), a middle
area (with some rent) and a high area (with a lot of rent). And, I use
monopoly money form the game, so it is a fiat currency. The consumer
goods are chocolate bars.
I let the students have whatever tax system they want to have. The
outcome depends on what kind of tax and spend system they select.
Sometimes the class will have an income tax, and it will turn out to
be a big mess with a lot of transaction costs and cheating. And
sometimes they will have a land tax (the ones that actually learn
something) and things will go very smooth. Then, towards the end of
the class the money becomes worthless because there are only a few
chocolate bars left. So, it is interesting to see that the prices get
bid up.
Well, what is money? The economic definition of money is it is "a
medium of exchange and the final means of payment" because you
can pay with other means such as a check or you can use travelers
checks, but the store receiving the travelers check -- they don't want
to spend that -- they are going to deposit it in their bank in
exchange for cash. So, it is a medium of exchange and a final means of
payment. Now, when I got my British Pounds, as an economist I was of
course curious to look at exactly what it says. Here is a ten pound
note. It says the Bank of England and it also says "I promise to
pay the bearer on demand the sum of ten pounds." I know that
Britain has fiat money just like the United States dollar and all
other currencies in the world. But, we used to have commodity money
(we called it silver), so since Britain has fiat money I was curious
exactly what are they promising to say. Pounds are what? So, during
the trip on Wednesday I happened to go by a bank. I figured I would do
an empirical experiment and asked a bank teller - and I showed her the
promise to pay ten pounds - and asked, "ten pounds of what?"
What exactly do you pay? She didn't know. But, of course, that was my
hypothesis. That it was probably a meaningless statement. So, I had
one data point from one bank teller saying they don't know what it
means. But there must be some legal reason why they said that.
Of course, in America prior to World War I we really did have
promises to pay. We would have a $20 bill and it would promise the
bearer to pay twenty dollars in gold coin. You could take that $20
paper bill to a bank and they would give you a gold coin of 20 dollars
of gold. Gold was money. The money was not backed by gold. Gold was
the money. The dollar was defined as a certain number of ounces of
gold. And, we also had silver certificates which lasted up until the
early 1960s. You could actually go to the U.S. Mint and ask for a
dollar's worth of silver, and it was a fixed amount of silver for the
dollar. This finally disappeared because the dollar's worth of silver
was changing and a lot of people were taking advantage of the fixed
exchange rate.
We now have fiat money and it is unsatisfactory; and , so, we have
two different visions of how it could be reformed. Now, one of the
advantages of coming to a conference in Scotland is that I get to wear
these Scottish ties. This one is a James Buchanan tie. And, James
Buchanan is a Nobel Prize winning economist I took some seminars with,
and is one of the founders of the "public choice" school of
economics. Public choice is a branch of the field of economics that
studies the decisions of government and voters. The relevance of that
is that we have seen that the issue of money and banking is very much
tied into government. Shall the government issue the money and spend
it? Or, shall the government be the central banker? Or, should there
not be any government involvement in the money at all?
Georgism as I understand it involves the common ownership and sharing
of the land rent and the individual ownership of labor and a free
market economy, with true free trade so that you can produce anything
and exchange anything so long as you are not harming other people. I
do not see any "ifs" and "buts" or "asterisks"
in the system. Or there shouldn't be any. It should not be that you
can have free trade except money and banking. Why would money and
banking be an exception? So, as I see it with pure free trade - if
that is what we believe in - money and banking should also be a free
market system that anybody should be able to use whatever currency
that want and it should not be a government monopoly.
Alistar talked about government debt. Now, as I see it government
debt is a separate issue from the fact that the central banks of the
United States and other countries use debt in order to issue money.
When the Federal Reserve Bank of the United States buys bonds, and
they are buying pre-existing debt. It is called the "open market
committee." They go and buy bonds that are already out there.
They go through brokers and buy bonds that the government has issued.
So, the government is going into debt already. The banks are simply
holding that debt. They aren't really creating or adding to it, as I
see it. So, it is not that the central bank is responsible for the
debt. They are simply using it as the safest and most convenient means
of holding debt against which they issue money.
Now you have the question of seigniorage, which is that as the
economy grows people naturally demand to hold more money and therefore
if the money is created at the same rate as the exchange of the real
economy it won't do any harm. It is not inflationary. And that is
seigniorage.
