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                                      MONEY

                                         

                                         

                                         

                                         

                                         

                                         

                                         

                                         

                              A guide to the economy

                                   by Ian Green

                                         

                                         

                                         

                                         

                                         

                                         

                                Copyright 1989 by

                                         

                                    Ian Green

                                     Box 973

                                  Vancouver, BC

                                 CANADA  V6C 2P1

                                         

                               All rights reserved.

                                         

                                         

             Permission  is  granted  to  distribute   this  document  in

        unmodified form on a not for profit basis. All others must obtain

        prior written permission from the author.
















































        Money by Ian Green                                         Page 2







                                   INTRODUCTION
                                   INTRODUCTION

        

             Do you own your own home? If you do you are almost certainly

        one of  those so-called baby  boomers or  their parents. Consider

        yourself extremely lucky,  because if you tried to go buy a house

        today you probably  couldn't  afford  it,  even if you made twice

        what  you  currently  do.  The  reason  is  simple,  the  cost of

        borrowing  money  has  risen  so  high  that  it  has  completely

        outstripped the earning power of  the average  young  family. The

        real question is how did this situation come to be?  Sit back and

        read on,  I will tell you exactly what  is going on.  Some of the

        things  I will  present are likely  to shock  you, but everything

        contained in this essay is THE TRUTH!

             There are two major components driving the economy of today.

        The first and most influential is the supply of dollars. Contrary

        to popular belief,  the supply of dollars  has grown dramatically

        over the decades since the FIRST WORLD WAR. Prior to the war, the

        number  of  dollars  was  solidly   controlled  by  international

        agreement.  This was the last  period of the gold  standard. Gold

        has,  along  with  silver,  remained the 'official'  money of all

        nations.  Dollars,  yen, marks, pounds, etc. are all nothing more

        than money substitutes. Unlike the dollar, the supply of gold has

        risen only modestly over the centuries.

             The  second major force  driving the economies of  the world

        today is debt.  The United States of  America has emerged  as the

        leading debtor  nation,  far outstripping the   total debt of all

        the 'third'  world  nations combined.  It  continues  to  grow by

        hundreds of billions of dollars each year. 

             Combined,  the  two factors of  debt  and  inflation operate

        synergistically  to erode the  purchasing  power  of  the average

        family.  Now you may ask, confronted with these forces against us

        is  there a way out?  I would be  an out  and out liar  if I said

        there was. There is hope but time is quickly running out.




























































        Money by Ian Green                                         Page 3







                                 THE RECENT PAST
                                 THE RECENT PAST

        

             One of the leading themes of the numerous financial reports,

        that sum  up  the  '80s,  is  the  'unparalleled'  growth  in the

        economy.  What they don't tell you though,  is that the expansion

        is due entirely to inflation; the fact is that real earnings have

        declined   considerably.  In  1984  for  example  the  Dow  Jones

        Industrial Average was around  850.  Today,  five years later, it

        has broken 2700  or more than triple it's 1984 value. Other stock

        exchange indices reflect similar  performances.  I  can  not help

        wondering if your earnings did as well.

             In 1984, when I still smoked cigarettes, a package of twenty

        cigarettes was around $1.60.  Now prices of around $4.00 and even

        more  are  common-place.  Other  products  tell  similar stories.

        Unfortunately the official 'consumer price index' doesn't reflect

        realistic levels of inflation.

             In 1978  the start of the major downturn in  the economy was

        well established.  Inflation was rising to  unprecedented levels.

        In 1979  a major increase in the price of oil was to finally push

        the world economy over  the  edge  of  the  abyss.  Paper dollars

        reached all time  lows  nearly  reaching 1000  to the ounce gold.

        Interest  rates exceeded  21%  and inflation was  out of control.

        Only the collapse of 1929  exceeded the extremely high  levels of

        unemployment  that  resulted   from   unprecedented   numbers  of

        corporate  bankruptcies.  Things finally reached  a  crescendo in

        late 1981.  That Christmas was the bleakest  I had  ever  seen; a

        five dollar toy was the big 'hit'. You remember the Rubic's cube.

