Barter & Money

Money in Your Imagination

When people decided it was too inefficient to back money with gold, they invented fiat money.  I use the mnemonic device equating fiat to fake to remember what it is.  For the first time in our history, we started making money that did not represent a physical thing, IE tennis shoes, beaver pelts, gummy bears or gold.  This fiat money becomes a little scary when you ask yourself, “well, what is it worth?”  It is worth as much as people decide it is.  It is worth their faith in it.  It might seem impossible for people to all agree on the value of piece of paper, or give it any value at all, but think about how we value photos of people we love.  They are nothing but chemically altered paper, but to us, they mean so much, and we would be willing to trade a lot to keep them in our possession.  Money is assigned value much the same way.

Fiat money was a solution when the piles of gold could not build high enough to represent the productivity of the booming economy. Since value is created through human interpretation anyway, there was really no point in continuing to back it with gold nugs.

Fiat money is worth however much people decide it is worth. Let’s think about this on a much smaller scale to make it palatable.  Imagine you have a pile of rocks and nothing else.  You say to your friends and family, “you want some rocks guys?”  They look at you like you are crazy and leave you there sitting with your pile of rocks.  Then you make some delicious cookies with M&M’s on top.  You friends start showing up asking if they can have a cookie.  You tell them, “yes, I would love to give you a cookie if you give me a rock.”  So now you have fiat rocks in tandem with a commodity, which gives your rocks value.  Now imagine you not only had cookies, but you also had bicycles and gummy bears that you were willing to trade for rocks.  You can see how maybe some of your friends would do some of your chores to get rocks so that they could get some gummy bear or a bicycle.  The more goods you have, the more your rocks are worth because they can be traded for more things.

Now imagine your next door neighbor has a pile of sticks.  They don’t look like much until she says that you can trade sticks for boats, high-end GPS devices and titanium bicycles.  Now, wouldn’t you rather have those things than gummy bears and cookies?  That makes the sticks of your neighbor more valuable, as more people want what your neighbor has.  You can still trade with your rocks over at your neighbor’s house, but maybe you will need 57 rocks to get one stick.

On a larger scale it looks like this:  An economy that is doing a good job of producing things that people want and that other economies want has fiat money that is more valuable. Most of the time, the stronger the economy, the higher people will perceive the value of the money in that economy to be.  It works the same in the other direction.  If the economies resources are shit, the money that economy created will be shit too.  So you can see how fiat money carries value and how that value can change over time.

So, collecting rocks will not create prosperity for your house. The value of your rocks, like money, is created by a constant dance between commodities, resources and services.  The fiat system is perpetuated by our passionate desire for, and faith in, what we believe has value. Your rocks, your neighbors sticks and money are valuable because people want them but they only want them so that they can get titanium bikes and other highly desirable items or services.

Stay tuned to see what money is worth in our next post: Personal Finance 101: Lesson 1: What is Money? Part 3

What is money?

The question is scary and hard for anyone to write about but has to be addressed first because of its amazing power, force and beauty.  Money is like the Zeus of our time.  It controls us, keeps us up at night, pits nations against one another, insights invention, creativity, vanity and ardor.  It can give us freedom or enslave us.  Turn saints into madmen and paupers into kings.  Money is the altar of the biggest cult that has ever existed.

It is our job to treat money with the respect it deserves.  Today you will see money zealots with blind faith in cash who are so devout to their place as disciples they cannot accept other ways of living.  I do not personally want to understand money with such passion, and I would not hope that anyone else ever has to understand it that way either.  I approach it slowly and excitedly with a mindset of respect, curiosity and righteousness.  We all have the right to know what money is and how it effects us.  I will explain it to you and myself with as little bias as possible.  It is not something I ever hope to be turned-on by but it is something I hope to understand.

A Short History of Money
A long, long time ago, in an era not remembered by anyone still living, a time that may as well have been made up in someone’s weary dream world, people would barter to get what they wanted or needed. Two people would meet face to face (no Ebay or Amazon then) each with something wonderful to the other person.  Human 1 has an air pump and Human 2′s bike tire is flat.  Human 2  has some Haribo gummy bears and Human 1 has a sweet tooth.  These humans use this opportunity to make a trade.  Human 1 now has rotten teeth and a full  tummy (just what she has always wanted) and Human 2 has a bike which is rideable again!  Bravo Humans!

The way they used to do it (get what they needed and wanted), with bartering, was not without its flaws. It was very impractical actually, and kept a lot of people away from getting things they needed and wanted ( I would like to note that the current money system also keeps many people from what they need or want).  For instance, if you have gummy bears but need air for your tires, you must find someone who not only has an air pump but also a sweet tooth!  What if you finds someone who wants your gummy bears but does not have an air pump or a new tube or even a bike that you could borrow?  SUCK!  To get your tire fixed, you have to find an ol’ chap who appreciates Haribos and also has an air pump on hand.

This bartering system, as I have shown you, is exhausting!  You may as well have taken a cab and not embarrassed yourself trying to hawk your candies.  And that is just the beginning!  What if  you find someone with whom to trade gummy bears for a single tire pump usage, but they don’t think your gummy bears are worth a whole fill up. You would then have to only fill up your tire part way with air and then figure out what you will trade the next human with in exchange for the use of their air pump to fill the rest of your tire. Seriously?  The whole situation sounds really horrible to me.

