Economics and Wealth, Part I

In a recent discussion about prosperity and money I realized that basic knowledge about economics is lacking in this country. I want to give people further information about how money works and what wealth is. One person I know was interpreting the Bible based on his understanding of economics, that is, gold is symbolic of prosperity. As it turns out, wealth comes from someplace else. I agree that religion and economics are related.  In fact, three things are related that affect one another: religion, politics and economics. This disquisition is about the economics portion of that triad. As you can imagine, explaining any one of those things would be voluminous. Regardless of its length, I hope you are able to take time to read this.

Three intertwined things control every aspect of our lives: religion, politics and economics. They are as much a part of each other as Matter, Time and Space are related in Einstein’s theory. People have a better understanding of religion and politics when they know how economics work, although that is something they may not realize at first. This may seem absurd to them, but it is true nevertheless. Each affects the others and all control our lives. We can be like driftwood in waves of the sea, driven and tossed with the wind in ignorance of the Three, or we can be like ships with rudders and use the Three. Money and how it works are very important to us; we walk in ignorance of it to our own peril.

I want to explain why money and wealth are limitless. Gold is a limited resource. Money and wealth have no limit. Understanding or misunderstanding this influences our political politics and our religious understanding of God and the Bible.  Take a few minutes now, one day out of your life, and add to it something that will influence you for the good for the rest of your life.

Suppose you were rich

Let’s start off with money. You need money to understand how it works. So, Poof! You have just received one million dollars (henceforth known as “$1m”). Don’t worry about SSI any more. From now on (in this example) you have all the money you want or need.  We’re using $1m as an example. You heard a knock on your door and when you answered it, the guy standing there handed you $1m.

What is the first thing you’re going to do with all that money?

The first thing you’re going to do with all that money is put it in the bank. Great.  So now you have $1m in the bank. What happens to it then?

The bank has your $1m. What does the bank do with it? The bank loans it out at interest or invests it. Hey!  Wait a minute! That’s your money. How can the bank loan it out?  Easy. It says, “Here,” to a person applying for a loan. In other words, the bank is using your money as if it belonged to them. It does belong to the bank. If somebody robs the bank, it’s the bank’s money they are robbing, not yours. Your $1m belongs to you and it belongs to the bank.

You have an interest-bearing savings account, so you’re drawing interest on it. The bank loans it out (or invests it) at a higher interest rate, so the bank is also drawing interest on it. Both you and the bank are using the exact same $1m because you both “own” it; you are both profiting on it.  Two people – you and the bank – both have your names on the same $1m. 

What does the bank do with that $1m? Let’s say a construction company owner comes in and wants a loan for $1m and the bank gives it to him. Now who owns that money? You do, of course. And the bank does because the bank has it listed as an accounts receivable and they are drawing interest on it. They can borrow still more money using that as collateral. It’s the bank’s money. But it’s also the construction firm’s money, too.  The construction firm can use that $1m and profit from it – from your money.

The construction firm does several things with the money. It buys supplies but more importantly, it meets its payroll. It pays out the money to 1,000 employees. Now whose money is it?  It belongs to you, it belongs to the bank, and it belongs to 1,000 other people.

What do those 1,000 people do with their paycheck – with your money? They buy groceries. They pay their rent. They pay their bills. They go on vacation. They put their children through college. They’re using that money as if it were their own money because it is their own money. In some cases the people put some of the money into a savings account. Now whose money is it? It’s your money. It’s your bank’s money. It’s their money. And it’s their bank’s money. What does their bank do with that money? Guess.

In this example, some money was spent and some was saved. The construction worker owned the money until he paid it out for payroll. Then he didn’t own the money any more. However, you still owned that money, that exact same money, and so did your bank.

The same dollar can be owned by a million people. Every one of those million people can gain wealth from it as long as their names are on it. When they spend it, their names are no longer on it. When they save it and invest it, their names stay on it.

Your money is in general circulation. Your $1m is used by everybody because it is not sitting in a vault in the bank. It is in general circulation.

Money by Fiat

Where does money come from? One way is by fiat. Remember, I said one way. I’ll tell you another way in a moment. In the meantime, what is “fiat?” Fiat is the spoken word. Money comes into being by the spoken word.  Banks create it out of thin air.

