When economics becomes sensible again

On the face of it,  economics ought to be among the simplest of all subjects that scholars study.  After all, the world’s economic system consists only of an aggregation of simple transactions that two individuals take.  Sometimes the individuals act on behalf of organisations and sometimes the transactions involve many items simultaneously but, nevertheless, the simple one-to-one exchange applies.

The net result of all this at any stage and at any one instant of time ought to result in a zero balance of trade the whole world over where everybody’s spending equals everybody’s income.  Yet this is not what has happened.  There is a vast imbalance of debt and no-one — not even some of the brilliant individuals who study economics — can explain why.  Nor can they explain how to emerge from the situation.

The reason is that once governments took over the means of producing money by printing banknotes instead of minting silver or gold, then the old-fashioned notion of transactions having to be balanced went out of the window.  Never mind that the Chinese had tried this once before in the Middle Ages with disastrous results, European countries weren’t aware of this and proceeded to do so all over again in the late 18th century.  In both cases, it was a quick get-out in order to pay for wartime armaments.

In both cases the governments concerned promised to pay back those who had banknotes. In China’s case it was with silver and bronze coins, but it took centuries for the country-wide economy to get back to normal.  In our case, the original promise concerned bringing back gold coins was largely carried out in the course of the 19th century if depositors wished but, towards the end, money in circulation had to be augmented by the use of personal cheques.  This was the beginning of the money supply and its valuation losing contact with reality and compounded not many years when vast amounts of paper money had to be printed to pay for the First World War.

Considering that we now have world-wide communication then getting back to gold ought to be much more rapid and relatively simple — indeed, it is highly likely if governments’ intransigence continues for much longer and puts multinational corporations normal business at risk.  If things become even worse than now they will surely step up to the plate in and initiate a currency of their own to keep the world economy going in reasonable heart.

The trouble is that since the industrialised countries took to printing money universally and exclusively since 1931 all subsequent economics text books have mis-described what money really is — or has been since 900 AD when silver and gold coinage was first invented by business as a convenience.  Modern text books describe money as a unit of sccount — which can be used variously as a medium of exchange, a unit of account or as a store of value.

When a government is in a state of collapse money means none of the three above things. Almost a anything of value — cigarettes, chocolate, even bucket of water sometimes — is money.  If it’s desperately needed and can conveniently passed around then it’s money — real money.

It was, in fact, the insufficiency of silver and gold coupled with a lack of world-wide value of gold and silver as coinage that prevented them being used in the end during the fantastic prosperity that the industrial revolution brought about in 19th century England and a small cluster of other European countries.   There was no world gold exchange at the time wherein the shortage of gold and silver would be automatically adjusted upwards as the demand for money grew.

At that time we only had local gold and silver exchanges that centred around the nearest gold or silver mine where the metals had value as highly desirable status ornaments that could be carried by individuals according to their social rank.  By the time that world gold silver exchanges opened — in London in the 1930s — all the countries in the world had gone over to fiat currencies that were jingoistically printed by all governments and whose values could be manipulated from time to time by changing instructions to the banknote printers.

We’ll only have a zero-balancing world trading economy when we get back to gold.  Of course, when most of the world’s populations start to have cheap smartphones the most of the money will be in digital form but it still won’t alter the basic need that for every unit of digital money there will have to be a certain amount of gold (or silver or platinum) in despot somewhere able to be exchanged if an owner of digital money really wants to.

Alan Greenspan, as wise a bird in economic matters as any thinks that it would be in China’s best interests to make its own currency, the yuan (or renminbi), gold-backed then, if China doesn’t do so fairly soon and if the present world monetary dilemma continues then I can’t see any other option than for gold-backed currency to return via multinationals moving into the mess by default.  It is only then that economics will become the sensible subject it always should have been.

2 thoughts on “When economics becomes sensible again

  1. Dear Keith,

    You say: ‘There is a vast imbalance of debt’.
    I wonder how you come to even think of of the possibility of imbalance?

    Wherever there’s a debt there’s always a balancing credit, by definition – whether you’re dealing with money or anything else.

    But I’m sure you must have an answer…

    Peter

    1. Hi Peter, Yes, I do have an answer and it is a very obvious one. A debt immediately starts acquiring a running penalty — interest payments — until it — and they — are all paid off. Keith

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