Pianist4Freedom
Member
- Joined
- Feb 3, 2008
- Messages
- 132
I share the fascination with monetary policy that everyone on this forum seems to hold. There are so many videos on youtube, however, which seem to think that fiat monetary systems are evil, I've decided to play devil's advocate and figure out for myself 1) why they work and 2) why all the doom and gloomers must be wrong.
Here's one such video which suggests that fiat money is evil and doomed to destroy us all:
Money as Debt
In order to fully understand how banking works, I've conducted several thought experiments for myself.
The first thought experiment I came up with definitely arrives at the same conclusions that this video
and many people on this website share: the debt monster is going to devour us all.
Experiment #1 (endless self generating debt):
Imagine a small economy with several people who can create goods and services that you need: a cobbler, a baker, a butcher, a computer programmer, a dentist, a barber...etc. etc. They are all currently bartering their stuff with one another, and it is very inefficient.
Enter the banker. The banker will issue promissory notes and lend them out to each business in the economy, and set the initial value of the promissory note so each person knows how much they will need to
borrow to trade at current barter exchange rates. Set it to the value of a haircut, perhaps. Now each business can exchange those promissory notes with one another, making trade more efficient. In order for
the banker to fund his own operations however, he will have to charge interest on the loans. But wait a minute---where the heck is the extra money going to come from?
enter the debt monster.
The banker will have to loan out additional promissory notes, also at interest, while collecting interest on the previous loans. Obviously, this would lead to the frightening conclusions that all those videos on youtube seem to share. In this experiment, the only thing the banks can be paid off with is the money they loaned out. Clearly this cannot work.
Experiment #2: (Why fiat monetary systems can and do work, and why the world isn't nearly as scary as the anti-bankers on you tube would like you to believe)
This experiment begins exactly the same way.
Imagine a small economy with several people who can create goods and services that you need: a cobbler, a baker, a butcher, a computer programmer, a dentist, a barber...etc. etc. They are all currently bartering their stuff with one another, and it is very inefficient.
Enter the banker. The banker will issue promissory notes and lend them out to each business in the economy, and set the initial value of the promissory note so each person knows how much they will need to borrow to trade at current barter exchange rates. Set it to the value of a haircut, perhaps. Now each business can exchange those promissory notes with one another, making trade more efficient. In order for the banker to fund his own operations however, he will have to charge interest on the loans. ...
Don't panic!
Since money is just being introduced to this economy, the banker can ask to have the interest on the loans partially (or even entirely) paid off with real wealth---with property. In such a small economy, the banker might ask for the interest on his loans as manual labor, as widgets made by some businessman, or he might ask for it indirectly---one of the properties that a business built, for example. If it is done this way, the promissory notes that have been lent into existence stay in the economy in the possession of individuals and businessmen, and they represent real created wealth.
You see, this thought experiment allows for the banker to acquire real wealth as well as money to pay the interest on the loans he gave out. In a much larger economy, most people will be able to pay off debts with money because there will be so many people who can buy their business, etc. But I realized this must be the way it works, and this is why banks acquire properties: when people default on loans. In my thought experiment it is different because nobody is "defaulting on loans": they are paying the interest on their loans with real created wealth. And I realized this is just a small version of what happens in a large modern economy.
So you might ask: by what right does a banker lend out promissory notes (money) that he doesn't have? Well, once the principal on his loans are paid off, it isn't as though he gets the principal. The only wealth he acquires is the interest on those loans. And since the banker has made this economy efficient, and he has taken risks on entrepreneurs, he has provided some real value to the economy. In fact, the banker is the BACKBONE of the economy. Let him become fat and happy---he is managing everyone's promises to one another to create wealth...and because he is doing such a good job at it, he makes a lot of money in the process.
The exact same thing would happen in a barter economy---it would just be less efficient. Say someone starts a new business in a barter economy---and they need various things to start their business. They would ask all the people who create the things they need to loan them some of their stuff as the business is being built. Once the new business is complete and it is creating the widgets or services it set out to create, the guy who created the business can pay off his lenders with whatever he is creating. Banks simply make this process far more efficient. To me, that is creating real value for an economy.