To solve the gummy bear air pump problem, humans created  currency with commodities.  So in this situation what they did was take some things everyone wanted and made them into money.  They used to use beaver pelts and the like, which today might be like trading with brand name sneakers. Sneakers are like beaver pelts in that they are something everyone wants, last a long time, and nearly everyone has a place to keep them.

Our money system today even has a connection to the age old commodity business.  When the U.S. first started printing dollars, every dollar they printed and coin they produced represented the amount of gold they had locked away in a gold vault.  So while the money as lighter and easier to carry around than tennis shoes or beaver pelts or gold bars, there was still a gold bar out there that existed for all the money on the streets.  This is different from money today because that gold could be used for something.  It is a precious metal and people want it.  You can build and decorate and make engagement rings with the stuff.  It isn’t like paper money which has the functionality of a paper towel.  Money was ‘backed’ by gold bars.  Since 1971, we started making money without gold to represent it in a vault somewhere.

Wait?  Let’s think for a second longer.  What can you really do with gold?  Anything that will keep you alive?  Safe from harm?  Come to think about it, in those terms gold is about is valuable as a paper towel, or maybe even less so.  So why do people want gold more than paper towels?  Well, most people ascribe value to it because it is very pretty.  It adorns queens and makes gangster cross necklaces and is basically a symbol of power.

Oh gosh!  Now everything is mixed up.  What graces gold with aura of prestige?  Is it because it is actually, really something or is it because of its relationship to money?  This is where it gets confusing.  Here is what I can tell you in light of basic economics:  you don’t have to worry.  Gold is Special.  While the price of something can be a clue to its value, most things that can stand the test of time, IE people still want them in good and bad times, are valuable. Gold is one of those things.  It costs so much money because so many people want it.

Read the rest of this article in my next post Personal Finance 101: Lesson 1: What is Money? Pt. 2

A new form of money emerged due to the restrictions of barter that was based upon commodities i.e gold,silver, peppercorns.Commodity money had its value from the commodity it was made from.With this new form of money empires were able to exchange goods and services easily which led to their respective golden ages.

What we have today is not actually money but rather an idea of money that is actually backed by debt and if the old civilizations were here to witness this they would be actually laughing their ways back to their graves.So why isnt this money?Money retains value through the ages. Currency on the other hand either fluctuates in value or changes value.In our case we have paper backed by debt and not forgetting the fact that the dollar lost 95% of its value.Maybe not today or tomorrow but sooner or later we will have to either change our monetary system or face the same destiny as the Continental.

Note: the following is another guest post was written by James Lander, a writer for the couponing site, Couponing.com; they provide a variety of coupons and offer couponing tips and techniques.

Money has been around for a very long time. In the beginning of recorded time, people used to barter for their needs. If you were a fisherman and needed bread to go with your supper, you would trade your catch with the bakery. The obvious problem is, and was, when the baker didn’t like fish.

Those who lived long ago came up with a solution to this problem…money! They determined that they needed to have something that would be accepted in trade for the items they needed. In the earliest cultures they often used seashells or beads. There were times when tea or furs or meat were used.

According to the Federal Reserve Bank of Minneapolis, in around 700 BC there was a group of seafaring people known as Lydians. They developed the first coins to increase their ability to trade. This tradition was handed down from one civilization to another. People liked coins because they were easy to transport, they lasted a long time and they had some precious metal in them. Paper money was introduced as a means of exchange by the Chinese beginning in the T’ang Dynasty in the 7^th century. According to the Oracle Think Quest, paper money caused uncontrolled inflation and in 1455 the Chinese stopped using it. It was a long time before European countries started using paper money.

The Gold Standard was introduced in the mid-1700s in England. This meant that a certain amount of gold was tied to the value of each paper currency. The United States officially adopted the gold standard in 1900 with the Gold Standard Act, although a de facto gold standard had existed since the early 1800s. One of the best things about the Gold Standard was that it was an effective way to control inflation because it prevented the federal government from printing money without having the necessary gold reserves to guarantee the dollar’s value. It also increased confidence in the value of a country’s money since that money was tied to a tangible commodity.

The Gold Standard’s greatest strength, however, is also its greatest drawback. By restricting the government’s ability to print money, the Gold Standard makes temporary large expenditures (such as wars) nearly impossible. After breaking down during both World Wars, the Gold Standard was abandoned following WWII in favor of the “Bretton Woods System,” or a system in which the United States adopted the Gold Standard and other countries tied the values of their currencies to the US Dollar. President Nixon ended this system in 1971, and today most countries allow the value of their currencies to “float,” or be determined on the global currency exchange market. While this system also has its drawbacks – most notably in allowing nations to accumulate crippling debt – it allows nations a great deal of monetary flexibility.

Money has undergone significant changes since its origins in ancient times, but none is more striking than the rise of electronic money transfers. Today, nearly all government transactions and a significant portion of consumer transactions are carried out via electronic transfers. Consumers now rarely need to use paper money and can instead use credit or debit cards for the majority of their purchases. The Internet has allowed shoppers to buy anything – from computers to groceries – from the comfort of their own homes.

I find this little 30 min. film VERY informative, and gives great insight into how our financial system works and how it came about. If it’s the first time you see history presented this way, you will be horified, how ever you – the people – holds the power to your own salvation, so don’t worry.

Before i get any more up my own ass, with revolutionary thoughts, I will let you decide what you think and read your comments and come with my feedback in the following posts.