And then the question is, "Who should get it?" And I think
there is a good point to be made that if the government would simply
print the money and directly spend it, it should get the seigniorage
on behalf of the people. But, under the central banking system, as you
we have in the United States, it is not that the seigniorage goes
away, it is that the Federal Reserve holds the bonds, gets interest on
it and after paying its expenses the remaining amount of its interest
goes back to the Treasury. So, the people are still getting the
interest. But, of course, the rest of the money is being expanded by
the banks, as was pointed out. The Federal Reserve increases the money
supply and then the banks have extra money to lend out, but this extra
money gets lent out several times, so the private banking system does
expand the money supply several times over beyond what the central
bank expanded. And, the problem is, because the Federal Reserve Bank,
the Bank of England, and other central banks have a monopoly on the
money supply, if they expand the money too fast - multiplied by the
private banks expansion of the money supply - we get price inflation.
The word "inflation" really has two meanings. There is
monetary inflation, which is the expansion of money at a greater rate
than the real economy is growing. And, there is price inflation, which
is a continuous increase in the level of prices. So, there is a
problem with monopoly money and the question, then, is what to do
about it.
Now, Abraham Lincoln did issue greenbacks during the Civil War, as it
was pointed out, and then greenback dollars were not directly
redeemable into gold at the time. But, after the Civil War they were
redeemable into gold, so eventually they did die out and we had gold
money until the 1930s in the United States.
Also, the monetary reformers say money should be backed by real goods
and services. While I agree - and that goes back to Adam Smith - the
real wealth of a nation is the goods and services produced and not
just the metals. However, when economists talk about money being
backed by some commodity what we mean is that it is redeemable at a
fixed rate -- just like the United States dollar was defined as 1/20th
of an ounce of gold. If you had a $20 bill you could go to a bank and
redeem it for an ounce of gold.
If you say the general economy is the goods and services of the
economy, what does it mean for that to back the money? You could spend
the money for goods and services, but the money could be inflated.
Even though you could spend it for goods and services more and more
dollar or pounds would be needed buy the same amounts of goods and
services.
Let me now comment on the paper by Ed Dodson. He talks about before
the Civil War in the United States where were more than 1,500 banks in
operation, and many of them we "wild cat" banks that did not
have much real gold backing. A lot of them failed, and that was a real
problem. The United States as a whole never had free market banking.
The banks were very heavily regulated by the state governments. For
example, the states prohibited branch banking. It was illegal for a
private bank to branch out, especially into other states. The banks
were also forced to hold state bonds and that led to banks having a
lot of state bonds, against which they issued their own private
currencies. Where do you think that private currency went to? It went
to land speculators. So, there was a lot of land speculation fueled by
money from these wild cat banks backed by the state bonds. And so, the
states could just issue bonds like crazy and the whole thing collapsed
and the land speculation collapsed in the Panic of 1837 and the
depression of the 1840s. This was not free market banking but banks
heavily regulated by the states. If they had not been prohibited from
doing branch banking, you would have had a few sound, good, New York
City banks that everybody trusted, establishing branches in the
western part of the country, and the banking system would have been
sound.
After the Civil War, Ed's paper talks about the problems that led to
the passage of the Federal Reserve Act of 1913. During the time gold
was the money, part of the Treasury Department of the United States
issued a national currency that was backed by gold, but the problem
was the supply was inflexible. The demand for money fluctuates, but
the supply of paper money controlled by the Treasury Department was
inflexible. That led to the Federal Reserve, which does have a more
flexible system of expanding the money supply. However, the problems
with central banking are, first, incentive and, second, knowledge.
Even though the bank is supposed to be somewhat independent of
Congress, it is a creation of Congress. Congress created the Federal
Reserve Banks, and it can abolish them at any time. And, therefore,
they do have to pay some attention to the politics; and, of course,
Greenspan and other central bankers consult with Congress and talk to
them all the time. But the major problem is the knowledge problem --
the knowledge of how fast to increase the money supply. And, that
would be a problem under any government monopoly fiat system. How do
they know how fast to expand the money?
If they expand too fast they will have price inflation. If they don't
expand it fast enough they will have a recession. You will not have
enough money and prices cannot adjust fast enough. So, the bank always
teeters in that fine line, and you get a dysfunctional system today,
at least in the United States, where good news becomes bad news and
bad news becomes good news. If you have good news - the economy is
expanding, wages are going up - that is bad news for the stock market.
