Oct 28, 2011

Fiat Currency and the Milkman

"This is my favorite family to deliver milk to..."

Imagine a milkman who, in delivering his normal route, notices a sudden increase in demand for milk.  Perhaps normal customers are asking for more supply, as well as potential new customers who would purchase this milk if it were available.  Unfortunately, the milkman only has the capacity to create X gallons of milk, and knows he is risks losing market share unless something is done to increase the supply of milk.

There are several courses which the milkman can pursue to satisfy this demand.  He could invest in more cows and/or more or higher quality equipment could be purchased to increase efficiency.  An arrangement can be made with another producer who has excess milk .  Or, unscrupulously, the milkman could dilute the milk with water to make more product.  Only the integrity of the milkman can dissuade him from the tantalizing prospect of more profit without real input.

Let's say the milkman does decide to dilute the milk to satisfy this increased demand.  If the milk is diluted to account for a 5-10% increase in demand, it is likely most customers will not notice.  However, a few are suspicious even at this point, as the human pallet is quite sensitive to differences in a known product.  This, of course, leads competitors to the market who produce undiluted milk.

In the face of this competition, the milkman has a few courses of action to satisfy the customers:  He can offer a lower market price for his diluted milk.  Buying more cows, efficiency, and contractual agreements with other producers could be applied, as before, to increase his supply of actual milk, thus allowing him to fill the demand without diminishing the product (or the market price) as much or at all.  Or, unscrupulously, the producer can attempt to force the competition from the marketplace altogether.

Let's say the milkman is able to seize the market, and become the only legal milk producer in the area.  Now, with 100% market share, the milkman is essentially able to dilute the supply ad infinitum.  The only recourse the consumer has now is to find an underground producer, produce the milk themselves, or illegally import milk from outside the area.  Those who place more value in having undiluted milk than the repercussions of buying illegal milk will do so- the level of diluiton will directly affect the number of consumers who choose to skirt or break the law.  These people will likely be mostly good, upstanding citizens when judged by any other standard.

There is, of course, only one place the milkman can go to make buying or selling other brands of milk illegal- to literally force other brands off of the market.   This is, of course, the State or one of it's tentacles- the arbiters of force in our society.  These inter-relationships are never without "justification"- usually preceded by some crisis or sudden public concern, and the inevitable slew of propaganda that comes from the State and it's sympathizers.

Seriously...why don't we just use these things?

This scenario parallels the story of money.  The banking cartel producing endless fiat currency is no different than the monopolistic milkman who will ultimately be driven to produce milk so thin you can read your emails through it.  When supply dries up, these producers will always be compelled to dilute- the latter uses liquid, the former "liquidity."  The loser is always the consumer, who incrementally experiences the undermining of the product- and can do nothing about it.

There is probably no issue that affects people on a day-to-day basis more than the integrity of the money they use.  The value of money is relevant in every monetary transaction- it determines how much labor people are willing to exchange per unit, as well as how many units one will exchange for a product or service.  Finally, the value of the currency affects savings, investment, and retirement- and how much products or services will cost in the future.  Clearly, a sound currency is crucial for anyone working, spending, or saving- i.e. everyone.

If we are to break ourselves of this cartel on money creation, we first have to face the fact that they are illegitimate counterfeiters and have no integrity.  We, of course, cannot forget the badge and the fancy suit behind the cartel- the State, which forces us to behave as if this cartel is legitimate through law.  To eliminate the monopoly enforced by the State in the market for money is, thus, allow consumers to choose which producer has the most scruples.

An effect of this awakening, and presumably a return to competition in the currency market, would be the ability for consumers to choose something other than the cartel's monopoly money.  If history is to repeat itself, precious metal commodity money will likely emerge as the currency of choice, namely gold.  People tend to choose gold because it's value can only be diminished when more actual substance is mined and minted.  Thus, runaway inflation due to endless fiat money is practically impossible in a constitutional gold and silver commodity money economic setting.

Also, because a finite amount of gold exists in the market at any given time, interest rates can only be moved by the actual activity of the market- i.e. spending and saving.  Because of this relationship, a gold currency can provide a real picture via the intrest rates of what the true market conditions are.  When the interest rates are relevant, a vivid indicator exists to signal investors as to what the risks the market presents.  For, interest rates are supposed to show investors whether or not there are significant savings in the market to back up a risk they are about to take.  This is a much more stable platform for a society to operate on than a cartel that manipulates interest rates at it's whim.

When interest rates are controlled by the central bank, investors are rendered blind to risk and prone to malinvestment.  Look at our society today- we have an extreme lack of savings and high debt.  But, the major complaint is a credit crunch!  With no savings to back it up the risk, investors should not be borrowing right now, they should be waiting for savings to build up support the projects they are considering.  Instead, we have a central bank who insists on keeping the rate of borrowing low, prodding the investors to back projects with no future.

It is no wonder that as we have seen more money flow toward these masterful failures, we have seen more antagonism from the general public.  They are the losers who have to suffer through currency devaluation, inferior products, and lost opportunity as the "experts" decide what is best for the rest of us.  Our masters may promise us utopia, but they ensure it for themselves.

A sound currency is the true hedge against central banking. While we can never live in a perfect world, we should at least be able to see it for what it is.  Just as our milk should be open to competition, so should be our currency.

The video below explores the issue: "What is money?"  The lecture is part of a series dealing with the money issue with subsequent lectures coming entitled "What is Constitutional Money?" and "What About Money Causes Economic Crisis?"  I cannot wait for these to come out, as the presenter is quite thorough in covering a subject critical for each of us to understand.

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