Once upon a time, there was a peaceful village deep in the forest. The inhabitants of the village were an industrious sort with a wide variety of trades and skills. There was a baker who made all sorts of breads and cakes, a shoemaker who made everything from work boots to sandals, a blacksmith who could forge iron into a variety of tools and wares, a coppersmith, a carpenter, and many, many others. And, of course, we shouldn’t forget the host of people living outside the village like the farmers, ranchers, and miners, without whom, life in the village would have been quite impossible. All of these went about their daily lives, peacefully and profitably applying their various skills.
The villagers traded with each other using a barter system. Two men would seek each other out. The first had something the second needed and the second had something he first needed. They would negotiate their transaction, exchange their goods, and shake hands. Then they would walk away from each other, fully satisfied that they had both profited from the transaction.
This system of commerce was simple and straight forward but at times, awkward.
One day a farmer came to the village to barter for a new plow. He went to the blacksmith and said, “Sir, I would gladly give a bushel of wheat for a new plow.” The blacksmith answered, “That seems like a fair exchange, but I have no need for a bushel of wheat.” The farmer then asked, “What DO you need?” The blacksmith replied, “Well, I need a new pair of work boots.” So the farmer said, “I’ll see what I can do.” And off the farmer went to barter with the shoemaker.
The Farmer said to the shoemaker, “Sir, I will gladly give you a bushel of wheat for a new pair of boots.” The shoemaker answered, “That seems like a fair exchange, but I have no need for a bushel of wheat.” The farmer then asked, “What DO you need?” The shoemaker replied, “Well, I need some fresh bread for my family.” So the farmer said, “I’ll see what I can do.” And off the farmer went to barter with the baker.
The Farmer said to the baker, “Sir, I will gladly give you a bushel of wheat for a basket of fresh bread.” The baker answered, “That seems like a fair exchange, and, in fact, I need some wheat so I can make more bread.” So, the farmer gave the wheat to the baker, the baker gave the farmer a basket of fresh bread, the two men shook hands, and the farmer went on his way. The farmer took the bread to the shoemaker and exchanged it for the boots. He then took the boots to the blacksmith and exchanged them for the plow. Thus did the farmer exchange his goods of value for the plow he needed.
Now, this was a terribly cumbersome transaction, and the farmer was not the only one having to spend so much time and energy making deals. The blacksmith had trouble negotiating for iron ore and coal. The shoemaker had problems getting leather and nails. Time would fail me to describe the agony the coppersmith went through to get copper from a distant mine. It seemed everyone had something they needed and something of value to trade for it, but lining up the right people and making all the deals necessary could be a very consuming chore.
One day, a young man in the village came up with a brilliant idea. He said, “Let us come up with a system of tokens to represent the value of our goods and services. Instead of exchanging those goods and services directly, we can give the provider a token for his product which he can then use to buy whatever he wants from whomever he chooses. If the baker needs wheat, he can give the farmer a token for that wheat. If the farmer then needs a plow, he can buy it from the blacksmith with the token he got from the baker. It won’t matter if the blacksmith needs no wheat because, as that token makes its way around from one hand to another, it will eventually find itself in the hands of the baker who DOES need wheat.”
The people of the village, weary of all the fuss and haggling, embraced the idea. They formed a committee to produce and regulate the tokens. The tokens they called coins, and the committee was named the Coin Authority. The Coin Authority then wrote a set of rules to regulate the currency and hired a crew of copper smiths to make the coins. The coins began to be circulated, and thus began the use of money.
The village economy flourished. All the time that people were saving by exchanging currency instead of products, they were now able to spend making more things to be sold. Money offered many other advantages also. Unlike many goods and services, money could be used at any time in the year or season. Money could be saved and stockpiled to be spent on larger, more expensive items. Money was light and easy to carry. It was ideal for travel and long distance commerce. The village had become so prosperous from this new system, people were coming from miles away to be a part of the experience.
The years passed and a new generation of villagers arose that had no memory of the earlier barter system. They did not know how or why their elders had made the transition to money. They only knew that money buys everything a person needs or wants, and, the more money a person had, the more they could buy.
The members of the Coin Authority decided they needed a bigger, more comfortable place to conduct their business. To pay for it, they decided to simply stamp out more coins and use them to buy what they needed from the villagers. So they stamped out coins and purchased a piece of land. They stamped out more coins and bought lumber and other building materials. They hired carpenters and workers of various skills, and stamped out more coins to pay them. They stamped out coins to buy wood and leather, and hire skilled craftsmen to make fine furniture. And then, when the day came to open their new headquarters, the governors threw a huge party and invited all the villagers to attend. They stamped out coins to buy food and tables and chairs. They stamped out coins to hire musicians and dancers for entertainment. It was a wonderful, joyful celebration that lasted late into the night. And, all the suppliers and craftsmen who worked on the new building and the party, filled their pockets with lots and lots of coins.