They expect the Federal Reserve to react to that by increasing
interest rates to probably stop inflation, and the higher interest
rates lead to less investment. The good news leads to bad news; the
stock market drops when the economy is growing. Then, bad news becomes
good news, when you have high unemployment. That is really bad news
for the economy, but for the stock market that can be good news
because that means the Federal Reserve will lower interest rates to
stimulate the economy. And, so it is a very crazy system. And, it is
no wonder the stock market is so volatile.
Toward the end of Ed's paper, what he proposes is a price level
anchored to a commodity of universal demand, such as gold. And, he
says it does not have to be gold. It could be a basket of metals and
so on. But it is not enough to have gold, We did have gold in the
United States and elsewhere in the 1800s and that was insufficient
because it is not flexible enough. What you need is gold and free
banking. We are meeting right here in Scotland, and the best example
of free banking was right here until 1844. There is a book about it
called Free Banking in Britain, written by Lawrence White.
The way free banking worked in Scotland was that the real money was
gold. And, then, the private banks issued their own private bank
notes. There were four or five large banks that were well-known and
trusted. And, then, private bank notes supplemented the real money.
They were money substitutes for gold because it was more convenient to
have paper money than carrying around heavy gold coins. But, they
could be redeemed for gold or for the notes of some other bank. And,
if for any reason one of the banks was running short of gold it could
borrow gold form the other banks. So, they cooperated as well as
competed. And, that banking system provided a flexible amount of money
because it could respond to money demand. If the demand to hold money
went up, it would simply issue more of these money substitutes, or
private bank notes. But, they could not over-issue and cause price
inflation because if one bank issued too many notes it would come
right back to it for redemption. So, the banks could not issue more
money than the public demanded because people could always demand
their gold for it. It was a sound banking system providing a stable
price level with great flexibility and it worked very well up until
1844. And, the only reason it ended was the Bank of England took over
the banking system of Scotland.
You still have a small vestige of it because you have bank notes
issued by the Bank of Scotland, but this does not really mean much.
The benefits of the interest that the borrowers pay to the banks goes
to the savers - the people who have deposits in banks. It is not like
the bankers get rich. Banks are intermediaries. If you have a
competitive banking system, if banking is so profitable then people
will start other banks. Competition will drive the profits down to
normal profits. So, the gainers of the system are the public as a
whole.
So, the great reforms that would eliminate the business cycle are the
public collection of rent and free banking.
Fred Harrison:
I would like to understand the difference between the reforms
proposed by the people who advocate government control of money and
deficit financing. What is the difference?
Michael ......:
The problem with deficit finance is that in order to create money
today a government does not use its automatic natural right to
actually create a currency for the economy. It sells bonds to
commercial banks and goes into debt. It is the age-old thing: If a
government can create a dollar bond it can create a dollar bill. A
dollar bond as government debt requires the government to pay back a
great amount in the future and introduces an inflationary form of
currency into the economy rather than a stable one. But that is just
one element of currency expansion. The other elements are commercial
banks and private banks and those are the most significant ones. At
the moment mortgages are supporting about 60 percent of the money
stock. It is a completely different form of money creation. It
introduces different conditions into the economy, and it places the
government in a different circumstance. If the government was creating
the supply of money to an economy, it is in a radically different
position than if it goes into debt to the commercial banking system.
Ed Dodson:
Fred and I had a bit of a debate over the definition of money. He
used that term many times. I would hope he would use the term "purchasing
power" or "paper currency" to indicate that money is
not in circulation very much. That's my basic point.
Michael ......:
The economy of Britain has periodically been rocked by a monetary
form of inflation. So, it is not a system with the same amount of
money being reissued. It is a monetary expansion by commercial banks
through the acquisition of government debt which is wholly
unnecessary.
Christopher Williams
Yes, I would like to ask Fred why he wants to eliminate the Federal
Reserve System?
