on Money by Stephan Haller
Table of Contents
- Origins of Money and Credit
- Functions of Money
- The Right Amount of Money
- Origins of Money Part II
- Interest Rates - The Price of Money
- Foreign Exchange Value of a Currency and Trade Deficits
- Public Debt
- Printing Press = Devaluation of the Currency + Pauperization of breadth
Parts of the Population
Peter D. Schiff wrote
in his book “The Little Book of Bull Moves in Bear Markets“:
“A nation can
create money and the individual cannot.“
This assertion is
wrong. On the contrary the truth is:
“The individual can
create money and a nation, a government or a central bank cannot.“
Of course I know, since
Peter Schiff is a very smart man, that he is not talking about real money, he
is talking about the colorful paper we call Dollar, Euro or Yen.
So his quotation is
true regarding to fiat money.
But when I say only the
individual can create money and a nation cannot, I‘m talking about real money.
In this essay I show
you what real money is about, how it comes into existence and what tasks money
undertakes in an economy.
Authors note: When I‘m using the term money in this essay, I‘m talking about real
money and not Euros, Dollars, Yen, or Yuan, etc.
- 2. Origins of Money and Credit
The state cannot create
money, but every time he tried to create money in the past, he destroyed it and
brought major disaster over the economy and its people.
What the Federal
Reserve Bank, the European Central Bank, the Bank of Japan and the Bank of
England are doing at the present time is nothing more than a grand theft of the
fruits of the labor of their people.
Our modern economy,
just like the economy in ancient times, bases on trading goods and services for
other goods and services.
In a primitive barter
economy without money, it is difficult to exchange goods, because very often
some goods have a much bigger value than others and are indivisible.
Therefore credit came
Let‘s suppose a cattle
farmer wants to buy some fish from a local fisherman, but one cow is worth much
more than one catfish. So in order to settle this transaction one of the two
parties must grant credit to the other party. The cattle farmer could give the
fishermen one cow and the fisherman signs a contract to deliver a catfish
everyday for the next 365 days or whatever amount of catfish they agree on. It
is also possible that the fishermen delivers a catfish everyday for the next
year and the cattle farmer delivers the cow in a year, when the calf has grown
Another option would
be, that the cattle farmer trades his contract with the fisherman for other
goods and then the new owner of the contract
- the commercial bill of exchange - has the right to claim the fish from
Every one of us is
granting or using credit several times a day. For example we go to work
everyday, but get paid once a week or once a month. So when you are doing your
job, you are giving credit to your employer, payable in a week or in a month.
In other words, you are
performing a service in the present and you get your reward in the future. By
producing or delivering goods or by performing a service you acquire the right
for the equal amount of goods and services, payable in the future. In order to
guarantee your right to receive the equal amount of goods and services, we need
a security: MONEY.
So money is just the
documentation that you produced a good or performed a service, without
receiving goods and/or services of the same value in reward.
Most of the time your
employer can‘t pay you for your service with the equal amount of goods and/or
services. Therefore he pays you with money.
After receiving your
wage from your employer paid in the form of money, you and your employer are
even. The transaction between you and your employer is closed.
But you still have a
claim to receive a certain amount of goods and services. Not against your
employer, but against the market. The money you received as a payment for the
goods you produced or the service you performed, entitles you to receive a
small fraction of all the goods and services, which are produced in an economy.
So the most important
character of money is that it fully guarantees your entitlement to receive a
small fraction of all the goods and services produced in an economy in the
Money is an
entitlement to goods and services, which came into existence, because somebody
has produced goods and/or performed a service, but hasn‘t received an equal
amount of other goods and services, yet.
clarify this with the help of an easy example:
Let‘s suppose I want to
buy myself an excellent investor education.
Phil Town is selling
such an education for the price of $4,995.
Phil wants to buy
himself a new saddle for his horse. The price for a saddle is also $4,995.