             If we look back a few more years   we find a  situation that

        is almost as bad. It was around 1972 that President Richard Nixon

        (America)  instituted wage  and price controls  in  an attempt to

        control double  digit inflation.  Many  other leaders  around the

        world followed suit.  It was market conditions (in 1973 the first

        of a series  of  huge increases in the price of  oil  shocked the

        world)   more  than  anything  else  that  controlled  increasing

        inflation,  although President Nixon took credit for the improved

        situation  (a  reduction  in  the  increasing  inflation). Almost

        immediately  after  controls  were  abolished  inflation  resumed

        reaching double digit levels. Many reacted by immediately raising

        prices (or demanding large wage settlements)  largely out of fear

        that controls would be re-imposed shortly.

             I could go on and on  and on,  citing examples of inflation,

        financial panic and more.  What I have yet to reveal is why there

        is  inflation and all  this  other  crap.  All  of  the so-called

        reasons that are offer to explain inflation are in reality simply

        symptoms of a deeper underlying problem. What we need is to do is

        get to the  root of the problem.  First though we need to learn a

        bit about the evolution of our economic system.
































        Money by Ian Green                                         Page 4







                                EARLIER INFLATIONS
                                EARLIER INFLATIONS

        

             For  as  long  as  there have  been  rulers  there  has been

        inflation. In archaic times it took the form of coins of slightly

        reduced purity  or weight.  Because early coins were  not exactly

        uniform in  shape,  these inflated coins could  circulate side by

        side  with  one of  full  weight and fineness.  Other reasons for

        their success was that the difference was very  slight; the coins

        were officially certified to be of  full weight and  purity, i.e.

        the guy in charge decreed they  be accepted without  question. It

        was also reasonable that the recipient could pass them  on at par

        with full weigh/purity coins.

             As  time  moved  on,  coins  would  go  through  a  cycle of

        replacement  until  some  time  later  they  were  ultimately and

        intrinsically  worthless.  All the time however the  value of the

        coins  would erode and eventually  no  one would  accept  them in

        exchange at  all.  It  was  about  this  time  that  a  change in

        management would occur.

             In medieval timers,  it was customary for  the goldsmiths to

        act as depositories for the safe-keeping of money (gold).  When a

        client wanted his money he had to go down and get it, or at least

        take  the guy he  was doing business  with  down  to  witness the

        transfer of accounts.

             Once paper finally became readily available,  it didn't take

        long for the goldsmiths  to  begin  providing  receipts  for gold

        deposited.  These  could then  be  endorsed  (not  unlike today's

        checks)  over to a third person  to complete a  transaction. This

        third person could then  go and  redeem the receipts and  get the

        gold.  Ultimately  goldsmiths  began  offering  'bearer' receipts

        which  were  the earliest  bank-notes  (in the  West  anyway, the

        Chinese were way ahead of us by several centuries).   
































































        Money by Ian Green                                         Page 5







                            FRACTIONAL RESERVE BANKING
                            FRACTIONAL RESERVE BANKING

        

             Goldsmiths,  in  issuing their  receipts,  came  into direct

        competition with  the guy in  charge  over  the supply  of money.

        Rather  than   abolish  these  receipts,   some  monarchs  became

        intrigued by the fact that the masses preferred their goldsmith's

        paper over his often underweight  and impure metal  coins. It was

        also readily apparent that it was far easier  to make counterfeit

        paper  receipts  for   gold  that  could   circulate  along  side

        legitimate receipts.

             Naturally under even the simplest of legals  system, conning

        thine neighbor is not allowed,  unless of course you  are the one

        who makes the rules. Details are scarce but it is clear that some

        greedy king, along with the cooperation of a dishonest goldsmith,

        started  the system  of  fractional reserve banking.  The guy  in

        charge would protect the goldsmith from anyone  who complained in

        return for the goldsmith's financial backing.