To your success,

Anders

"O my ducats! O my daughter!"

Here is a fascinatingly coherent and cataclysmic piece of economic forecast which explains the reasons for gold’s inevitable resurrection and inexorable rise as a commodity (and perhaps more than that) written entirely without jargon. The author, a former Vice-President of Goldman Sachs (and UBS and Credit Lyonnais), and keen student of history from university onwards, wishes to remain anonymous. His personal investment of his fortune in gold in 2000 speaks for itsef. I include my queries and his responses at the end:

“In the beginning there was barter. Fresh eggs were exchanged for salt. Fresh milk was exchanged for timber. Money emerged anddeveloped as an intermediate commodity, to facilitate the exchange of goods; but in order to function effectively, the “money” commodity (or commodities) needed to fulfil three functions. Money needed to retain its value between transactions; it needed to be portable (or mobile) in order to make the transaction practicable; and the commodity was requiredto be sufficiently universal and divisible that it comprised a recognisable unit of account – i.e. two parties to a transaction might argue about the price of fish (relative to money) but would not argue about the value of the other commodity (money).

Society initially settled on salt and cattle as the money commodities. Salt retained its value (the commodity did not rot or spoil) and was divisible into small units. Cattle were transportable. However, gold and silver rapidly replaced them asthe money of large denominations and small denominations, respectively. One of gold’s key characteristics was that it was almost impossible to dramatically grow the quantity of money – the biggest gold mine in the world would only represent a tiny percentage increase in the amount of gold already circulating above ground. Today, the global mining industry increases the amount of gold circulating above ground by 1.6% a year. In practical terms, it is not possible to flood the world with NEW GOLD – gold in large quantity must come from historical supply.

‘Paper money’ was originally a money derivative – a gold derivative or a silver derivative. The note holder was entitled to draw bullion from a goldsmith, a bank or (eventually) a central bank. Like a debit card today, paper money facilitated transactions but it did not represent actual cash. It took generations of daily usage for paper money in Western Europe and the US to be accepted by the public as a substitute for the real money; but practice makes perfect and government behaviour facilitated the acceptance process.

From an early stage, governments encouraged and regulated the coinage of gold and silver in standardised weights and measures of fineness. The government’s motives were selfish. Standardised coinage facilitated the collection of taxes; but if government-regulated gold and silver coins were, to some degree, tax coupons, this meant that the potential existed to introduce pure fiat money, paper money not convertible into gold or silver. A precedent had been created: government tax coupons became coin of the realm for everyday transactions. If the government decided that inconvertible paper money became thenew tax vouchers, the precedent had been set for the public to accept fiat money as the money commodity for everyday commerce -so they did.

Paper money is a commodity – like all forms of money throughout history. The cost of production is effectively zero; and the supply is theoretically controlled by the government through the central bank, though for all practical purposes the banks can create their own deposits and other credit instruments that act as money substitutes. In theory, therefore, the potential annual supply of paper money is infinite;but, the argument runs,in practice money supply is controlled by wise central banks, who restrict the supply of money. Fact: every major economy in the world, apart from the US and the UK, has at some point in history hyper-inflated their currency to the point where it became worth zero. Policy-makers are human. It is a human response to create too much of a good thing – because they can.

The debate about the intrinsic value of gold, seen in isolation,is a meaningless one. A car has no intrinsic value, unless thereis access to oil, water and refined petrol. Wheat has no intrinsic value, unless it can be refined. Above all paper moneyhas no intrinsic value, as survivors of the KMT regime in China or before that the survivors of the Confederacy would testify, when they found themselves on the losing side of their respective civil wars. A commodity only has value in the context of an exchange of goods in an economy with some degree of specialisation. Gold has characteristics which make it uniquely suitable as an intermediate commodity in an exchange of goods; and the growth of the world’s quantity of gold is slower than growth of the world’s population and production of goods.

Arguably with the possible exception of oil, no single commodityis absolutely essential to an advanced economy. There are alwayssubstitutes, though not always in sufficient quantity. The supply of agricultural commodities, for example, is effectively constrained by the availability of water and agricultural land. Nevertheless, agricultural production supply can be increased substantially over a period of a few years, given the correct economic conditions. Gold, however, is genuinely scarce. If the world needs 10% more gold to circulate above ground, it is physically impossible for this to occur in less than six years. Central banks used to own 50% of all gold. Their holdings have fallen below 20%. A change in the perceived economic value can change the gold price; but a surge in supply is not possible.

The story of paper money is uniquely analogous to the parable ofthe Emperor’s Clothes. There is no requirement to believe in theintrinsic value of paper money. Nor is there a requirement to believe that the government will preserve the value of paper money. It is an essential requirement of the system, however, that citizens believe that their neighbours are convinced of theintegrity of government-backed paper money. The crowd could see that the Emperor was not wearing any clothes; but the collectiveopinion was that their neighbours had not noticed. The little boy did not have the baggage of beliefs and prejudices common toadult society, so he did not see the value in pretending that the Emperor was not walking naked. Grown-ups today only strugglewith concepts of money when they have to explain it to children.

The real issue for gold vs paper money is that inconvertible paper money is an experiment that has already failed numerous times in France, Germany, Russia, the whole of Eastern Europe, the American Confederacy, Latin America, China, Japan and throughout Japanese-controlled Asia (during the Second World War); but it does not feel like an experiment. The dollar was linked to gold until late 1971 – and Sterling was linked to the dollar – but within the Anglo-Saxon world, the man on the streethas been familiar with paper money for hundreds of years. The fact that it was theoretically convertible to gold was meaningless to the average household; and it will only become meaningful if the experiment fails. Therefore, it does not feel like an experiment.

