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A Debate
Over Monetary Reform |
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edited
transcript prepared by |
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[Addresses
delivered at the International Union Confererence, |
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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
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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
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
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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."
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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.
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GARRY
NIXON |
Supposing the Bank of Amsterdam is destroyed
with all of the coinage and bullion in its vaults.
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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.
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GARRY
NIXON |
The money supply is mostly gold and silver, and
no one can use gold and silver.
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ED
DODSON |
Almost every manufacturing process you can think
of today that involves high technology makes use of these metals.
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FRED
FOLDVARY |
Silver is a widely-used industrial metal.
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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.
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FRED
FOLDVARY |
Could you explain a little more. How is a bank
of deposit get its fee? What is it being paid for?
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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.
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FRED
FOLDVARYx |
Why do you call it a bank and not a warehouse?
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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.
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FRED
FOLDVARY |
It is a vault that makes its money.
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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.
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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.
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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.
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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.
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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.
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ED
DODSON |
The two reforms go hand in hand. Neither one
will work effectively without the other, in my view.
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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.
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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.
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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.
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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.
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FRED
FOLDVARY |
In the United States, barter is legally subject
to the income tax. Whether it collects it is another matter.
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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.
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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.
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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.
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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?
|
MICHALE
....... |
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
HIMMELSETEIN |
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
FROM 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.
|
DUNCAN
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
FOLDVAR |
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.