             Using the old standby propaganda, both the goldsmith and the

        guy in charge would continually  reassure the public that  it was

        all right  to have more receipts outstanding than  there was gold

        because there would  always be more  than enough gold  on hand to

        meet redemption demands.  As long as those responsible didn't get

        too greedy,  the  erosion of  value of  the  receipts  was barely

        noticed (although people did eventually catch on).

             When things did get out of  hand  a 'run on the  bank' would

        occur.  Sometimes the goldsmith became 'bankrupt';  he could only

        pay  out the 'fractional reserve'.  The  rest  of the outstanding

        receipts were  worthless (at last  the counterfeits  were flushed

        out,  usually along with the counterfeiter). Sometimes the guy in

        charge foresaw the run and  closed  the  goldsmith's  shop before

        disaster struck.  Needless to  say that  remaining receipts would

        decline in value rather  precipitously.  If he had 'connections',

        sometimes the king could borrow some money (gold) and re-open the

        goldsmith's shop and meet the rush head-first!  Eventually people

        would see that the notes were being redeemed and would eventually

        refrain from redeeming their holdings. In fact these people would

        start  bringing  their gold  back  to the goldsmith's  to get the

        newly acceptable receipts. A fool and his money are soon parted.

             I guess you can see the obvious.  Once  the situation cooled

        off it didn't take long  for the guy in  charge to start  the old

        game again,  all the while eroding the value of the receipts more

        and more.  Eventually the whole  thing would fall  apart and once

        again a change in management usually occurred.








































        Money by Ian Green                                         Page 6







                                  CROOKED CREDIT
                                  CROOKED CREDIT

        

             Not  long  after the abuse of  paper  receipts  started, the

        practice moved over to the  loans business.  In earlier times the

        goldsmith 'loaned'  money (gold) to certain customers for a small

        payment.  Certain other  customers  provided  gold  on  long term

        deposit for which they were paid a small amount. In the beginning

        it worked out well. Loans outstanding never exceeded deposits.

             A  new method of book-keeping,  known as the  'double entry'

        ledger system emerged. It was fair and accurate and it kept track

        of the goldsmith's business  and  everybody  was happy.

             Later though goldsmiths would loan money that was  in excess

        of the amount  on deposit.  In order to cover  the discrepancy, a

        dishonest goldsmith would 'depositing'  an  equivalent  amount to

        keep  the books balanced.  Needless  to  say  such  practices are

        completely and utterly fraudulent, but with the protection of the

        king what could be done?

             Although this kind of abuse  is not readily  visible, it did

        have  an  effect on the money supply  and inflation  continued to

        gnaw away the purchasing power of the receipts.

             Combined  with counterfeit receipts,  these fraudulent loans

        combined to destroy more economies that you can shake a stick at.

        It kind of  makes you wonder what is next. What can be worse than

        counterfeit money?














































































        Money by Ian Green                                         Page 7







                                    FIAT MONEY
                                    FIAT MONEY

        

             Somewhat more recently the value of  the  world's currencies

        has moved  to  the  logical  extreme  of  the  fractional reserve

        system.  If you  go  down  to  a  coin  dealer  and  look  at the

        historical bank-notes (American)  you will notice the  are marked

        'silver certificate'  or 'gold certificate'  as at one time these

        were  redeemable  in  precious metals.  Coins were actually still

        made of precious metals.

             Genuine paper  money is fully  redeemable. Counterfeit paper

        carries the promise of  redeemability (which the  issuer knows is

        fraudulent).  Paper money which doesn't carry even the promise of

        redeemability is even worse - it is a fiat money.

             Fiat money is what is left of the fractional  reserve system

        gone  broke.  It  is  a  money  substitute  that  has  no backing

        whatsoever.  Dollars became  fiat  in August 1971  when President

        Nixon declared that  the dollar  would no longer be  redeemed for

        gold (although in effect this was  evident as early  as 1968). In

        fact ALL currencies  of  ALL nations today are  100% irredeemable

        fiat money with NO TRUE BACKING whatsoever.

