Monthly Archives: May 2013

Gold, Currency, Fractional Reserves And The Tale Of The Goldsmith

The story of the town’s goldsmith helps to simplify our understanding of modern banking.  This goldsmith, so the story goes, having a secure place to store his own gold, began to be asked by the townspeople to store their gold too.  He obliged, and to keep an account of who had what in his vault he provided certificates of deposit to his customers.

In time the goldsmith realized that very few people actually ever claimed their gold because they were exchanging his certificates around town, instead of the actual gold, for goods and services.

With this in mind the goldsmith got himself an idea.  Since his signature was as “good as gold”, he began to make loans using only his signature on a piece of paper.  The net effect of this was that each certificate of deposit was actually worth less than it claimed to be worth.  Us moderns call that inflation.

The goldsmith however was confident that no one would catch on to his scheme because he was certain that they would not all want their certificates redeemed at one time.  Experience had taught him that, at any given time, there was always a fraction of the the gold, which was represented by outstanding certificates, sitting in his vault available for claim.  So he felt assured that as long as there was sufficient gold on hand to satisfy those who wanted to redeem their paper,  he was, as one might say, as good as gold.

This is what us moderns call  “fractional reserve banking“.  But instead of  actual gold, paper dollars themselves work somewhat, but not exactly like, gold. In addition,  in modern times everyone from your local goldsmith (the bank) to the federal government (via laws) to the federal reserve (currency makers) are all in on this action–for good and/or evil– with coordinated participation.


Filed under Banking, Currency, Economics, Politics

First Things

Ideas that are so basic and fundamental that they are beginning points of thinking I call “first things”.
An example of this is the idea that nothing can be got from nothing. In economics this particular “first thing” is fundamental.  But wait, you might protest, the government can create money from nothing and then exchange that money for something; isn’t that getting something from nothing? No, and we know this because it violates a fundamental commonsense principle… or “first thing”.

Economics is a kinfolk of global warming and evolution in this way. A thing is made so complicated that “first things” are lost sight of. Plausible explanations about a thing, combined with a highly technical language, combined also with conclusions we desperately desire to be true, mixed with academic browbeating and political correctness, can lead otherwise smart people to believe that man can change the temperature of the planet through a tax, that he himself exists through a chain of events that started from nothing, and that wealth can be created by printing money.

But though we may not be able to argue against the millions of technical details thrown at us, as long as we do not lose sight of first things we will not have to fall prey to dazzling displays of BS.  Politics has usurped true science.  There are political motivations having nothing to do with the sciences at hand, but which are driving many of the issues supposedly based on science.   The modern acceptance for scientific consensus is an excellent example of this.  Man would do well to remember his past experiences with scientific “consensus” and make all attempts to avoid its advancement-retarding dogma.

Science means knowledge, that is, what is known and not what is politically acceptable and presupposed.  We live among the wonders of a scientific age which can be intimidating. There is much every person doesn’t understand which can make us susceptible to intimidation by intellectual words, charts and doublespeak.  But we need not be the moronic patsys, of others who are themselves moronic patsies, as long as we don’t lose sight of first things.


Filed under Economics, Human Nature

True Equality, Social Justice part 6

The previous post concerned equal outcomes, which is often confused with equal opportunity. Many times discernment is needed to distinguish between the two “equalities”.

At issue is the wealth disparity that naturally arises in a free society.  This disparity introduces a highly emotional component, with feelings of unfairness.  The fact is however that populations are made up of diverse individuals.  Some will try with varying success, some will try and fail, and some will just go surfing.

Another problem with the notion of “equal opportunity”, some complain, is that all are not born into equal circumstances. The actual circumstances enjoyed by a person, or perhaps overcome, are wwide-ranging and mostly  are out of a given person’s control.  Still,  in recent American history most of these circumstances, mixed with hard work, ethics, motivations and wisdom, (which are free to all) would have landed a person somewhere in what we call today, the middle class.  

But the goal of equal opportunity only seeks to provide equality to whatever circumstances a person brings to the table.  While it grasps that not all begin on equal footing, it also grasps the limitations of mortal man.  In 1961, the satirist Kurt Vonnegut illustrated this dilemma in a short story about a man named  Harrison Bergeron.  Bergeron, so the story goes, had an unfair advantage because he was highly intelligent.  This was unfair so he was forced to wear an earpiece that randomly emitted loud noises to interrupt his thought processes.  

The arts provide another poignant  illustration of outcomes vs. opportunity.  The rock group, Rush, produced a song1 called The Trees 2 in which the maples were upset with the oaks because the oaks hogged all the sunlight. In the end, equal outcome was finally enforced by “hatchet, ax, and saw”.

In the final analysis, this discussion on outcomes vs.opportunity raises an important question for those who judge equality by outcome:  If what one does doesn’t ultimately matter, what does it ultimately matter what one does?