In effect, Nicholas Nassim Taleb is wrong. The sight of the first black swan does not disprove the theory that all swans arewhite. It may only require a minor adjustment to the theory – i.e. all the other swans are white. Likewise, the failure of an inconvertible paper money system in Revolutionary France or Hitler’s Germany does not prove that paper money systems are bound to fail. It only proves that those particular paper money systems were bound to fail. Paper money is an intrinsically human feature because it is a triumph of hope over experience. So, we do not need gold because we can create an artificial ‘money’ commodity, which, history has shown, works until it doesn’t.

Paper money is an illusion; but it is an illusion that is potentially sustainable for generations. In the end, at the veryend, central banks will print unlimited quantities of paper money – because they are human and because they can. Returning to the parable of the Emperor’s Clothes, the gold price trading in a free market at $250 was telling you that the crowd was silent, quietly admiring the magnificence of the Emperor’s outfit. If the little boy were to shout, the fraud would be exposed and the gold price would not trade at thousands or even millions, it would trade at trillions of dollars. The gold priceat $1350, however, represents just the faintest whisper, an echo that could fade to silence at any time – but I don’t think so.”

What follows is the summary of the exchange of emails between us:

Dear Mr. X,

In your model, the gold stood for the goods, then the paper stood for the gold, then – when people weren’t watching – the paper was made to stand for the goods. However, the problem – in your model – is that you can print as much money as you like. Which is a sensible point.

(I, of course, assume that you don’t really think people will ever go back to using gold as an actual currency, as opposed to a gold-standard. The problem of forgery would be insurmountable. There are a host of ways to forge weight and colour for metal – and no design you can stamp is anywhere near complex enough to be forgery proof. The only reason it doesn’t happen more often for £1 coins here in the UK – and it does happen – is the cost-gain ratio. It is, I believe, why the £2 is composed of two different metals mechnically combined: to up the production and therefore the forgery costs without having it made from a more expensive basic material. However, with gold sovereigns currently valued at around £250 and rising, it really would be worth investing in some quite serious forgery technology.)

However, this does all rather rest on the premise of your view of human nature – which is in essence that if the banks can, the banks will. About which I am not so confident. To turn to history: this was exactly the argument against the possession of the nuclear deterrent and the policy of mutually-assured destruction. If ‘can’ invariably implied ‘will’ in human affairs, you and I would would be long dead as the Soviety Union and United States had been reduced to slogging it out with ICBMs any number of times in the post-WWII period, most notably in ’62 over Cuba.

You say that hyperinflation has occurred before, citing it as evidence that it will happen again and on a much larger scale. In response, I point to Hiroshima and Nagasaki and point out that these have never been repeated despite the pessimist assumptions of the founder of CND.

I would end by saying that your collapse requires humans to see through the Emperor’s New Clothes that is paper money. I sometimes wonder if  the human ability to perceive the truth is inversely proportional to the importance of that truth. Otherwise how to explain the persistence of the belief there is life after death. Remaining,

Yours sincerely,

Anon.

P.S.  I read somehwere that in the century and a half between Colombus’s first voyage to the Americans and the Treaty of Westphalia ending the Thirty Year’s Was, Spain shipped 190 tonnes of  gold across the Atlantic . I know there is 190,000 tonnes in circulation now, so in the 16th Century there must have only a few percent of that. I wonder if you know, as a historian what effect that vast increase in supply had on the economies of Western Europe?

________________________________________________________

Anon,

Hiroshima and nagasaki were isolated cases. The success of the the fiat dollar and the fiat pound are isolated cases – 99 per cent of fiat systems have hyper-inflated and more than half of them have done it more than once. The only other successful medium-sized fiat currency that I can think of has been the swiss franc; but their central bank has been famous for having large gold reserves. I don’t know what the new monetary system will be – just not this.

Mr. X.

P.S. Inflation in the sixteenth century was rapid but still less extreme than the twentieth century. The influx of silver was more important than the influx of gold; but you must not just measure it against the existing stock of bullion, but also against the increase in population and production of goods during that period. As the influx of silver slowed in the seventeenth century, and population and production continued to grow, prices actually deflated i.e. the value of gold and silver went up.

From the 17th century, equity in corporations could be bought and sold in similar ways. From the 18th century, insurance funds and then pension funds exploited economies of scale and the laws of averages to provide financial protection against calculable risk. From the 19th, futures and options offered more specialised and sophisticated instruments: the first derivatives. And from the 20th, households were encouraged, for political reasons, to increase leverage and skew their portfolios in favour of real estate.

Economies that combined all these institutional innovations – banks, bond markets, stock markets, insurance and property-owning democracy – performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning.

For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalisation. From ancient Mesopotamia to present-day China, the ascent of money has been one of the driving forces behind human progress: a complex process of innovation, intermediation and integration that has been as vital as the advance of science or the spread of law to mankind’s escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap.