Fred Foldvary:
The reason I want to eliminate the Federal Reserve System is that we
have central planning in money in the United States. Now, central
planning did not work in the Soviet Union. The problem with central
planning is that the planners simply don't have the knowledge of how
fact to expand the money supply. The demand changes all the time. The
velocity of money - which is the turnover of money - that changes and
the real money effect is not just the number of dollars out there but
how fast they turn over. In economic language M x V (money times
velocity). With changing velocity, with the changing demand for money,
with the change in technology and the changing population movements -
money pouring in and out of the country - the demand fluctuates and
the central bank has to guess how fast to expand the money both for
today and in the future, because the effects of its expansion will be
felt months and months into the future. As we heard, maybe two or two
and a half years into the future. They simply do not have this
knowledge. They can make their best guess. They have been lucky so far
managing it, but we still have had crises.
We have had the 1997 Asian crisis. We have the current downturn, so
things have not been entirely rosy. But, they made mistakes in the
1970s with high inflation, big mistakes in the 1930s with massive
deflation. So, they haven't always gotten it right. And they may not
get it right in the future. The benefit of a competitive banking
system is that you do not need an all-wise central banking authority
to guess what the future supply of money should be. The market takes
care of it, responding flexibly to the demand for money.
Christopher Williams
What is to prevent a government from printing money?
Fred Foldvary:
Here is how you would have a transition to free banking today. You
could not just immediately go back to gold because we are now using
dollars and pounds and so on. What you would do if you wanted to move
towards free banking is that you would freeze the monetary base, you
would freeze the number of Federal Reserve notes. The Federal Reserve
would no longer expand the money supply. The number of dollars would
be fixed. So, in effect, it would act like a fixed amount of gold. The
expansion from then on would be from private banks with their own
private notes. And, if other countries started doing that then
eventually the world would move toward a common monetary system like
we actually had in the 1800s which - because of historically and other
reasons - would be gold but it could be something else. So, the
benefit of free banking based on either a frozen amount of national
currency or a commodity like gold is that you prevent inflation.
One of the big problems with fiat money, since World War II, the
money has been inflated every year. Every year we have a certain
amount of inflation, sometimes more than others. Some countries have
hyper-inflation where the money has become practically worthless.
Then, they have to chop some zeroes off and they go and inflate again.
So, with commodity-based money we stop inflation, which is basically a
tax on money holdings. That is the benefit of free market commodity
based money.
Ed Dodson:
One difference between my proposal and Fred's is that I am less
opposed to regulation then Fred might be. The analogy would be in the
United States and is a move to end the difference between investment
banking and commercial banks. I am in favor of retaining some level of
distinction which is how I distinguish between a bank of deposit and a
lending institution. I am not inherently opposed to the free banking
idea if the proper degree of oversight can be applied. My market
response is auditing companies and insurance. Maybe we are closer than
I thought.
Fred Foldvary:
Yes. The customers have the right to a full knowledge of exactly what
the bank is doing. Then, they take the risk.
Mr. Clay:
(not certain of the name of this person, unclear on the tape):
Mr. Chairman. I have a very simplistic approach to economics. I have
to admit that half of what has been said this afternoon goes clear
past me. My view is that we have a pretty sick economy in our world
today. The sickness is caused by two fundamental reasons. One is that
natural sources of wealth - the natural resources meeting the social
environment - together with man creates wealth. That wealth provides
the natural source of community funding as I see it. Because the
community does not reserve that natural source of wealth it
confiscates money from that which is earned by individuals. Thus, on
average, an individual earning 100 pounds has to give 40+ pounds back
to the government. This creates a sickness. That sickness creates the
money system. I believe the money system is a reflection of what is
happening in the society, and I wonder whether you can cure the
problem in society and economics by tampering with the money system.
But, first of all you have to resolve this basic sickness, the fact
that the natural sources of wealth is not circulating within society.
Ed Dodson
I do not suggest that honest money is a cure for the business cycle
or to poverty. But, honest government is worthwhile in its own right.
And, self-creating credit is not a power I would give to government.
Privatizing money is the way to get the government out of the ability
to self-create credit (which, again, is without your consent taking
away your purchasing power).
Question from Unknown Person
Is that going to create a healthy society, a just society?
Ed Dodson:
Its is on the road.
Fred Foldvary:
For a healthy, just society, we need the sharing of the rent. But we
also need to fix the money side because the business cycle has the two
components - the real side and the money side. And, they work
together. We focus on the real side - the physical economy and real
estate. But, the money side is very intimately connected with the real
side because real estate - both land and construction - if made with
borrowed money. When the land prices crash they bring the banks down
with them. So, we need the dual reforms.