Note 1. “The Trees”

There is unrest in the forest
There is trouble with the trees
For the maples want more sunlight
And the oaks ignore their pleas
The trouble with the maples
(And they’re quite convinced they’re right)
They say the oaks are just too lofty
And they grab up all the light
But the oaks can’t help their feelings
If they like the way they’re made
And they wonder why the maples
Can’t be happy in their shade
There is trouble in the forest
And the creatures all have fled
As the maples scream ‘Oppression!’
And the oaks just shake their heads
So the maples formed a union
And demanded equal rights
‘The oaks are just too greedy
We will make them give us light’
Now there’s no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet, axe and saw
Note 2


Filed under Equality, Social Justice

Economically, Putting Money In The Bank Is Like Spending It, Only Better.

How can saving money be the same as spending it?  What? Do you think the banker just hides your savings in a big vault until you want it back?  In a normal and healthy economy your money would be put to use doing things like building stuff, or digging and exploring for new resources, or all sorts of things like that. It would in fact be working just as if you had spent it. What you are putting in the bank, you see, represents value: which is your work.  But rather than consume the fruits of your labor right away, you forego that satisfaction and save.  This means that the currency that represents something of value, your labor, is used for other enterprises.  Those other enterprises involve profits, of which you get a little, (interest) the banker gets a little, (interest) and the one who borrowed it gets a little. (profit)

Don’t be an economic moron. Take the time to watch this short video to understand how we are all much better off with a true banking system, and not just a spigot with a money printer at the other end.


Hat tip:  Austrian Economics Addict


Filed under Banking, Economic Science, Economics, Money

The Egalitarian Pipe Dream, Social Justice part 5

Two conflicting economic goals involving “equality” are often confused.  One is of equal outcome (which I will discuss today) and the other is equal opportunity.

The vague ideas upon which “Social Justice” are constructed all involve, in one form or another, the goal of equal outcome.  The dreams of such “justice” envision a world that functions much like a global commune in which the outcome for every inhabitant’s effort is the same in terms of resources.  In this global commune, rich and poor would be blights of the past.

But entertaining such visions is just one of the luxuries enjoyed by affluent societies.  Prosperity allows the affluent to dream of their Utopia without having to actually engage the harsh realities of man’s existence such as the true condition of man himself.  But the harshest reality is the means by which a diverse group of people, with diverse ideas of happiness, goals, strengths and weaknesses must be oppressed to effect equal outcome. It necessarily requires the loss of freedom, and of the concept of private property; two things which the advocates for social justice unfortunately take for granted.  It also requires a heavy handed and totalitarian government in order to ensure and enforce the “fair” allocation of resources; a government, by the way, which historically has always exempted itself.

In reality the equitable distribution of resources is not much more than a feel-good idea that is a source of meaning and purpose for those who advocate for it.    Bright people sit in their comfy homes and faculty lounges discussing it as an abstract thing that will not touch them.  But the reality of it is by no means abstract, for history is replete with ruinous and nightmarish examples of real attempts of “social justice”.


Filed under Harsh Reality, Human Nature, Social Justice

Social Justice part 4, Justice Or Corruption?

Justice is justice, right? Well maybe not. The concept of justice must be attached to a universal standard of right and wrong, for something cannot be right for one person and wrong for another. I cannot, for example, be excused from stealing Bob’s apples simply because stealing apples is not wrong… for me.

Of course, we know that stealing is wrong, if for no other reason than we don’t like returning to our car to find a hole where our stereo once was. So rather than violate our own conscience, we legalize the raid of Bob’s orchard by hiring the government to steal Bob’s apple for us under the guise of social justice. But is that really any more just than stealing them ourselves? If it is, then there is no ultimate justice, social or otherwise, and the same majority that can be persuaded to violate Bob can be persuaded to violate you. This is called “corruption”.

As it turns out, you see, Bob is no fool. While he knows that  he can’t fight City Hall, he also knows that a City Hall elected by a corrupt society can be enlisted to fight for him; and all for the low price of just a few apples. So Bob develops a plan of his own:

  1. He claims to be for the social justice of free apples and campaigns for the one who promises to steal his.
  2. Not only does he sell more apples because the people like to buy from Bob because he’s for social justice, he gains favor with the new magistrate too. That favor comes in handy.
  3. With his influence from helping his man get elected, he has his apples exempted from confiscation, and,
  4. he promotes burdensome regulations on his competition’s orchards to make it almost impossible for them to enter the marketplace, which,
  5. allows him to charge more for his apples than he otherwise could’ve.

And he knows that a corrupt society will never discern the corruption behind their “free” apples.


” The two enemies of the people are criminals and Government, so let us tie the second down with the chains of the constitution so the second doesn’t become the legalized version of the first”.   Thomas Jefferson

See also:

This great article by Urbansaving, and:

“Don’t Tread On My Private Property”


Filed under Social Justice, Worldview