This is the way it is done. When you put money in the bank, the government authorizes that bank to loan out up to ten times the value of your deposit. Pretty cool, huh? You put in $1m and the bank loans out $10m. Wow! Where’d it come from?

The Constitution of the United States says that congress is in control of creating money for the United States. Congress (unfortunately or fortunately, depending on your point of view) abdicated that responsibility and turned it over to a private bank, the Federal Reserve.

The Federal Reserve is not part of the federal government. It is a private bank just as Federal Express (FedEx) is a private transportation company. Congress granted the Federal Reserve the right to create and print money. When the banks want cash, they order it from the Federal Reserve.

So, you deposit $1m and the federal government authorizes your bank to loan out up to $10m. Your bank orders it from the Federal Express, and voila! Money by fiat.

Dollars are Tokens

For the volume of wealth available, not much cash is actually needed.

At this point I’m going to use the word “money” to mean wealth in general and “cash” to mean that stuff you put in your pocket. A dollar bill and a quarter coin are cash. They are called “money” too, but they are an amount of money.

When you got your million dollars (remember that?), I didn’t say how you got it. Was it by check or by a suitcase of money? A person who has a million dollars usually is not stupid enough to walk around with it in a suitcase, so let’s assume he had a check. You opened the door and he handed you a check for $1m.

You took that check to the bank and put it into your account. What happened then? Did your bank call the other bank and have the other bank send them $1m cash in an armored truck? Of course not. Your bank made an entry in its accounting books and charged the other bank for that $1m. It probably went over the telephone line and the other bank made a corresponding entry in its books.

In the meantime, the other bank has its own charges against your bank. The other bank makes their entries and sends their charges to your bank through their computer. So, what do they do at the end of the day? Do they add up the difference and then an armored truck takes the cash to the appropriate bank? Or do the bankers simply go home and come back the next day, ready to do business again? Transference of wealth is simply the changing of numbers in accounts.

Suppose you had two bank accounts in the same bank, a checking account and a savings account. One day you decide to transfer an amount of money from one account to the other, and you do so.  Does the banker then go to a wall of drawers, open one drawer which represents your savings account, take out the appropriate cash, close that drawer, walk over, open your checking account drawer, and put the cash into it?  Or do they simply make a notation in their books that one account has less money and another account has more money? They make a notation in their books only. 

When you deposit $1m into your bank, does the Federal Reserve quickly load up another $10m in cash and rush it to that bank because they are now authorized to own that much more? Or does your bank simply send a notice to the Federal Reserve and the Federal Reserve makes a notation in its books?

The only time cash is sent to a bank is simply because that amount of cash is needed at that time by that bank. It does not represent all the money the bank has, because its money only exists as a notation in a book. Or more precisely, these days, it’s only a notation recorded in electrical impulses on a computer disk.

So, what is cash, if not money? Cash is a token of money. If you burn a dollar, you have not removed one dollar of money from the economy. You have simply lost your ability to use it. If you wanted to ride a city bus using a token, that token, that piece of brass, is valued at one bus ride. If you lose that token, the bus company does not go out of business and the buses do not stop running. The buses continue to run, just as the nations economy continues to operate. The only thing that is lost is your ability to participate in it by that amount.

What About Spending?

Mars Money

Some people lament the lost of money due to sending a space probe to Mars. I’m telling you there’s not one penny on Mars. We did not stuff huge boxes with cash and shoot it up to another planet. The only thing on Mars that we put there are pieces of metal, plastic, and cloth. If you bought them in their raw nature at the store, it may cost you less than a thousand dollars. No, the hundreds of millions of dollars spent on the space probe were all spent on planet Earth, every penny of it. None of that money was sent to Mars.

Where is that money now? It’s in general circulation. Poor people have it. Rich people have it.  Church goers are giving it as tithe to their churches. Hungry people are spending it in the store. Gamblers are dropping it in Las Vegas.

All the effort, all the work, all the training, everything that earthlings did for the space probe has only resulted in some earthly metal on Mars but our economy hums on without a bump because of all that spending.

