Money

Part 5 – Lawnmower analogy

Lee Friday

I recommend reading Parts 1 through 4 before reading this essay

When a bank lends fiat money, it is loaning money which did not previously exist. Think of it another way. Your neighbour Charlie loans you his lawnmower, which he is unable to do unless it exists in his garage prior to your request. If Charlie had the power to create lawnmowers out of thin air, he could open a lawnmower rental shop. When a customer walks in, Charlie would go into the back room, snap his fingers and a lawnmower materializes. He rolls the shiny new lawnmower into the front room and collects the rental fee from the customer. The lawnmower is returned the following day. Charlie takes it in the back room, snaps his fingers and it disappears. Everybody knows this is impossible. A tangible good cannot be created out of thin air!

Throughout history various tangible goods have been used as money. This tangibility allowed people to see, touch, feel, smell, taste, bite, weigh, etc. the money to satisfy themselves as to its legitimacy. When a nineteenth century (and earlier centuries) banker loaned money by issuing a paper gold receipt (money substitute) without having the gold in his vault, he committed a fraudulent act because he was unable to honour his promise to all receipt holders to return their tangible money. If all receipt holders show up at the bank to retrieve their gold, thus revealing the fraud, the banker must be held accountable for the theft. He must be forced to honour all of his contractual promises, perhaps by selling his bank to raise the money. There is only one definition of honest bank lending: a loan of tangible money which the banker owns, or has borrowed from another person.

Long ago, one of the reasons that people – not governments – decided to use gold as money, was because its limited supply created confidence in its present, and future, exchange value. Limited supply led to falling prices for goods. The marketplace never chose to use paper as money, because the supply of paper is virtually unlimited. People deposited their tangible money with banks because it was easier to use receipts – paper money substitutes – for their daily exchanges in the marketplace.

Note the subtle but crucial distinction: The market never used paper as money per se. Paper was simply a money substitute for the genuine tangible money (gold, silver) secured in a bank vault.

A banker who loans fraudulent paper money substitutes and is not caught because the loan is repaid before anyone is the wiser, is still guilty of stealing the loan interest because he lied to the borrower about loaning him a tangible good. The borrower would not have borrowed the money substitute had he known the truth. If all receipt holders had demanded the return of their gold prior to the loan repayment, the borrower could have been the one stuck with the Old Maid card.

Consider a real lawnmower rental shop. The owner closes the shop for a two week vacation. I break into his shop, take several lawn mowers, rent them out every day, and return them to the shop before the owner returns. I keep the rent money and no one is the wiser. Clearly, this is theft, the return of the lawnmowers notwithstanding. Whether anyone is aware of the theft is immaterial. It is still theft.

If the owner returns early from vacation, my theft is discovered. Likewise, if all depositors attempt to retrieve their gold, the banker’s theft is discovered. I loaned lawnmowers which I pretended to own. The banker loaned gold which he pretended to own, or pretended to have borrowed. Latecomers to the bank are unable to redeem their receipts – they are victims of theft.

This is a simple concept – if I deprive someone of their property, even temporarily, whether they are aware of the deprivation or not, I am a thief. The rent money is stolen money because it is a direct result of the theft, just as the banker stole interest on the loan of an irredeemable money substitute. I pretended to have the moral right to loan the lawnmower, just as the banker pretended to have the moral right to loan an irredeemable money substitute.

However, this analogy requires two distinctions. First, my theft relies on the existence of a tangible good (lawnmowers), whereas the banker’s theft relies on the magical creation of an intangible good (irredeemable money substitutes) which he claims to be a tangible good (real money – gold). Second, the government says my theft is illegal, but the banker’s theft is legal. We must not confuse legality with morality.

Now let us consider modern banking and one hundred percent fiat money. Paper or electronic money can be considered legitimate only if there is a tangible good (commodity, e.g. gold) to back it up, yet people borrow money all the time without verifying its tangibility. Why? Most people know very little about money, and they subconsciously assume that when they borrow money, they are borrowing a tangible good, because they sense the tangibility of all other goods which they borrow, such as a lawnmower, or a cup of sugar, or a sweater, or a car.

More importantly, people trust their government because they have been conditioned to believe that government exists for the good of the people, and it would never intentionally cause them harm. In other words, people simply do not believe the government would allow banks to operate if every loan was a fraudulent loan. To fully comprehend the evil of fiat money is to explode the myth of the altruistic State.

If you did not know that a thief broke into your house and stole one hundred dollars every month, you would sense that you were constantly running short of cash, but remain unaware of the cause. So you scratch your head and go on with your life. But if you discovered the truth about the thief, you would be angry. And so it is with the hidden theft caused by fiat money (stolen loan interest and stolen purchasing power).

Recall the words of Galbraith in Part 1:

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.” ………… John Kenneth Galbraith (1908-2006), Canadian born, Professor of Economics at Harvard, Author, Public Official

Indeed, our minds should be repelled! Now consider the following, written long ago:

“We may amuse ourselves,” wrote William Gouge, Treasury advisor to President Andrew Jackson, “by contriving new modes of paper banking. We may suppose that kind of money which has been tried, in various forms, in China, Persia, Hindostan, Tartary, Japan, Russia, Sweden, Denmark, Austria, France, Portugal, England, Scotland, Ireland, Canada, the United States, Brazil, and Buenos Aires, and which has everywhere produced mischief, would if we had control of it, be productive of great good. We may say, it is true that paper money has always produced evil, but it is because it has not been properly managed. But, if there is not something essentially bad in fictitious money, there seems to be something in human nature which prevents it from being properly managed. No new experiments are wanted to convince mankind of this truth.” Since Mr. Gouge wrote this in 1833, we have had many melancholy examples to add to his list.[1]

William Gouge said there seems to be something in human nature which prevents fictitious money from being properly managed. He was correct. The managers always serve themselves, at the expense of everyone else. No one can be trusted with such ‘Legal’ power.

 

[1] Ron Paul Gold, Peace, and Prosperity: The Birth of a New Currency (Foundation for Rational Economics and Education, Inc., 1981) p 51

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