             Dollars  have  become increasingly worthless,  yet curiously

        they  have  become  redeemable  again (albeit at  a substantially

        reduced rate).  You can now go and buy gold bullion one again (It

        used  to be illegal to  own gold  bullion in  America). The paper

        dollar  has declined,  is declining and will  continue to decline

        relative  to  the gold  dollar until eventually it  is absolutely

        worthless. The path will be erratic but it is well established on

        its way down.






































































        Money by Ian Green                                         Page 8







                                       DEBT
                                       DEBT

        

             Finally  we  come  to  the debt  problem.  So  far all those

        deficit dollars (yens,  pounds, etc.) are increasing by leaps and

        bounds.  Sooner or  later this  debt  will  have to be  paid. The

        crucial question is how?

             Well if  you took the  American situation as an  example the

        debt  there is $3  trillion ($3,000,000,000,000.00)  or so. If we

        simply printed  it up and circulated  the notes it  would devalue

        the presently feeble dollar by at least 90%.  Not to popular with

        all those holders of  dollar  denominated assets  like  bonds and

        treasury  bills.  So  what else can be  done.  Well the supply of

        dollars can be increased more slowly  but it has  the same effect

        of depreciating the present value of  the dollar.  If we  look at

        the Canadian  situation,  it  is  even  worse.  Here  the debt is

        currently around $350,000,000,000.00 and only a  small population

        of 25 million people to pay.

             Suffice it to say inflation is going to get worse because of

        the double whammy of  counterfeiting and debt.  A gloomy scenario

        but accurate. Worse is the fact that there is more to come.

             Another consequence of this debt is that it siphons up money

        there by removing  it from the overall credit  pool.  This drives

        interest rates higher  which in  turn  drive  the  deficit higher

        which drive  interest rates high in  a vicious cycle.  In Canada,

        for  example,  the federal budget  deficit stands  in  the $30-35

        billion range.  Curiously that figure is about what  the interest

        payments are on  the total debt.  Any increase in  interest rates

        simply raises the budget deficit which in turn drives  the supply

        of dollars ever  high.  Consequently  the  debt  simply  feeds on

        itself growing uncontrollably.

             Another  peculiar  aspect  of  debt  lies in America.  It is

        variously known as the Savings and Loan crisis. When the industry

        was first created S &  Ls  were  confined  to  financing housing.

        Deposits were all insured and the situation was stable  (or so it

        seemed).  As time moved on however increasing  federal debt began

        to  drain money from  the private sector.  S  &  Ls  responded by

        raising the interest  offered on  deposits  to  maintain adequate

        reserves as required by law.  The problem was that  large amounts

        of  money had previously  been  loaned  out at  comparatively low

        interest rates for long  periods of  time.  Stuck  with these low

        paying mortgages and spiralling  interest  rates  it  didn't take

        long before the whole industry to fall into turmoil.

             In  a  quick  fix  the  American  congress  decided  it  was

        expedient to  allow the S &  L's  to  invest  in  higher yielding

        ventures to  help  improve their financial  health. Unfortunately

        such a change  in  policy did  nothing to ease the  situation. As

        interest rates continued to  climb more and  more these alternate

        investments  (mostly  in  commercial  real   estate)   fell  into

        bankruptcy and once again the industry was on the  verge of total

        collapse.  Only  this  time  the  situation  was quickly becoming

        hopeless.

             What happened to exasperate  the problem is nothing short of

        incredible.  In a frenzy  to  maintain  viability S &  Ls started

        competing  heavily  to  attract  depositors  to  the  point where


















        Money by Ian Green                                         Page 9







        interest  rates were  becoming  unrealistic compared to earnings.

