Wednesday, October 17, 2012

When the State Issues Money

As we saw yesterday, "money" is simply a contract to deliver marketable goods and services on demand or at some specified date in the future. Since money is a contract, it necessarily implies that the parties to the contract have the ability to "perform" according to the terms of the contract.

That is, if I make a promise in May to you to deliver a hundred bushels of wheat on October 31, I either have to have 100 bushels of wheat in my possession now and hold them for you until you present my promise for redemption on October 31, or — what is more likely to be the case — I have to have the capacity to obtain or produce 100 bushels of wheat by October 31 so I can comply with the terms of my promise to you.

In other words, I have to own or obtain either the means of purchasing or producing the wheat. I can't just take it from someone who has produced it without compensation, nor can I produce it myself unless I possess the means of producing it.

For some reason these very sensible rules manage to get suspended when we talk about government making promises. When governments issue money, they break the connection between money and production because (except under socialism), governments do not own the present value of the existing and future marketable goods and services that people exchange with one another.

When the government issues money, the money is backed not by the present value of existing and future marketable goods and services that the government owns. The government doesn't own them. Rather, the money is backed by the present value of the power of the government to tax existing and future marketable goods and services that somebody else owns. Taxes are not an exercise of a government's ultimate property right in everything, but a grant from the citizens, and unjust without their consent.

Ultimately, government-issued money is making a promise for someone else to keep. It is a complicated form of redistribution through the hidden tax of inflation, because governments by their nature produce nothing in the way of marketable goods and services.

When the government issues money backed by what private individuals or groups produce, it takes away any incentive for people to produce. People begin to think that the government, not God, is the source of all good. The more money government issues, the worse the situation becomes, and the more power government gains over everyone's lives.

A program based on binary economics, such as Capital Homesteading, would reform the monetary and tax systems. New money would only be created by the private sector in response to increases in the present value of existing and future marketable goods and services. Instead of printing money to meet its expenses or for social purposes, governments would have to live on what could be raised in taxes granted by free citizens.

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