Money

RESEARCH ON MONEY AND FINANCE REPORT

A groundbreaking new report by Research on Money and Finance (RMF), a network of political economists, censures the orthodox analysis which prescribes austerity as the solution to Europe’s crisis.  The Report provides rigorous, original analysis of the debt profiles of Spain, Portugal and Greece. It finds that austerity will worsen income distribution, further shift the balance of power against labour, and fail to solve the Eurozone’s underlying structural problems.  

While default is increasingly likely, it should be clear that creditor-led restructuring, while generating profits for the banks involved, will not significantly reduce the debt burden. Debtor-led default with the prospect of exit from the Eurozone is assessed from the point of view of its ability to restore competitiveness and alter the balance of social forces in favour of labour in the countries of Europe’s periphery as well as its core.

Eurozone Between Austerity and Default: http://www.researchonmoneyandfinance.org/
___________
Jeff Powell
School of Oriental and African Studies (SOAS)
University of London
+44 (0)7817184435
www.researchonmoneyandfinance.org

Posted here by Glenn Rikowski

The Flow of Ideas: http://www.flowideas.co.uk

MySpace Profile: http://www.myspace.com/glennrikowski

Money Menace

Wavering on Ether: http://blog.myspace.com/glennrikowski

Scene 1

(sunny morning, tranquil surroundings, busy market place)

Mr x: Morning young man, lovely day isn’t it!

Jack: It’s nice now sir, but I hear the weather is going to take a turn for the worse later.

Mr x: You’d better clean my shoes now then, before this bad weather arrives.

Jack: No problem sir, one silver coin.

Mr x: Here you go (hands over a note)

Jack: What’s this then?

Mr x: Aint you ‘eard? Oh, This ‘eres a note of receipt….a receipt of note….a note worthy receipt of ‘aving received notable goods.

Jack: Oh yeah? Well I aint received nowt but this note of having received summat. But its still nowt to me.

Mr x: Nooo. It’s a note from Mr Redshield. I gave him all my silver and he gave me all these notes. (shows notes)

Jack: (looks at them) They’re all the same! Why did you buy so many of the same picture? (starts laughing). You were robbed!

Mr x: Noooo.. you don’t understand!

Jack: I think its you that don’t understand. You’ve spent all your money on….abstract art! But what does it mean sir? What is it saying to me?

Mr x: It’s telling you that if you take that note back to that man, he’ll give you one of my silver coins. You see? That way, I’m not going around worrying about pickpockets and getting robbed.

Jack: but won’t people just rob these notes instead?

Mr x: Oh. I never thought of that….(tucks his money away)

Jack: All right then sir. Any friend of yours is a friend of mine. Give me one of Mr Redshield’s notes. This’ll never catch on though.

(late morning, dark clouds appearing)

Jack: (approaches Mr Redshield:, who is walking slowly through the market place with a pot in his hand). Excuse me Mr Redshield:! I’m very sorry to trouble you sir.

Mr Redshield: What can I do for you young man?

Jack: a man just gave me this piece of paper and told me to come and see you. He told me that if I give you this paper you will give me the silver coin that he owes me for cleaning his shoes.

Mr Redshield: Hhhhmmm. You’re Jack:, Albert’s son, aren’t you?

Jack: Yes that’s right. Are you a friend of my father’s?

Mr Redshield: Well let’s just say I’m a…….. how shall we say……’associate’ of his. Yes, an associate of his. I’ve helped him out a few times.

Jack: How do you help him?

Mr Redshield: Well I keep his coins safe for him. That’s what I do, I look after people’s gold and silver coins for them. Keep them safe. Let me show you.

(gesturing to the market place) see these traders here, they give me their gold and silver coins to look after. I put them away in my safe so nobody can steal them. I then write a note of what they gave me on some paper. For example, a man gives me five pounds of silver to look after. (gets paper and pen out of his top pocket) I then write ….”I, Mr Redshield, promise to pay the bearer on demand the sum of five silver coins”. So when people need their coins back they come to me with the note and I give them their coins back. Simple. It’s much safer that way. No stealing.

Jack: I understand Mr Redshield. Can you look after my coins as well please?

Mr Redshield: Certainly young man. But can you clean my shoes for me?

Jack: Yes Mr Redshield:. Black aren’t they?

Mr Redshield: Oh yes. Black. Make them as black as possible. I want to see my reflection everywhere I go.

Scene 2

(rain starting to fall)

(Arthur: hobbling)

Mr Redshield: No work today Arthur:? Shouldn’t you be down the mine?

Arthur: I broke my leg a few weeks ago Mr Redshield and I cannot go back to work until it’s healed. My boss Frank says he can’t pay me until then. It’s not my fault he doesn’t use safe mining equipment.

Mr Redshield: You could probably do with some help couldn’t you? It’s times like this that I can prove very useful to people. I have many people’s gold coins stored. Maybe I can you lend you some, to help you out whilst things are difficult. I’m sure you’ll pay me back won’t you?

Arthur: Of course I would pay you back. But those coins don’t belong to you Mr Redshield. You’re merely keeping them safe. How can you lend other people’s money out? That’s immoral.

Mr Redshield: No one will know Arthur. We’ll keep it a secret, between me and you.

Arthur: (hesitantly) well I guess I could. I really could do with the help. And if no one knew, then that’s ok then isn’t it?

Mr Redshield: That’s right Arthur:. No one will know. (scratching his chin). I’ll have to charge you a fee for this though.

Arthur: A fee?! I thought you were going to help me, not make me pay back more.

Mr Redshield: Look Arthur, do you want this money or not? Its hard times now. I help you in your hard times and you pay me back when things get better. I scratch your back you scratch mine.