        None  of  this  mattered  though  because the  deposits  were all

        insured. This meant that savers could simply go to the S & L that

        paid the  most,  there was no risk so why not go  to  the highest

        bidder.  The  Federal  Savings  and  Loan  Insurance  Corporation

        (FSLIC)  was the one stuck to pay all this  money.  Once an S & L

        was bankrupt  (most were  well  past  that  stage years  ago) the

        entire  burden  fell  upon  the FSLIC.  Estimates of  the current

        amount needed to 'bail out'  the industry range into the hundreds

        of billions of dollars.  And still the congress has  done nothing

        alleviate the problem. Shutting the industry down seems to be the

        only viable solution.  It cannot continue to function the  way it

        does now. One thing is certain the accumulating debt will have to

        be paid.

        

             In  Canada  the pension system  is  run on  a pay as  you go

        basis.   Pension  payments  are  paid   from  general  government

        revenues.  Unfortunately demographics will make this program very

        expensive  for younger persons.  The reason is simple,  in Canada

        fully one third of the population is over the age of 50.  In only

        15 years the number of persons claiming a pension will skyrocket.

        The 'problem' of the declining birth rate is manifest.

             When  this pension  program was introduced  decades ago, the

        number  of  persons  that  were  eligible  was  relatively small.

        Advances  in  medical  technology  have  however  increased  life

        expectancy of the average individual substantially.  This results

        in ever  increasing  numbers of  persons  living  long  enough to

        collect a pension for longer   periods of time. Unfortunately the

        pension plan has not been modified to reflect this fact.

             This unfunded liability is sure to  drive up the  debt as no

        government has the  political  will  to  deal  with  the problem.

        In Canada a deindexing (decoupling the program to  inflation) was

        tried but the government  rescinded the  proposal  after numerous

        protests.  Instead one can expect that this liability will add to

        the already massive debt  driving inflation to  higher and higher

        levels.  It is even possible that the pension plan  may be phased

        out completely (because of bankruptcy).

             In America the national pension system  is  forced to invest

        in government  securities  which is  effectively  means  the same

        situation as Canada's only disguised. In order to pay the pension

        the  Federal government  has to pay  off some debt.  But the debt

        continues to grow and grow. A paradox that must be corrected.










































        Money by Ian Green                                        Page 10







                                    THE FUTURE
                                    THE FUTURE

        

             What I have  described above is  all true.  Inflation has so

        eroded the dollar that it is now  almost intrinsically worthless.

        On top of that is a huge supply of additional deficit  dollars to

        further dilute the remaining value.

             Recently M2 (an index of the dollar supply) has been growing

        at an annual rate of some 15% (three times the official inflation

        rate)  and no slowdown is likely.  Where does it lead?  It simply

        means that government  policy continues  towards the inflationist

        view.  As I outlined in  earlier chapters  continued inflation in

        the  money supply  is sure to  cause the ultimate  downfall of an

        empire.

             Recently housing has become  short in  supply,  a symptom of

        the high cost of money.  The shortage drives prices up and up. If

        the cost of money wasn't  so  high then the housing  supply could

        keep up with the ever increasing population.  Construction of new

        homes is  slowed  when  the cost  of  money  rises.  Worse, local

        governments   are   reluctant   to   provide   building   permits

        exacerbating the problem.

             Sooner or  later,  all of  those deficit bills will  have to

        stand up and be counted.  You can be sure that inflation will run

        right through the roof when they do. Look at Argentina right now.

        It is in the hyperinflation stage right now. Prices are  doubling

        ever  day or  two,  the government  is  out to  lunch (there were

        recently a change in management there,  but the new president has

        nothing with which to rebuild the economy, inflation has eaten it

        all up).  At times there were riots as people fought to get basic

        food (it has  been priced out of  reach by  inflation). This will

        happen here, I just cannot say when.

             One things is clear,  previous generations  have been living

        beyond  their means,  and now the present and  future generations

        are going to have to pay and pay and pay and pay and pay and pay.




























































        Money by Ian Green                                        Page 11







                                     SURVIVAL
                                     SURVIVAL

        

             I guess you kind of  expected something of a  survival guide

        to  this dilemma and  lucky for you there is  a faint  glimmer of

        hope.  Basically put you have to change your  mentality regarding

        the health of the economy. Instead of valuating assets in dollars

        (or whatever) use gold dollars or my personal favorite sovereigns

        (they are coins that contain .2354 ounces of fine gold each, made

        by the British Empire,  they are still legal tender to this day).

