It’s not often
that we come across a new term — meaning a term new to us — that actually makes
sense. Last Friday we got lucky, and
were introduced to one: “financial resilience.”
Of course, we might have come across it much sooner if we didn’t have to
keep looking up how to spell “resilience.”
Anyway, there
does not appear to be a generally accepted definition of the term, but — when
we asked — it has to do with the ability of an organization to match financial
resources to its needs. On the
macroeconomic scale, it seems to be related to the ability of an economy to
provide an adequate and elastic currency.
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| Running a family takes planning and investment in new capital. |
The problem is
how to implement a financial system at either the micro level or the macro
level. Fortunately, the answer to both
is the same.
The most serious
issue facing an individual, a family, or a business (or a country, for that
matter) is where to find the financing for new capital formation?
·
For the individual and family, capital ownership
is essential as technology advances and displaces human labor from the
production process. This makes it
increasingly difficult for an individual or family to subsist on wages alone as
the value of labor as an input to production falls relative to that of capital.
·
For a business, new capital investment, whether
for replacement or expansion, is essential to the survival of the organization
as a viable enterprise. If it can’t keep
up, it will go under.
·
For a country, unless there is production, there
will soon be no capacity to pay for consumption. Charity can take up the slack in individual
cases, but not when an entire country fails to produce enough for its own
needs. The most graphic “natural”
example of this is a famine. Temporary
relief may come from other countries, but if the country itself cannot become
productive, many people will simply starve.
When a country fails to foster productive activity, the same thing
happens artificially.
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| First creating money and then investing is . . . well, you know. |
The problem is
that most academics and all politicians think that the way to finance growth is
to create money and hope something turns up.
Usually it doesn’t, and the only change is in the massive amount of debt
that results. To be blunt, government
doesn’t create wealth, despite the nonsense that Adolph Berle spewed out in
trying to justify the New Deal.
No, the only way
to finance growth is first to locate or develop a project with a reasonable
probability of becoming productive and profitable within an acceptable period
of time. In other words, find or come up
with something of value.
If a thing has
value, it can be turned into money. This
is what banks were invented to do — and which most people misunderstand,
thereby demonizing banks and bankers instead of using them to their own
advantage.
If you have
something of value, you can put it into a contract, and either use the contract
directly as money, or “sell” the contract to a bank in exchange for the bank’s
money. If the thing of value already
exists (such as an inventory of goods you will be selling), the contract is
called a “mortgage.” If the thing of
value doesn’t exist or you don’t own it (such as a piece of machinery to make
goods you will be selling), the contract is called a “bill of exchange.” (And if the thing of value is something you
don’t own but have the power to tax, you’re a government, and the contract is
called a “bill of credit” . . . and a bill of credit is not something you
really want to give your government the power to emit.)
Using your
contract either to buy new capital or buy other money with which to buy new
capital, you (obviously) buy the new capital, and put it into production. You sell the product, make money, and either
redeem your contract (“pay your bill”), or buy back your contract from the bank.
Either way, you
have matched the increase in the money supply directly to the needs of the
economy. You have become “financially
resilient” without having to guess how much money will result in how much
economic growth. You have also done it
without creating debt that cannot be serviced.
#30#