Now that isn't to say there aren't valid criticisms of fiat money and central banking---changing interest rates wildly can exacerbate the business cycle. The inflation tax may be harmful at times. There may be predatory and unwise lending/borrowing going on at times. But that doesn't mean that 1+1=2, money as debt means we're all going down the drain and are slaves to the bankers. It just isn't true.
Here's one such video which suggests that fiat money is evil and doomed to destroy us all:
Money as Debt
In order to fully understand how banking works, I've conducted several thought experiments for myself.
The first thought experiment I came up with definitely arrives at the same conclusions that this video
and many people on this website share: the debt monster is going to devour us all.
Experiment #1 (endless self generating debt):
Imagine a small economy with several people who can create goods and services that you need: a cobbler, a baker, a butcher, a computer programmer, a dentist, a barber...etc. etc. They are all currently bartering their stuff with one another, and it is very inefficient.
Enter the banker. The banker will issue promissory notes and lend them out to each business in the economy, and set the initial value of the promissory note so each person knows how much they will need to
borrow to trade at current barter exchange rates. Set it to the value of a haircut, perhaps. Now each business can exchange those promissory notes with one another, making trade more efficient. In order for
the banker to fund his own operations however, he will have to charge interest on the loans. But wait a minute---where the heck is the extra money going to come from?
enter the debt monster.
The banker will have to loan out additional promissory notes, also at interest, while collecting interest on the previous loans. Obviously, this would lead to the frightening conclusions that all those videos on youtube seem to share. In this experiment, the only thing the banks can be paid off with is the money they loaned out. Clearly this cannot work.
Experiment #2: (Why fiat monetary systems can and do work, and why the world isn't nearly as scary as the anti-bankers on you tube would like you to believe)
This experiment begins exactly the same way.
Imagine a small economy with several people who can create goods and services that you need: a cobbler, a baker, a butcher, a computer programmer, a dentist, a barber...etc. etc. They are all currently bartering their stuff with one another, and it is very inefficient.
Enter the banker. The banker will issue promissory notes and lend them out to each business in the economy, and set the initial value of the promissory note so each person knows how much they will need to borrow to trade at current barter exchange rates. Set it to the value of a haircut, perhaps. Now each business can exchange those promissory notes with one another, making trade more efficient. In order for the banker to fund his own operations however, he will have to charge interest on the loans. ...
Don't panic!
Since money is just being introduced to this economy, the banker can ask to have the interest on the loans partially (or even entirely) paid off with real wealth---with property. In such a small economy, the banker might ask for the interest on his loans as manual labor, as widgets made by some businessman, or he might ask for it indirectly---one of the properties that a business built, for example. If it is done this way, the promissory notes that have been lent into existence stay in the economy in the possession of individuals and businessmen, and they represent real created wealth.
You see, this thought experiment allows for the banker to acquire real wealth as well as money to pay the interest on the loans he gave out. In a much larger economy, most people will be able to pay off debts with money because there will be so many people who can buy their business, etc. But I realized this must be the way it works, and this is why banks acquire properties: when people default on loans. In my thought experiment it is different because nobody is "defaulting on loans": they are paying the interest on their loans with real created wealth. And I realized this is just a small version of what happens in a large modern economy.
So you might ask: by what right does a banker lend out promissory notes (money) that he doesn't have? Well, once the principal on his loans are paid off, it isn't as though he gets the principal. The only wealth he acquires is the interest on those loans. And since the banker has made this economy efficient, and he has taken risks on entrepreneurs, he has provided some real value to the economy. In fact, the banker is the BACKBONE of the economy. Let him become fat and happy---he is managing everyone's promises to one another to create wealth...and because he is doing such a good job at it, he makes a lot of money in the process.
The exact same thing would happen in a barter economy---it would just be less efficient. Say someone starts a new business in a barter economy---and they need various things to start their business. They would ask all the people who create the things they need to loan them some of their stuff as the business is being built. Once the new business is complete and it is creating the widgets or services it set out to create, the guy who created the business can pay off his lenders with whatever he is creating. Banks simply make this process far more efficient. To me, that is creating real value for an economy.
Now that isn't to say there aren't valid criticisms of fiat money and central banking---changing interest rates wildly can exacerbate the business cycle. The inflation tax may be harmful at times. There may be predatory and unwise lending/borrowing going on at times. But that doesn't mean that 1+1=2, money as debt means we're all going down the drain and are slaves to the bankers. It just isn't true.
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