        A sovereign is easily recognized by the image of  a reigning King

        or Queen on one side and a scene of St. George slaying the dragon

        on the other.

             Now move to liquidate dollar denominated assets like T-bills

        certificates of deposit and the like and redeem them for gold and

        silver.  Bulk coins (old  silver  dimes and  quarters)  are still

        around  and these make  a good  vehicle  for  hold  'money'. Bulk

        silver is also nice  (the troy pound is  12  ounces) as it weighs

        down the strongbox so that thieves  (Break & Enter is very common

        crime)  cannot just  simply  take  it  with  them;  it comes in a

        variety  of  convenient  sizes ranging up  to  and including 1000

        ounce bricks.  Bulk gold is available in sizes ranging up  to 400

        ounces. Fractional sizes are also available.

             Precious  metals rise in  value as inflation  rises. This is

        simply because  gold  cannot  be  artificially  increased. Nature

        severely  limits  the amounts that  can be  mined each  year to a

        minuscule fraction of the total world  supply.  Consequently they

        are extremely resistant to  inflation.  Another convenient aspect

        of  gold  is  that it is  recognized world wide.  No hastles with

        paper money changers, gold buys goods and services everywhere.

             One last piece of advice, should a dealer ask your name when

        making  a purchase do like  I do,  simply use a false  name. This

        avoids attracting attention to  yourself  lest certain 'official'

        money grabbers try to put the grab on your 'money'.

        


























































        Money by Ian Green                                        Page 12







                                    THE AUTHOR
                                    THE AUTHOR

        

             I was born  on  September 10th,  1958  in the Grace Hospital

        (now known as  the Children's  Hospital).  I  was  raised  in New

        Westminster and attended a variety different  schools  because of

        the politics of divorce (that my parents undertook).

             Once  I reached high  school  a degree  of stability finally

        reigned and my academic abilities reached their peak in  grade 11

        when I was granted Academic  Student of  the Year.  The prize was

        modest,  a  one  year  subscription  to  Scientific  American.  I

        graduated with honours in 1977.

             After  completion  of high school  I was able  to attend the

        University of British Columbia  for one year.  The  only reason I

        was able to achieve this was  simply because I  won a scholarship

        to attend,  my father would not assist me in any way  (I even had

        to pay for most of my books and supplies).  In 1978  I was unable

        to win  another scholarship (as the economy faltered  so  did the

        supply of funds for education)  so I was forced to enter the work

        force.

             My early years as a worker taught me a great deal  about the

        realities of  economics.  I entered the work  force  just  as the

        economy went to hell in a hand-basket. Still I was able to secure

        work if you consider working in toxic waste dumps  work.  Such is

        my lot I suppose. At least I could pronounce all the names of the

        chemicals I was cleaning up. Later in 1981 I got another job in a

        chemical factory, my lungs still bother me from the alkaline dust

        that permeated  the air (mostly soda ash, but phosphates and more

        complicated organics were also present).

             Lately I have found  myself working at poorly  paid 'service

        sector'  jobs.  I manage  to  survive.  Curiously  I do better to

        indicate  an inferior level of  qualification than  to present my

        full  academic  credentials.   (I  successfully  challenged  many

        courses at UBC and was taking one 3rd year math course  all in my

        first year).  Needless to say it makes me that  much more cynical

        to see hordes of morons in places where they shouldn't be.

        

             My personal survival depends on you,  because I don't have a

        steady job.  If you can afford it why not send $5  or $10  to the

        address on the cover,  I could sure use it.  Keep your eyes open,

        I plan to publish many more essays as time moves on,  both on the

        topics presented here as well as  others.  

             Perhaps if the venture works out I will be able  to complete

        my academic goals. I was pursuing a program based on mathematics.




