Arthur: but they aren’t even your coins Mr Redshield!

Mr Redshield: I don’t think you’re in a position to dictate the terms to me are you?

Arthur: I guess not Mr Redshield.

Mr Redshield: So how much do you want then?

Arthur: How about 10 gold coins?

Mr Redshield: Very well. 10 gold coins it is. But you have to pay me back 14 gold coins. We’ll call it a……hhhmmm…….’service charge’.

Arthur: 14 gold coins!? That’s a lot of hours down the mine Mr Redshield! Can’t we say 12 gold coins?

Mr Redshield: 14 gold coins or nothing Arthur.

Arthur: I suppose we could live off a bit less this month. My wife can get some extra hours in the cotton fields, and young Jack could shine more shoes. This will contribute to the family kitty so we can pay you back. All right then.

Mr Redshield: And another thing Arthur. I want it back in 2 months time.

Arthur: But Mr Redshield, I don’t know if I’ll be back at work by that time. Can’t I pay it back when I get back to work?

Mr Redshield: 2 months, that’s the arrangement. This is how things are Arthur. I can’t have one man’s money in somebody else’s hands for too long. It’s a matter of trust. I have to be seen to be trustworthy.

(Arthur signs agreement)

Arthur: I see.

Mr Redshield: And trust me, if you don’t pay me back, I’ll come looking for you.

Arthur: Looking for me Mr Redshield? What will you do?

Mr Redshield: You have a home don’t you?

Arthur: Errr, yes.

Mr Redshield: Well let’s just say if you don’t pay me back the 14 gold coins in 2 months time, you’d better get used to living in the cold.

Arthur: (tears forming in his eyes) You wouldn’t do that to us Mr Redshield.

Mr Redshield: Wouldn’t I? Haven’t I done it before? Wouldn’t I think anything of doing it again?

Arthur: But it’s not even your money you’re lending me!

Mr Redshield: This is how things are Arthur. Do you accept the terms or not?

Arthur: (reluctantly and sadly) I guess so Mr Redshield.

Mr Redshield: Good. Here you go (hands him notes)

Arthur: I thought you were going to give me gold.

Mr Redshield: this is as good as gold.

(Arthur: walks away)

Mr Redshield: Takes out his coins) My my. I’m building up quite a coin collection. And nobody’s coming back asking for their gold. They’re all happy spending my notes instead. With all this extra money I have, I could buy myself a nice shop on the high street. That way everyone will see me. I’ll be easy to get to. Yes, excellent, excellent. I’ll move in immediately.

(approaches empty shop and hands over notes to buy shop. Takes over shop)

Scene 3

(Late afternoon. Rain pouring harder, dark skies)

Frank: (walks into Mr Redshield’s shop) I see you’ve gone up in the world Mr Redshield

Mr Redshield: Oh hello Frank. How are you? Terrible rain out there, come in come in. Let’s get you out of that rain, terrible out there isn’t it!

Yes, business is good Frank. How about you Frank?

Frank: Business is not good Mr Redshield. I’m not  making much money. It’s the same for everyone. We all seem to be working longer hours but we aren’t living any better. In fact we seem to be living worse!

Mr Redshield: That’s how things can go sometimes Frank. It’s just the way it is. I work long hours too. All your workers come in to give me their coins to look after. It’s a lot of work changing coins for notes and then notes for coins again. It would be more convenient for me if you paid your workers with notes instead of coins. That way they won’t have to come to me with coins all the time.

Frank: Pay my workers with paper?! They wouldn’t accept that! What kind of person would accept a simple piece of paper, for all industrial labour down mines?!

Mr Redshield: What difference will it make Frank? Just make it company policy, the men will soon get used to it.

Frank: But those notes are your debt to them. You owe them their coins back. And you know full well Mr Redshield that I cannot pass your debt on to my workers! It’s against the Law!

Mr Redshield: Laws change. If people accepted paper it would make things a lot easier for everyone.

Frank: You’ll have a hard job selling this idea to the people. Look here, if I try to set fire to these coins, nothing happens. That’s why we use it, it cannot be destroyed. This paper, it’s not worth anything except the paper, it has no intrinsic value. And if I put a flame to this, it disappears! Like a magic trick!

Mr Redshield: You don’t need to tell me about magic Frank. I know all about magic. I can do magic. I can make things appear out of nothing. From nothing to something, amazing eh?

Frank: People don’t believe in magic anymore.

Mr Redshield: We’ll see about that Frank. Things are changing all the time. I’ll let you in on a little secret. Mr Wilberson is about to pass a law allowing these paper notes to be exchanged for goods. That way people won’t have to come and hassle me all the time. They can pass them on to each other!

Frank: So you mean people will be trading in the market place with pieces of paper, instead of gold and silver!?

Mr Redshield: That’s how things can go sometimes Frank. Take a look at this (waves Frank into the back of shop).

See this machine here. I just had it delivered this afternoon. This machine prints out receipts that people get when they give me coins.

Frank: So every time someone gives you coins you come into the back of your shop and print out the paper receipt?

Mr Redshield: That’s right. Of course, Mr Wilberson insists on having his face printed on the paper.

Frank: Mr Wilberson’s face! The laws he has passed have been detrimental to business. Nobody’ll pay money to trade his portrait.

