Friday, February 26, 2016

Money, Currency and Credit

No sane people ever let government get involved with money, currency or credit.  There must always be a strict separation of monetary affairs and state.

If definitions are kept straight, one can understand how the media of exchange operates in an economy (and at the same time understand the confusion introduced by the bad guys, leading mega-economist Galbraith to comment ‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’

First money, normally gold and silver in history, can be reviewed here.

Money is used to extinguish a debt, where no further business is anticipated between parties.  Think caravan trade.

Of course, perspicacious business can lead to accumulation, and some people find they have more money than they need immediately, and will store it in a bank.  But usually excess gold and silver would be converted into plate, decoration and jewelry, the more precious metal accumulated, the more luxury.  If "money" became scarce, then the plate, decoration and jewelry would be melted down, to match demand.

Now backed by the money in a bank, people once issued warehouse receipts, titles to the gold and silver, so they would not have to actually carry the gold and silver around.  This is good for ongoing relationships, and tends to finance in a pinch.  Or expansion.  The amount of these notes in circulation was pitch perfect to the commerce associated with the warehouse receipts, of course.

As an aside, warehouse receipts for fungible items such a olive oil, wheat, or say beeswax would also emerge as currency, again pitch perfect to the commerce between the parties involved.

Next there is vendor financing, as when a baker delivers 3 dozen loaves of bread to a grocer, and leaves a bill to be paid at the end of the month. The baker was also extended credit, by the miller, who received credit from the granary, which received credit from the farmer, who received credit from farm labor.  Again, this is all asset backed credit, matched perfectly to the demands of commerce, no more no less.

Only in utterly corrupt regimes such as ours does the question "what is the right amount of money" occur.  (Although the question is inherently obtuse: neither warehouse receipts nor credit is money.) In a free market, the perfect amount of money, currency and credit is always available.

Since capitalism is now in the vortex of its death spiral, people who have some claims warranted by portfolio statements, deeds of trust, pension promises etc are wondering how to escape the denouement.   The smart guys are advocating holding gold.  the same smart guys, though, will tell you as the price of everything drops, so will gold.  but gold will still buy what it did before, and maybe more... just as two silver dimes, 20 cents in 1962, would get you a gallon of gas in 1962, can be sold for silver for a couple of bucks and get you a gallon of gas in 2016.  Money holds its value, currency does not (hence the "right now" root of the word.)

Property, pensions and paychecks are forfeit in the coming fights over who gets what from what is left of the USA productive capital base.  (Stock portfolio and gold holdings are property too.)

Why hold gold if it will be taken?  On the other hand, the means of production, a bakery or bicycle repair shop is too small and to diffuse to confiscate.  A small mill grinding heirloom (non-gmo) corn is of not value to the powers that be, too small to steal.  At the same time such companies are your escape as well as a partial solution to the problem.

Get your own business going, and understand the difference between money, currency and credit (and benecredit v malcredit).

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