Monday, April 18, 2016

When Money Fails - by Gary North

(Full text at link below)


Men have delegated to others the task of producing the goods that sustain life. These others have in turn delegated much of their assignments to mysterious machines. Very few people can understand the languages that run computers.

Autonomous man now regards himself as a colossus striding across history. But he is dependent. He is totally dependent on information- above all, information regarding prices. If the pricing information of a generation disappears in one night, what then? He is blind. And the noise that will arise when man is blind will deafen him, too.

Noise. We cannot imagine the noise. When checks no longer are made out properly, when bank wire transfers cannot be trusted, when commands no longer can be followed as issued, everyone will pick up his telephone to call someone in charge of his account.

Everything you buy is denominated in terms of money. A price is the product of billions of competitive bids overtime. These bids have given us information on the value of almost everything. The array of prices for all the components of an entire civilization is based on the fractional reserve banking system. What happens if there is a run on the banks?

The price of every item you buy will change dramatically. It will fall like a stone, possibly to zero, it the government refuses to intervene. But if neither the government or the central bank creates paper money to meet demand for cash, then prices will skyrocket, at least for a time. Paper money is no answer. How can you buy anything with paper money if you must mail the money? You can't trust the recipient. We are back to Röpke's warning about moral order and the division of labor. You can buy across borders or even across the state only because the recipient trusts your bank's promise to pay money. What if your bank is empty?

If this takes place, if you can't buy an item on a face-to-face basis, you can't buy at all. Neither can anyone else. The house of cards collapses. The base of this house of cards is the moral and legal order. The second floor is the price system and all the information that it conveys. This house of cards supports the entire social order. It has been building up since 1913 (the Federal Reserve System).

"What's it worth to you?" This seemingly innocuous question keeps the world alive today. We can normally provide fast answers. We look at the price tag, consider our financial situation, and we tell him: "Not as much as you're asking." We make decisions, day by day, because we have a good idea of what anything that might be offered for sale to us is worth to us. This will end in the Alzheimer's economy.

"What's it worth to you?" That is what Joseph asked the people of Egypt. Their answer was simple: their very lives. It was therefore worth their freedom. They sold themselves into bondage to the Pharaoh.


Back in 1957, Leonard E. Read wrote what became a classic essay, "I, Pencil." What a wonderful tool a pencil is. It struck Read that he had no idea how a pencil is made. He called a man who was in charge of pencil manufacturing. That man did not know, either. His company bought all the components, but he had no idea how those components were made. Read pushed it out even father.

How does anyone know how to make the machines that make the components? And the machines that make the machines? On and on it went. Conclusion: nobody knows how to make a pencil. No one knows how to make a pencil, yet a pencil is so common as to be cheap - hardly worth thinking about.

Then how can such a miracle as a pencil be? Because of the, division of labor and the freedom we have to make contracts with each other. Multiply Read's example across the array of foods we buy and tools we use to remain productive. Some four decades ago, I had to take a required class in electric shop. I remember a question that some would-be clever student asked the teacher. "How does a TV work?" The man's answer matched the seriousness of the question: "You flip a switch."

What would happen if all the switches failed to work as predicted? A collapse of the West. What if only 1% failed to work as predicted? How many switches do we rely on to keep us alive and our systems operating'! The cascade of failures created by a mere 1% failure could be enough to shut down system after system, at which time, none of the switches will work.

What would a pencil be worth to you if you could never buy another one?


The free market can keep money from failing in most scenarios. But in a true disaster -- nuclear war or a pandemic caused by biological warfare -- our money could fail. The division of labor could collapse. This is why maintaining peace is crucial.

Our money really could fail. Our goal should be to have that kind of money which will not fail. But maintain peace is basic to maintaining money. We tend to forget this. We assume that peace is somehow free of charge. It isn't. There is no such thing as a free peace.

Full text at: When Money Fails