Mr Redshield: I prefer leaders who don’t rock the boat too much, but it makes no difference to me. If I have control over the printing and issuing of the paper notes I care not who makes the laws!

Frank: You certainly have that power Mr Redshield. And it leaves me in a bit of a predicament.

Mr Redshield: Anything I can do to assist?

Frank: Would a loan be out of the question?

Mr Redshield: Good time to ask. I’ve had a good day so I’m only charging 30% interest this afternoon……….

Scene 4

(Government inspector walks in to Mr Redshield:’s shop)

Government inspector: Afternoon Mr Redshield

Mr Redshield: Good afternoon.

Government inspector: Just come to do a routine government inspection.

Mr Redshield: No problem, it’s all there. Every single paper note in the market place is fully backed up by my gold reserves. I know the Law. Here’s the key for the vault. You go and check

Government inspector: Thanks Mr Redshield. I’m sure it will be. (goes into basement of the shop to count up the gold reserves)

Scene 5

(Evening time. Darkness. Rain torrential, thunder and lightning)

Mr Redshield: writing away at his desk, spotlight on him.

(man knocks on Mr Redshield’s door. Mr Redshield goes to door to answer)

Two men enter. One man puts umbrella down that he had been sheltering other man with)

Mr Redshield: Mr Wilberson! What a surprise! Come in come in, let’s get you out of that rain!

Mr Wilberson: Thank you Mr Redshield. What a terrible evening. And this morning was so bright and lovely. The weather seems to have got worse throughout the day. But tomorrow is another day, and I have big plans.

Mr Redshield: Big plans eh? Tell me more

Mr Wilberson: Ok, straight down to business Mr Redshield. I think the time is right for us to implement the next stage in the war plan.

Mr Redshield: Operation storm?

Mr Wilberson: Yes.

Mr Redshield: It’s a necessary war. Their president told me only this evening that he refuses to accept my paper notes as his currency. I think its time we stepped in. if we don’t do something now, we will not be able to trade well with them.

Mr Wilberson: And with the huge amounts of natural gas and oil they have, if we invade we can take it all for ourselves. It will all be ours!

Mr Redshield: Are your people ready for the news? Have you laid the groundwork?

Mr Wilberson: Mr Burdock has been busy preparing them, don’t worry about that. He did a front page spread saying that they were going to attack us. He’s rounding up some of their people and saying they were caught preparing to attack.

Mr Redshield:  If you tell something to people often enough they start to believe it’s true!

Mr Wilberson: Quite quite. And the people are getting so used to hearing bad things about this man, it will come as no great shock if we tell them we have to go and stop him before he can.

Mr Redshield: Such a nice way to dress up aggression! Stop them before they attack us!

Mr Wilberson: Indeed!

Mr Redshield: But Mr Wilberson, you know how hard it is to prepare the military these days! Soldiers to pay, weapons to use…. And they have a big army, it’s not going to be cheap!

Mr Wilberson:  This is where you can help Mr Redshield.

Mr Redshield: I had a feeling that was what this was about.

Mr Wilberson: I need a way to motivate the soldiers. When I pass this law allowing your notes to be used in the market place, then we can pay people in your notes. But the soldiers want their pay now.

Mr Redshield: but they’ll be at war. And this war needs to last a few years, if we want to get what we go for. Look, here’s a thought. Set up a war fund. Tell the soldiers that they will have notes put away for them which they can exchange for gold. Extend their service times so that by the time they come back, people will be using paper. Then they can use paper too.

Mr Wilberson: But if every note can be exchanged for gold, we need the gold in the first place.

Mr Redshield: Not necessarily.

Mr Wilberson: What did you have in mind Mr Redshield?

Mr Redshield: Your inspector came in earlier. He checked that all the paper notes were each backed up by gold. And of course they were.

Mr Wilberson: And?

Mr Redshield: It got me thinking. I was thinking about a magic trick I saw the other day at the circus. This magician made gold coins appear out of a hat. And I thought to myself ‘what if I could make money appear out of nothing’? I could then have as much money as I wanted. And of course you could borrow some at a special rate. You could buy as many weapons as you want.

Mr Wilberson: How will you do that?

Mr Redshield: I’ll just print paper. If you tell the inspector not to come around, I can print as much as you like. You name the amount, I’ll print it. And of course I’ll put your face on every single note! Make it look official!

Mr Wilberson: You want me to change another Law?

Mr Redshield: You have the power to do that Mr Wilberson.

Mr Wilberson: (straightening his collar) Yes I do have the power. But the people will simply not accept this! You’re printing money in the back of your shop!

Mr Redshield: And then charge for lending it them.

Mr Wilberson: The people will be on the streets! You want to print out money in the back of your shop and then charge people money to lend it to them! We need limits!

Mr Redshield: We always change limits Mr Wilberson. How about if we say I can print out 20 paper notes for every 1 gold coin I have in my vault. That’s a limit isn’t it!?

Don’t worry about the people. They won’t even notice. if you allow this you can borrow as much as you want! All that gas and oil can be yours. And we will force them to accept our paper! It’s a good investment

Mr Wilberson: It is a good investment, but like I say, if the people find out……

Mr Redshield: The people will be far too distracted by the war. Bombs, explosions and death are far more exciting than a law change!

Mr Wilberson: True. But I’ll need a lot of money for this though.

Mr Redshield: I’m sure I can help you. Just pass this law Mr Wilberson, and the money is yours.