Jake Himmelstein:
I know one thing about the United States currency. There is probably
more United States currency. There is probably more U.S. currency in
Russia than there is in America. And, I think the reason for that is
because of [worthless?] of the commodities or whatever is behind it,
it is the confidence that the people of the world see in the American
government that gives the currency the value it has and added here
anything about that.
Fred Foldvary:
The confidence is not in the United States government as such. The
confidence is that the Federal Reserve will not expand the money that
much because we do have fairly responsible people in the Federal
Reserve System, and that the U.S. dollar is a widely circulating one
which is known all over the world. So, certainly the U.S. dollar, the
British pound, the French franc and so on have been much sounder
currencies relative to others. But, in the absolute the U.S. dollar
loses some percent of its value with inflation and that the value with
inflation and that the central bankers will not always be all wise and
may make a mistake. And, when they make a mistake because the U.S.
dollar is used so widely throughout the world it could be rather
disastrous.
Jake Himmelstein:
I doubt very much that the average Russian who holds U.S. dollars
knows anything about the Federal Reserve. I submit the U.S. dollar
represents the strength of the U.S. government. Now, if the U.S.
government has a major failure then you will have a real problem
worldwide.
Alistar McConnachie:
It was mentioned that diamonds are an example of a commodity which
has value. Well, I would take issue with that. And, you can buy a
diamond engagement rink but you try taking it back to the jeweler a
year later and he won't give you any money for it because diamonds do
not hold their value because there are so many diamonds in the world
that if they were all put on the straightaway their would be no value.
In fact, the very concept "diamonds are forever" was a
market ploy by diamond manufacturers to encourage people to keep their
diamonds and not return them to shops because that would lower the
wholesale price of diamonds. In fact, the Western diamond market began
to decline in the 1980s. The diamond manufacturers had to open up a
new market for diamonds and they hit on Japan, where there was no
market. What they did was put a whole series of advertisements
encouraging Japanese couples to adopt the Western lifestyle of diamond
engagement rings, and now something like 95% of Japanese couples have
diamond engagement rings. But that is only because that was deliberate
marketing by diamond manufacturers. So, my point is that diamonds - as
such - don't really have intrinsic value.
Fred Foldvary:
There are investment grade diamonds where you see wholesale prices
that you can actually sell them for. There is a market.
Ed Dodson:
I would also add we should not discount the value of sentiment. I
would go around and ask all the women to give up their worthless
diamond rings and my success rate would be fairly low I would think.
On of the other hand, a wise consumer might visit the pawn shop. So,
if you are getting engaged
Fred Foldvary:
In economic textbooks they always have this famous example that goes
back to Adam Smith about diamonds and water. They always ask students
why are diamonds so expensive and water, which is such a necessity, so
cheap. Well, what I figured out is if you have a diamond that costs
$3,000 and it does last you all your life and beyond, that the real
cost is spread out over sixty years or longer. So, if the diamond does
last forever, the cost per day is only about 50 cents. And, this isn't
that expensive.
Question form an Unknown Person
When Marco Polo went to China and stayed there so long that his wife
married someone else, and he was in the service of the imperial
Chinese empire they were using paper money. And, they had used it for
400 or 500 years. And, I suspect that our tendency to look at
commodities to underwrite money is actually wrong. We have made the
comment about stability is what we should be looking for. Certainly,
in economic reform the key point is actually stability. And, if we
have confidence in stability we would use paper currency.
Ed Dodson:
Honesty yields stability.
Bob Andelson:
Money really has two separate functions. It is both a standard of
value and a medium of exchange. Now, as far as a medium of exchange is
concerned, I am pretty close to Ed's position. I believe in free
banking with oversight to make sure the claims made are valid. But, as
far as a standard of value is concerned would it not be within the
proper function of government, which in our society government has the
responsibility of setting weights and measures, to declare that a
dollar is equivalent to so many ounces of gold or a market basket of
commodities or whatever.
Ed Dodson:
My response is, the United States Constitution suggests that the
framers had this in mind. However, the subsequent Congresses had
something else in mind, so we no longer have a system of coinage
creation with a standard system of weights and measures as required
under the Constitution.
