Monday, April 19, 2010

Sound Money and Schoolyard Politics

Economics is not rocket science. In fact, most everyone learns the basics of economics when they’re children. It’s quite simple, really, like math. If you have something I want and I have something you want, we can trade. We’re both happy. That’s really about it. Oh, sure, there are subtleties involved and other considerations to take into account, but those are really more about psychology and human behavior rather than economics. At its most basic level, economics is simply about how one acquires stuff.

Let’s say, for instance, that we’re two kids in a schoolyard. You have a small bouncy ball that I want. Sure, I could try to knock you down and take it from you if I was a bigger and stronger kid than you, but we all know that’s not very nice. That’s not a very good way to make friends. Not too many people like a bully. It’s also not very good economics. I might be happy, but you’re not going to be. We’ll call this theft. I think it’s safe to say that it’s more or less universally accepted that theft is wrong and those who engage in such practices need to stopped, punished and taught that theft is not acceptable no matter how big and strong one is.

Suppose then, that I decide to go about trying to obtain the ball in a more civil manner. I check in my pocket and find I have some jacks. So I offer you one in exchange for the ball. You’re not entirely certain about the trade, so I offer you two. You accept and now we’re both happy. Simple. One plus one equals two.

Now let’s make things a little more complicated. Little Jimmy has been watching us and wants to know what’s been going on. He comes over and sees your ball. Suddenly, he wants to trade for it too. He looks at what I’m offering and notices that my jacks are a little worn and slightly corroded. His are nice and new and shiny. It’s obvious that you, being the only one in the schoolyard with a small bouncy ball can now determine for yourself which person you want to trade with, if either, and the amount of jacks you can ask for. It’s not quite as simple as earlier, but it’s still voluntary and two of the three people are going to end up happy.

Now let’s go even further. Little Suzy has noticed three boys gathered together and wonders what it’s all about. She comes over and sees the colorful little ball and has decided she wants it too. It turns out she has candy to trade. Well, who wouldn’t trade a colorful little rubber ball for some sweet candy? The boys with the jacks are sweating it now as they dig in their pockets for more neat stuff to try to win the ball, and maybe even some candy. Things have become a little more complicated, but everyone’s more or less acting civilly toward one another and no one’s going to trade something for something else they don’t want.

Well, let’s say this goes on for awhile. Other children show up with marbles, more candy, more rubber bouncing balls, jacks, dice, cards, matchbox cars, all kinds of things to trade. There’s now a regular smorgasbord of trading going on. Everyone’s trying to find something to trade and something to trade for. It might look a little chaotic, but all the kids are more or less satisfied with the deals they’re getting. Some might be looking to trade up and get something to trade for something else, but others are getting exactly what they want and walking away. They are doing what kids do. And they are deciding for themselves what they want to receive and what they are willing to give up. Most of them are going to be happy with their trades, even those who decide to simply keep what they have and maybe try to trade again tomorrow.

Ah, but now a shadow creeps onto the schoolyard. He sees the large gathering of kids, and he doesn’t necessarily like what’s going on. He looks in his own pocket and finds that he doesn’t have much the other kids would want, and he smirks. He doesn’t think it’s very fair. Then he smiles. He realizes that he has something the other kids don’t have. He has his size and his muscles. He’s been held back a couple of years and he’s the biggest and strongest kid at school. He’s quite intimidating. We’ll call him Dick.

Dick has a pocket full of toothpicks and an idea. He marches over to the gathering determined to get a piece of the action. He quickly assesses the situation and makes the announcement that the students are no longer allowed to trade amongst themselves without his approval. There is too many of them crying that things are unfair. He is there to make sure that trade is kept as fair as possible. He is going to take all the stuff and in exchange he will give the kids an amount of toothpicks depending on the stuff they have. Only the kids he decides will trade in a fair manner will be able to trade the other stuff for the toothpicks. He will then allow the kids to use the toothpicks to get back their stuff and to “buy” other stuff. But, they’re not just regular toothpicks he’s giving out, they’re special toothpicks colored in a way only he can color them, with marks only he can make because he wants to be certain he’s the only one who can give out the toothpicks.

You would think the rest of the kids would just walk away at this point and take their fair trade somewhere else, but there’s a problem. What I neglected to tell you about Dick is that he hangs out with a few other big kids after school and they happen to know that if they don’t do as he says, it’ll be more than him they have to worry about. They know they’ll get beat up. These kids are scared. They know that defying Dick is not a smart thing to do if they want to avoid a beating. Most reluctantly give into his demands and go along to get along, despite how badly they may feel about themselves for not having the guts to stand up to Dick. He takes note of those who do manage to sneak away and avoid him, or those who do speak up. He’ll get his retribution on them soon and everyone will know what happened when they see the kid’s bruises. They’ll all certainly fall into line after that.

Now no one is happy, except for maybe Dick and his goons. The kids all walk away from the gathering grumbling harshly with their pockets filled with mostly worthless toothpicks. Dick has all the good stuff. They are hoping that they’ll be able to get their stuff back, but they are filled with uncertainty. They are simply too small to do anything about it if Dick decides to be a dick and keep the stuff. Their trading frenzy, and hence their prosperity, has come to an end.

I have been accused of being a gold bug, of wanting to reinstate a gold standard back into our monetary system. This is not necessarily true. While I believe that a gold standard would be better than the current fiat system that we have, I don’t necessarily believe that it would be the best way to go. I understand that a gold standard would have its faults. It has been pointed out to me, for instance, that the vast majority of the gold is likely held by the same moneyed elite that are currently in charge of the present world wide financial system. I think this is likely so and I think that they can and do manipulate the gold market. The same is likely true of silver. I’m not so certain about copper, palladium, and platinum but likely even those metals, lesser used in terms of currency, are likely controlled by the same elite controlling everything else.

That’s why I’m in favor of repealing legal tender laws. The only reason Federal Reserve Notes are so widely accepted is because of these laws. They basically made it illegal for merchants to accept anything else in this country in exchange for their goods and services. I think that competition in money would be a good thing. Anyone could put money into the system and it would be up to the merchants to determine what kind of money they’d want to accept. The market would be the governing body. Given such a system, it wouldn’t take long before sound money, money that was backed by some sort of real commodity such as gold or silver, would quickly become the most widely accepted money. Fiat currencies that are backed by nothing and printed at whim would soon fade into our memories like a nightmare fades in the morning light.

To you who think that fiat money is such a good thing and that a gold or silver standard is too quaint an antiquity, I would love to see what you would do if legal tender laws were repealed and we were allowed to trade in whatever kind of notes or specie we wanted. I have the feeling that if you kept your fiat money and I chose to use gold or silver specie or some other precious metal, that it would soon be you walking home with your head down. But then, what do I know? Unless we can kick the Dicks out of the schoolyard or get them to somehow leave us kids alone, we may never find out.

There are some who would likely say that I’m over simplifying things. Perhaps they are right. I am not an economist. I am not someone who knows it all. I’m just a poor kid with a pocket full of toothpicks walking home with my head bowed because I no longer have even the old, corroded jacks in my pocket that I had this morning. I’m a bit upset because I don’t think anyone should be telling two consenting parties what they should or shouldn’t use to trade with. I am a little upset at all the Dicks in this world, but there’s not a lot I can do about it.

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