So I buy from Phil a
three day Rule#1 Cashflow Seminar. I pay him the $4,995 in advance and now I
have a claim against Phil for three days of education. In other words, I grant
After the seminar has
ended on day 3, Phil and I are even.
Now Phil can buy his
saddle, but let‘s suppose he decides to buy the saddle not right now, but in a
In 2014 the price for a
saddle is not $4,995, but $5,500.
Is this a sign that the
money I gave him was of bad quality?
No. Not necessarily.
Because the $4,995 I paid him did not entitle him to get a new saddle.
There could be several
justifications, why the price for a saddle went up.
A shortage in leather
for example. The rise of prices for certain goods, says nothing about the
quality of money. When prices for a certain good rise in an economy with real
money, the prices for other goods must go down.
Phil was not entitled
to get a new saddle, but he was entitled to receive a certain percentage of all
the goods and services, which are produced.
To make this easier,
let‘s suppose the US GDP is 100 million dollars.
So Phil is entitled to
receive goods and services at least worth ($4,995/100,000,000) x 100% =
0.004995% of the US GDP. Today, tomorrow, or in several years.
We know now, that in
order to produce money somebody has to perform a service or produce a good.
Everybody should also understand now, that Mr. Bernanke cannot produce money
with his printing press. When the FED is creating new money, everyone who receives this new money, owns now
entitlements for goods and services, without having produced new goods and
services before. Therefore everyone who owns old money is a bit poorer now. I
call this outright theft.
3. Functions of Money
- a. Money as a medium of exchange
Money makes the
exchange of goods more convenient. But
money isn‘t just a medium of exchange. You can use money for giving a loan or
to pay down debt. In order to fulfill this function the money in use needs to
be widely accepted.
- b. Money as a measure of value and unit of account:
Money is a
documentation for the service you performed or the goods you produced in the
past. It also expresses the value of certain goods and services.
- c. Storage of Value:
The advantage of real
money is, that the buying and the selling of goods and services don‘t need to
happen at the same time. For example if you trade eggs for fish, then the
buying and the selling happens at the same time. You simultaneously sell eggs
and buy fish.
If you are using money,
you can trade your eggs today in exchange for money and buy fish or any other
good or service with your money next week. Or if you don‘t need the money in
the meantime, you can lend it to someone, who needs it and he pays you interest
In order to fulfill
this function, money needs to be an entitlement to receive a certain percentage
of all the goods and services, which are produced in an economy and this
entitlement lasts forever.
4. The Right Amount of Money
Nepomuk Nestroy: “The Phoenicians invented the money - but why so little?“
Most modern economist,
especially the Keynesians, believe, that when the economy is growing, the
amount of money (issued by the central bank) must grow, too. But this
assumption is wrong.
In a free market
economy with real money, there is always the “right“ amount of money
circulating. The money supply in a country is equal to the total amount of
claims for the produced goods or performed services that haven‘t been enforced
5. Origins of Money Part II
We have learned now, what
real money is, what the functions of money are and what the right amount of
money is. The way I described the origins of money was very abstract, though.
So how does money -
such as a bank note or a coin - come into existence?
For the party who has
sold a good, a new entitlement for goods and services has emerged and for the
party who has bought a good, the entitlement has expired. But no new money has
to be printed or coined, because the buyer just transfers his entitlement to the
seller. So the entitlements - or that is to say money - just circulates in an
But when and how did
the first money emerge?
Somebody has to produce
a good, which fulfills all the functions of real money, is widely accepted and
functions as a guaranteed entitlement to the delivery of goods and services in
the future. It is also important, that the value of the money can't be
History has shown, that
there is only one good, which has all this postulated qualities:
Only gold or paper
money 100% backed by gold can function as real money.
I said before, that
money comes into existence when somebody performs a service or to put it in
other words, works hard.
Mining gold and minting
it into coins is a lot of hard work.
Gold doesn‘t rot or
rust and it is widely accepted.