David’s Diamond

This is important. Sometimes we criticize wealthy people for spending money for things that we cannot afford. Suppose a wealthy person named David bought his wife Irene a 125-caret diamond ring for $250,000.  You can imagine the tongues wagging… “Think of all the food for poor people he could have bought with that money.” Well, he did. That was the best thing David could have done for the poor people.

What happened in David’s transaction? He got a lump of crystallized coal about the size of a half inch. That is how he enriched himself. In all his big house with a seven-car garage, he only increased his holdings by a half-inch crystal that was dug out of the ground. But where did his money go? It went to the jeweler, who put it into his bank account. Remember what happens to money in a bank?

What happened to the money? The Jeweler put it into his bank account. Then what? Let’s say he used some to pay his shop rent, some to pay employees (including himself), and some to buy more diamonds. What happened then? The money he paid on rent went to the landlord, who did the same thing: bank account and payroll. What about money to employees? They used it to pay their rent, food, vacation, college, and so on.  And the money to buy more diamonds? That went to the diamond company’s payroll, etc.

Oh, and let’s not forget taxes. All that money is being taxed, so it also goes to pay the government. What does the government do with it? They government has employees, too. And so on.

In other words, that $250,000 for the diamond immediately moves into general circulation, down to the humblest of our civilization. They use it for tithe to their churches, charity to help the poor, food for themselves, and so on. David, by paying $250,000 for a diamond simply moved that money from his own bank account into the hands of the poor people. And all he got out of it was a small chunk of crystallized coal. Was that a fair trade?

What was happening to the money before the purchase, while it was still in his bank account? We have already seen that money was then in general circulation. So all David did was simply move the money from one general circulation to another general circulation. It is like taking a bucket of water from the east end of a river and dumping it into the west end of the same river. Yes, the water has been moved, but the same river flows on and nothing has changed. Furthermore, David has the power to do that because his name was on that money.

What are Natural Resources?

Natural resources play a role in the value of money. Natural resources come out of the ground. In the case of money, think of gold, silver and copper. But that’s not all, of course. Fresh water, timber and fertile earth are also natural resources. When wheat grows, that crop is a natural resource. We can transform the wheat crop into money just as we can transform water, timber and gold into money.

People used to think it was natural resources that gave value to money. One ounce of gold equals five hundred U.S. dollars. But as we have seen above, what people used to think is not true. Money is created by fiat, out of thin air. You deposit $1m and bingo! the bank has $10m to work with.

But surely natural resources play some role in money? Yes it does. Let’s say you have a little field and there’s gold in the ground. You can’t spend that gold until you get it out of the ground. What does that mean?

Natural resources + manpower = wealth

You can see and handle a natural resource, but you can’t literally see and handle power. Yet you need both in order to have money.

Natural resources are stuff on earth, but what is considered natural resources has a narrower definition. Gold is considered a natural resource. Dead tree leaves are not. Yet you could rake up the dead leaves (manpower), burn them, and with the energy from the fire do something constructive.

At this point I’m going to refer to natural resources only the stuff that is considered a natural resource, the stuff that give money immediate value, such as gold.

Natural resources change. Two hundred years ago whale oil was a natural resource. People used whale oil to burn in lamps to provide light. However, whales are limited and so is whale oil. When whales became harder to find, people began to worry about the economic future of the financial capital of the world, London. Fierce headlines blurred the terrible news, “London To Go Dark In Ten Years.” Guess what. That was the decade when people began drilling for oil and we got another natural resource to replace whale oil.  Today, whale oil is no longer considered a natural resource. All it’s good for now is to keep whales happy.

Do you remember in high school history class hearing about the “Nutmeg Wars?” Yes, Great Britain fought a war to gain trade control of nutmeg. Why? Because nutmeg was used as a food preservative. It was a natural resource.  Today it’s a spice. We use refrigerators instead.

Natural resources change. Carbon was once… carbon. Today our scientists combine it with other elements and it becomes a substance harder than steel, hard enough to endure space travel. Pretty good, huh?

Remember our formula,

natural resources + manpower = wealth.

Think of it this way:

Once upon a time: Whale Oil + manpower = money

Now: Whale Oil + manpower = jail

Petroleum oil replaced whale oil. What will happen when petrol goes away?  It will be replaced. Likely candidates:  atomic fission, hydrogen power, solar power. But we may be surprised to find something else.

