01 February 2008

The Road to Poverty – Part III

(Part I, Part II )

Recall that I, the bank, have printed notes for which I don’t have gold in my vault and “loaned” this “money” to the city to finance its war with our neighbors. This printed money devalues all of the other notes currently in the market. Let’s say that I have one million dollars of gold in my vault; and there are one million dollars worth of notes in the market. When I print more notes than for which there is gold in my vaults, the value of those extant notes decreases.

Let’s say that the amount of notes I print up amounts to ten percent more than the total value of the gold in my vault. That means that the other notes have been devalued by ten percent. That is, a note previously worth one dollar in gold is now worth only $.90. So now, if you want to redeem your notes for dollars you have to bring in 10% more in notes than you are going to get in dollars. You want a dollar’s worth of gold? You need to bring in $1.10 in notes. That’s inflation. And it was caused by your city fathers.

Of course, no one knows this except for me and the city fathers. The notes they spend on military supplies are, so far as any one knows, worth every dollar those notes say they are worth. When the city goes to the arms supplier and gives him a thousand dollars in notes, they get a thousand dollars in arms. And when the arms supplier turns round and spends that money on whatever things he purchases he gets a thousand dollars worth of goods and so on until…until the market “realizes” that there are more notes going round than for which the bank has gold. That means that in order to keep making the same amount in real (i.e., gold) dollars people conducting business need to raise their prices, in this instance by $.10. Remember $1.00 in gold now requires $1.10 in notes, so a man who still wants to make a real dollar for his goods or services must charge $1.10 for those goods or services.

You noted that the people for whom a dollar note was still worth a dollar were the people at the beginning of the exchange process: the city fathers, the arms suppliers, and the like. Those people lost no money. Their $1.00 notes were still worth $1.00 in goods and services. It is the people towards the end of the exchange process who lost money, the working people. Their $1.00 is only worth $.90. They wake up one morning to find that they lost $.10 for each dollar they made the day before. And they can’t raise their prices to make up that loss. Overnight they have fewer dollars to live on. If he went to bed with $100.00 he now has, effectively, only $90.00!

Let’s say the war with our neighbors drags on. The city fathers need more money. Again, I print more notes. The process begins all over again until that day when the working people wake up to find that their dollars are now buying another $.10 less. And on and on it goes. Until some of the people who were at the bottom of the rich class, find themselves at the top of the middle class, and some at the top of the middle class find themselves closer to the bottom of the middle class, and those at the bottom of the middle class are now poor, and some of those who were poor now find themselves utterly destitute.

Then the poor in the city cry out to the city fathers for relief. Relief from whom? Why the awful rich people who keep raising the price for everything and won’t give raises in order to make up the difference! (We can’t blame them. The city fathers have seen to it that no one is taught economics and knows how the city banking system – me – works. They have no idea the real reason their dollars are buying less and less.)

So the city fathers, benevolent creatures, agree to provide this much needed relief: The War on Destitution. And how will they fund this War on Destitution, I wonder?

Part IV

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James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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