So now we know how
money, that we can use as a medium of exchange, as a storage of value and as a
unit of account, comes into existence:
Somebody digs gold out
of the ground, gives it to a goldsmith, who melts it down and molds it into
bullion in exchange for a small amount of gold or paper money redeemable in
gold. Now he gives the money to a commercial bank or a central bank. The bank
stores the gold bullion into a vault in exchange for a small percentage of the
gold and gives him paper money, redeemable in gold. With this new printed money
the gold miner can buy a certain amount of goods and services, depending on the
New money has entered
the market and now circulates in the economy.
But who is controlling
the velocity of money and how can the market make sure, that the money
circulates instead of lying under a mattress?
I‘ll answer these
questions in the next chapter.
6. Interest Rates - The Price of Money
Our modern alchemists -
the central bankers - keep telling us, that if the economy is in the state of a
recession, you just need to drop money from a helicopter and the economy goes
right back into growth mode and the unemployment rate comes down.
The enemies of these
Keynesians are the savers. Because in the world of the Keynesians, when people
pull their money out of the circular flow of money, then the economy can't
expand or falls into a recession.
This is complete
nonsense. If it were true, that the printing of paper notes makes a society
richer, than there would be no poverty in the world and Zimbabwe would be the
richest country in the world.
I said it very often in
my past writings and I have to say it again:
" A society can't
become richer by printing money. A society can only become richer by producing
more goods and services."
economy expands, there is no need for a greater amount of gold or gold backed
paper bills or fiat money. It is the velocity of money, which needs to speed
But don't get me wrong.
The rising velocity of money or an expanding money supply is not the cause of
economic growth. It is just the opposite. The expanding economy causes the
velocity of money to speed up and/or leads to a growth in the supply of money.
But how do we get the
velocity of money to rise, or to put it in other words, how do we get the
money, which is at rest, back into the circular flow?
The answer is very
easy: Interest rates.
Interest rates are the
price of money. If money is badly needed, because the businesses want to
expand, then interest rates will go up to the extent, where the demand for
money equals the supply of money.
So if the demand for
goods and services is higher than the production of goods and services, the
interest rates go up, because the businesses need money in order to expand
their production. On the other hand falling interest rates are a sign, that the
supply of goods and services exceed the demand.
Foreign Exchange Value
of a Currency and Trade Deficits
Every transaction is bartering, it doesn‘t matter if
the transaction is taking place on a national or an international level. Goods
and services are traded for other goods and services. Money is just a
substitute for goods and services.
The foreign exchange
value of a currency shows us if a country is exporting more than it imports or
the other way around. The exchange rate of a currency shows us also, how much
goods a country with a trade deficit must export to a country with a trade
surplus in order to equalize the trade balance. The United States have a long
record of big trade deficits with Japan.
Or put it another way,
the United States buy more goods and services from Japan, than they sell to the
In a free market
without currency manipulation by the central banks, the currency of the country
with the trade deficit should devalue until exports and imports are balanced.
So why doesn‘t the US
Dollar devalue more against the Japanese Yen and the Chinese Yuan?
All commodities are
traded in US Dollar, therefore the US are able to spread a big chunk of the inflation
created by excess money printing all over the world, because everyone has to
buy US Dollar in order to pay for oil, iron ore, etc.
When a car is produced
in Japan and shipped to the US, the Japanese auto maker can either get paid in
US Dollar or insist on payment in Yen. If he gets paid in US Dollar he can use
Dollars for buying US goods and services or exchange his US Dollar for Yen and
buy Japanese goods and services. If he insists on getting paid in Yen, the
American importer of the car has to find another person who sells him Yen in
exchange for US Dollar. Usually he does this with the help of his commercial
bank which supplies him with foreign currency generally with the help of the
The effect is always the same. The Japanese have excess US
Dollar, because they sell so much to and buy so little from the United States.
the US is still the best place in the world for investing, they ship the US
Dollar back to the US and buy stocks and bonds, mostly US treasuries.
keep in mind:
If a nation wants to
keep up a big trade surplus with another nation, the only way of maintaining
this trade surplus is to send money to the nation with the trade deficit.