Natural resources not only change, they are always being replaced. Once sand was something at the beach. Now it’s something in the computer. We use silicon to make computer chips. Wow.

The Complete Wealth Formula

The formula, “natural resources + manpower = wealth” is incomplete. Remember the bank? You give them $1m and they are $10m richer. Not only that, but we have seen the same money used over and over at the same time by different people as if it were their own money. Wealth is that way. Now we’re ready to add something to the equation. Here is the rest of the formula:

Natural resources + manpower + technology = wealth¹⁰

Actually, I think that “to the power of 10” is a little low, but it will do as an example.

Technology skews everything beyond one’s imagination. What happened when Mr. Benz invented the automobile? On one hand he put carriage people and blacksmiths out of business. They would have cursed him for that. On the other hand he created the industries of car manufacturing, tires, gas stations, paved roads, and who knows what else. By increasing technology he put thousands of people out of work but gave hundreds of millions of people new, higher-paying jobs.  The world was increased in wealth, not decreased.

What happened when Alexander Graham Bell invented the telephone? He created the world-wide communications industry. He put the telegraph people out of business, but now millions of people are employed in high-paying tech jobs because of it. Mr. Bell enriched the world with that one little technological development.

Consider what’s going on with satellites, space ships, air planes, computers and everything else. Each new development vastly increases the world’s wealth and far compensates those few people who lost their jobs because of it.

Technology increases wealth exponentially.

Wealth is Created

Remember I said one way to create money is by fiat? Where else does money come from?

In all this talk about money, have you noticed I have not talked about gold creating wealth? It does not. I said it can play a role in giving value to money.  Of course gold is valuable, but so is water. Can you imagine how rich you would be if you owned all the water in the world, or even if you owned all the water in the United States? Gold is valuable, but gold does not create wealth - money.

Business creates money. 

Gold is no good at all unless you transfer it to someone. You’re not wealthy if it just sits there. For you to get wealthy from gold, you have to sell it, to do business in some way.

The United States has been criticized for being wealthy. The thought is that we have our wealth because we took it away from other people. That is silly. A poor person cannot make somebody else a millionaire. The United States is wealthy because it created that wealth though business.

Sociologists have noted for years that some countries richest in natural resources are poorest financially, while other countries poor in resources are richest financially. Russia is overwhelmingly rich in gold, silver, oil, uranium, timber, fresh water, manpower, fertile land and who knows what else. So is China. But they are among the poorest countries in the world. Whereas the island nations of Great Britain and Japan, which have almost no natural resources, are two of the wealthiest countries in the world. Why?  Great Britain and Japan are business-oriented nations but Russia and China are not.

Granted, Russia and China are becoming industrialized and they are fast changing their conditions. But notice that they are poor until they become industrialized. Business is giving them wealth because business creates wealth.

Poor countries in this world do not have enough money to give the rich countries the amount of wealth they have.  Therefore, where did it come from? The money came from creating wealth through business.

Wealth is Unlimited

If wealth is created, then it stands to reason that wealth is unlimited.

Gold is limited. It is a limited resource. There’s just so much gold on this planet. Oil is a limited resource.  If you remember, natural resources are part of the equation of wealth. 

Natural resources + manpower + technology = wealth¹⁰

If that “natural resource” was gold only, then wealth would be extremely limited. But it’s not. Instead, we have many resources: gold, silver, copper, water, timber, whale oil, petroleum oil, hydrogen, nutmeg, sand… Yes, sand. We use silicon in computers.

What was once a valuable resource, such as whale oil and nutmeg, has become not a resource any more. What was once useless, petroleum oil and sand, are now valuable resources. Our resources change, and that makes them unlimited. Don’t forget, we still have atomic power, nuclear fission. Atoms themselves are a valuable resource to us. In addition to that, we now have the power to go to the moon and Mars.  Who knows what valuable resources we can glean from them?

Natural resources are unlimited and that means wealth is unlimited, too.

Instead of punishing the United States for being wealthy, or punishing rich people for being wealthy, we ought to teach poor countries and poor people how to be wealthy, too.  There’s plenty enough to go around for everyone.