Bob Andelson:
I am not suggesting that the government would create money.
Ed Dodson:
If its is generally understood that a dollar has a definition of
one-thirty-second ounce of gold, fine. But I would rather see the
paper currency say 1/32 ounce of gold is what you are entitled to in
exchange for this certificate. Or, easier, as Fred said, one ounce of
gold and have it clearly stated so we don't lose the tie between the
definition and what is behind it.
Fred Foldvary:
Well, I think money evolves. We currently are using dollars and we
are used to dollars. And, rather than change to some other system
would continue to use the dollars or pounds as a unit. Therefore, as I
say, if we move to a free market system you would have an evolution
first to a frozen base of federal dollars, then private bank notes
expanding on that. And, then, later the market would emerge with some
kind of value. And, if the U.S. at that point were to fix the
definition of the dollar as a certain amount of ounces that could
certainly be a way to do it.
Duncan Pickard:
I just wonder in talking about money, I always thought that the
inflationary effect it raises in land prices - that if my land rises
10,000 pounds a year I can get further credit on the basis of that.
What is the influence
I agree that without the public
collection of rent that monetary reform might be irrelevant.
Fred Foldvary:
I don't think an increase in land values by itself causes a general
price inflation. Generally, price inflation is caused by monetary
inflation - to much issuance of money. But, that increase in the money
supply often accommodates land speculation. When there is a lot of
demand for money for land speculation, the central bank might
accommodate that by increasing the money supply. But, if it doesn't
accommodate that, then an increase in prices is one area implies a
decrease in money available in other areas, and the price level as a
whole I don't think would be much affected.
Duncard Pickard:
So, a follow-up to that, then, the retail price index we take as a
measure of inflation since it doesn't take account of a rise in the
price of all commodities is not a very meaningful figure.
Fred Foldvary:
In the United States, the Consumer Price Index does take into account
housing prices. About 40 percent of the basket they look at, in fact,
is housing related.
Duncard Pickard:
In Britain, because it would not suit the government to include the
rise in the cost of mortgages in the retail price index, they dropped
it out. Then, when the rate of price increases in enough commodities
fell they probably would do it again.
Ed Dodson:
Stability has occurred to the extent it has occurred because the
monetary authorities have lost their power to influence the quantity
of credit in circulation. The global market for credit is extremely
efficient. When there is no investment opportunity in Japan, the
billionaires and millionaires in Japan look for a safe harbor and they
transfer their assets somewhere the return on investment net of
inflation is satisfactory. So, we have this global movement of all
this purchasing power. The average person in Japan right now is
feeling the pinch while in the United States credit is very liquid,
characterized by low interest rates and readily available. The actions
of the Federal Reserve are always behind what the market has already
adjusted for. The dust goes up and down in response to what the
central banks try to do, and in the end some are richer and some are
poorer without any general improvement in the overall economic
circumstance.
I think that this has been true since electronic transfers of account
balances, the computer and the fact that the stock markets are
basically accessed all over the world. And, the money markets are
often twenty-four hours a day. It just goes from one place to another.
Governments have lost the power to intervene effectively, and most of
the intervention they have is negative.
Fred Foldvary:
On the mortgage question, I don't think an increase in mortgages by
itself would cause inflation because that would just be a shift of
debt from other things to mortgages.
Godfrey Dunkley:
Does the Federal Reserve Bank make a profit? Does the Bank of England
make a profit? How does that profit compare in value with what the
government has to pay annually to the central bank for the pleasure of
making use of the money they create?
Fred Foldvary:
The government does not pay the central bank. It is the other way
around. Profits from the interest they get gets paid back to the
Treasury after paying the expenses of the bank.
Ed Dodson
The bank is permitted a 5 percent return, I think.
Duncan Pickard:
Why is it that almost every government in the world is in debt?
Fred Foldvary:
The governments spend more than they take in in taxes.
Duncan Pickard:
Who are they in debt to?
Fred Foldvary:
Bondholders.
Alistar McConnachie:
Those bondholders, though, are very often private banks. And the
question is, is it right for the democractically-elected government to
be in debt to the private banking system. And that is the essence of
the money reform view. Certainly, when it is the case of individual
bondholders, then that is a different matter. But it is bonds held by
the private banks which opens the moral question we are addressing as
money reformers.
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