Otherwise your own
currency gets more expensive and the trade surplus declines, because your
products are more expensive now abroad.
If you don‘t want to
send your money back to the country where it came from, then the only way of
increasing your exports is to increase your imports from the country you want
In a world with an international gold standard, foreign trade and
exchange rates balance themselves. As soon as the exporter of a good gets paid
in foreign paper money redeemable in gold, he goes to his bank and exchanges
the money into his national currency. The commercial bank exchanges the foreign
currency into national currency at the central bank, which finally exchanges
the foreign currency into gold at the central bank of the other country.
Thus when a country has
a trade deficit, gold is flowing out of the country, but when the supply of
gold is shrinking, the supply of money is shrinking, too. Due to the shrinking
supply of money prices and wages go down automatically. As prices and wages go
down, the products of a country get cheaper and the other countries start to
buy more of the country‘s products again and gold starts to flow back into the
Therefore big trade
deficits or surpluses are not possible in an international gold standard.
8. Public Debt
Paul Krugman: “Debt Is (Mostly) Money We Owe to
Most of the time I
completely disagree with Paul Krugman, but this statement is mostly right. But
I have something to add. You can‘t pay debt or a trade deficit with money. Yes,
money is the medium of exchange to pay down debt, but in reality you pay debt
by delivering goods, so you owe the debt to the future generations who will
have to produce the goods to pay down the debt. Therefore it doesn‘t matter
where your creditor is located. It doesn‘t matter if the Chinese are holding
the US debt or if the treasury bonds are owned by US citizens. But in contrast
to Paul Krugman I think that by piling up big public debt you are enslaving the
9. Printing Press = Devaluation of the Currency + Pauperization of breadth
Parts of the Population
The creation of new
(fake) money by the central bank is like a hidden tax on the fruits of our
labor. The central bank is robbing the people‘s wealth, but they keep telling
us they do it for our own good. But when the FED prints money, breadth parts of
the population are losing, big time. But there are some profiteers, though.
Artificially created money always drives up prices. Sometimes housing prices,
sometimes the prices for stocks or commodities and in the long term always the
But who are these
profiteers of money creation and how does the FED create new money?
At present the FED
keeps buying mortgage backed securities and treasury bonds worth $85 billion
from the banks every month.
By propping up the
housing market and keeping down interest rates, the FED helps the debtors and
hurts the savers.
Government is the
biggest debtor, so if price inflation his higher than the interest on
government debt, the public debt gets “inflated“ away over time, because when
prices and wages rise, the taxes the IRS collects also rise.
The next winners are
the commercial banks.
Because the FED prints
new money and buys assets from the commercial banks with this new created
When the banks get the
new money they can buy other assets at the old prices, because nobody has
noticed yet, that new money was created. If they invest the money, they drive
up asset prices and most of the time commodity prices.
The commercial banks
are also happy to lend out the new created money to their friends in the big
businesses. These big businesses drive up prices even more. The little guy is
the last one who receives the new created money, if he ever gets it. When the
little guy receives the new money (e.g. through a pay raise), prices are way
up. Price inflation is the main reason for the widening gap between rich and
In the long term a
small elite gets richer and richer and the rest of the population stays poor.
Another longterm effect of the money printing is that the value of the currency
So what can we do?
I think there is no way
to change the system in the short run. The central bankers won‘t change their
monetary policies, until the whole financial system collapses.
So our only chance is
to make money on a faster pace than the Bernankes and Draghis can inflate.
Rule#1 investing and Rule#1 Cash Flow strategies are our only chance to stay
afloat in a rising tide of fake money.
Haller, Landshut/Germany, April 6nd 2013