But the villagers would soon learn there is difference between coins, and the goods and services they represent. One day, soon after the party, a farmer came to the village to purchase a new plow. He went to the blacksmith and said, “Sir, I would gladly give 10 coins for a new plow.” The blacksmith answered, “That seems like a fair exchange but you will have to wait because much of my iron went into the Coin Authority building and what I had left was quickly bought out by the workers who made money working on the building. Furthermore, there are many people ahead of you wanting other things made.” That same day the blacksmith went to the shoemaker and said, “Sir, I would gladly give 10 coins for a new pair of boots.” The shoemaker answered, “That seems like a fair exchange but most of my leather went into the Coin Authority building and there are other people ahead of you wanting shoes made.” Likewise, there was no bread for the shoemaker to buy from the baker, and no wheat for the baker to buy from the farmer. In fact, everyone in the village found it hard to find food, tools, building materials, clothing, and many other things they needed. But what the villagers DID have were lots and lots of new coins; coins the sparkled and shined; coins that made a jingly sound in their pocket; coins that purchased for them absolutely nothing.
You see, money itself has no real value. You cannot eat it for food, you cannot burn it for fuel, and you cannot build anything with it. It is small piece of copper – virtually worthless. What gives it value is what it represents. Money represents food, clothing, housing, transportation, fuel, medicine, tools, and building material. In modern times, money represents telephones, TV’s, radios, cameras, and computers. It represents movies, music, pictures, vacations, and various forms of entertainment. In short, money represents every material thing we need or want.
But, you must never confuse money for what it represents. You cannot produce food by stamping out more coins. If you want food, you must plant the seeds, grow the plants, and harvest the grain. You cannot produce more lumber and other building materials by stamping out more coins. You cannot produce gasoline and other fuels by stamping out more coins. The things in this world that have real value only come about when someone, somewhere puts hand to tool and makes them.
When everyone else in the village presented money to purchase items, they first earned that money by producing something that had real value. Before the farmer bought the plow from the blacksmith, he first earned that money by producing a bushel of wheat for the baker. When the blacksmith purchased the basket of bread from the baker, he first earned that money by producing a plow for the farmer. And when the baker bought the wheat from the farmer, he first produced a basket of bread for the blacksmith. Each man, in his turn, purchased what he needed by producing something the community needed. But when the Coin Authority bought everything for the new building and the party to follow, they produced nothing of any value. They “produced” small pieces of copper that no one could eat, wear, or build with. In simple language, the Coin Authority stole from everyone else in the village.
It was a hard winter that year. Many of the villagers died of cold and hunger.
When the spring came, the need for food and other necessities had become very urgent and the efforts to fill these needs took a huge toll on everyone. The farmer raised the prices on his wheat so he could buy more farmland and hire more workers. He went to the blacksmith and insisted the blacksmith spare some iron and the time to make more plows. The blacksmith in turn raised his prices to build more shop space and hire more workers. The miner, who supplied the blacksmith with iron ore, also raised prices to hire more people and buy more tools so he could mine more iron. These costs were then passed on to everyone who bought from the miner, the blacksmith, and the farmer which made the prices for everything else go up. A loaf of bread that used to sell for two coins, now went for three coins. A ten-coin pair of shoes now sold for 15 coins. The villagers worked harder than they had ever worked and made more money than they had ever earned, but had very little to show for it.
Things eventually returned to normal as people adjusted to the new economy, but the whole, sad episode had already ruined many, many lives. The farmer had been saving money to build a new house, but the money he had saved could no longer purchase the higher priced lumber and nails. The old baker had been saving money to retire, but with the increased cost of food and medicine, what he had saved would only have lasted him a few years. So he kept working until the day they found him dead in front of his oven. Some of the wealthier members of the village were saving money to build a new school, and many had started talking of a new hospital. But, because of the increased cost of materials and labor, these would all have to wait for some future day.
Time flies and another story begins…
Once upon a time, there was a United States president named Mr. Obama and a Federal Reserve chairman named Mr. Bernake. When the president came into office, he had many things he wanted to spend money on. He wanted to spend money on a new health care program, government backed student loans and home mortgages, and assistance to poorer countries. He wanted stronger environmental laws and regulations to curb greenhouse gases. He wanted to do away with fossil fuels by funding green-energy startup companies. He wanted to do many other things too, but, alas, there was not enough money coming in from taxes to pay for it all. So the President borrowed money banks and citizens around the country by selling bonds. Then, he borrowed more money from a country called China. But this still wasn’t enough to pay for all the wonderful programs and initiatives he wanted to do.
To make matters worse, the economy was not doing well. Many people had lost their jobs. More and more tax money was going to unemployment insurance, government housing, and food stamps. The economy itself was growing, but in a very weak fashion, constantly on the brink of recession.
One day Mr. Bernake came up with a wonderful idea. He said to Mr. Obama, “Let’s have the Federal Reserve stimulate the economy by injecting more money into it. We will do this by buying back some of the government bonds we sold to borrow money from the public.” Mr. Obama said, “That sounds great, but where will you get the money to purchase these bonds?” Mr. Bernaki responded, “Simple, we will just print more dollar bills. And we will call it Quantitative Easing.”
Ken Moore
Republican Precinct Chair 793
Houston, Texas
Lol interesting read! Yes abnd funny too!
Like.