Mr Wilberson: Ok ok. I’ll pass the law. But you can’t lend out any more than 20 times your assets!!!

Mr Redshield: And what’s my security to make sure you pay me back this loan?

Mr Wilberson: I’ll invent a new tax. The people will pay you back don’t worry. Whilst they watch the bombs falling, you have your hand in their pockets taking their money. They won’t even notice.

Mr Redshield: Excellent, excellent. That’s a deal then (shakes hands)

(Mr Wilberson: leaves)

Scene 6

Mr Redshield: I think I’ll go into the market now and treat myself. It’s been quite a day.

(walks into market but everywhere is closed)

Oh no. what happened to all the traders? They have closed down. Whilst I was accumulating all this wealth business suffered.

I want to show you with these 5 videos the history of Money & Banks.

Five videos are a lot to digest, but aren’t you curious to see how Money started?

How Money works today?About the future?

Happy holidays everyone…

Sincerely,
Marco Viti

Any questions?!

1.  No escape: As you file your taxes this month, you can take solace in knowing that the ritual dates back almost 5,000 years, toa time when Egyptians started paying taxes in goods and labor.

2.  Collecting taxes became a lot easier after Egypt and Mesopotamia began using silver and gold bars as currency, around 2500 B.C.

3. Unfortunately, the invention of money also made theft a lot easier. Consequently, temples became the first banks because they were sturdy, frequently visited, and intimidating to would-be thieves.

4 But did they offer subprime mortgages? By 1750 B.C., Babylonian temple priests had branched out into issuing loans to locals.

5 Back then they didn’t need bailouts. Founded in Italy as a pawnshop in 1472, theBanca Monte dei Paschi di Sienais the world’s oldest surviving bank.

6 Paper money originated in China in the year 910 and amazed Marco Polo when he visited three centuries later. He alsonoted that the emperor, Kublai Khan, seemed to be printing an awful lot of notes…

7 …which ultimately wrecked the economy. Due to skyrocketing inflation caused by churning out so much money, paper bills had to beabolished in China in the 15th century.

8 Return of the funny money: The expense of the U.S. Civil War inspired the government to introduce paper “greenbacks” in July 1861.

9. All the U.S. coins and bills in general circulation today have a total worth of about $829 billion.

10. Two-thirds of that cash is held overseas.11  Filthy lucre: In a study last year, researchers found more cocaine residue on U.S. bills than on any other currency. Also found on money: staphylococcus bacteria and fecal matter.

12. That may explain why, for a period around 1916, you could carry your cash to Washington, D.C., to have it washed, ironed, and reissued.

13  The paper used for U.S. bills isn’t made from trees. Rather, it contains 75 percent cotton and 25 percent linen.

14  To foil counterfeiters, the latest $5 bill design has an embedded security thread that contains more than 650,000 tiny glass domes. They create an optical illusion that the Mint hopes is almost impossible to duplicate.

15  He left home without it: In 1949 Frank X. McNamara took friends to dinner in New York City but forgot to bring his cash. He vowed never again to be so embarrassed and so created the Diners Club Card, the first credit card.

16.The Diners Club Card was initially made of cardboard. It listed the 14 participating restaurants on the back and had an annual fee of $3.17 Scottish inventor John Shepherd-Barron built theworld’s first true ATMfor a Barclay’s Bank in North London in 1967.

18.  The machine was based on the concept of a chocolate bar dispenser.

19.  Plastic cards did not yet exist, so Shepherd-Barron’s ATM accepted only checks laced with identifying traces of radioactive carbon-14.

20.  Once a distinctively radioactive check was detected, customers entered their four-digit PINs. Shepherd-Barron claimed users “would have to eat 136,000 checks” for the radioactivity to have any dangerous effects.

There is a lot of spew about ‘behavioral economics’, the ‘behavior’ of markets, the psychology of markets, etc., and that ilk in pop media as well as ‘professional’ journals. All bring to mind that you can say almost anything if you don’t have to substantiate it. For the most part these type articles fill the vacuum left by disciples NOT having any scientific and empirical approaches to apply where needed. Most tell the reader little of value and almost all promise to understand the future enough to predict it. Yes, red flags all for those trying to figure what the heck is going on out there [in the world].

Niall Ferguson has written a book “The Ascent of Money” and, far from being a primer on Money 101 from this Harvard faculty member, his book is a set of deposits and balance statements on selected facts on loot, dinero, change, coin, or money and how it works with almost no relevance to the global financial meltdown (1-15-09).

So that you can appreciate the basis of what is going on out there financially and be entertained at the same time, I have enclosed the beautifully done PBS 2 hour documentary for online viewing. It is outstanding! Not in its profundity but in its scope. It was done (filmed, edited and packaged) before the death knell of current markets was sounded and it can’t possible live up to the expectations of those seeing it now through pauper’s glasses who are looking for THE ANSWER

The sections follow a sensible sequence: the history of money, trust, credit, bonds, stocks, insurance, real estate, globalization, hedge funds, computer models of investing, and “behavioral” finance. In reality the whole thing is about behavior; there is less focus on disciples of finance, economics, banking and risk management. See what you think. Let me know and I’ll respond to your thoughts and critiques.

http://www.pbs.org/wnet/ascentofmoney/featured/watch-full-program-the-ascent-of-money/24/

There is an interesting post on the internet by Rick Falkvinge which elaborates a great deal on this theme. READ IT!