April 26, 2009
Governments have proved themselves incompetent in economic matters. Especially in the last century, governments have embraced various authoritarian ideologies destructive to both local and world prosperity. The most egregious blunders include the debasement of money, central banking, regulation and nationalization of key industries, and massive giveaways to failing but politically connected firms. The result is a worldwide depression - one that may well become worse than even the Great Depression, because it is accompanied by higher consumer prices. At least in the Great Depression, an apple only cost five cents.
The ideology underlying this sad state of affairs might be called government profligacy or spendthriftism. To economists, it's called Keynesianism. This is the theory that, whenever there is a perceived problem of unemployment or people are not spending enough or not sufficiently in debt by politicians' estimates, the all-purpose solution is ramping up government spending. Put more paper money into circulation, the Keynesians say, and economic health will magically be restored.
Of course, this would sound ridiculous if it were suggested for an individual or household. "In debt? Just spend more money!" So why do people swallow this "solution" for a region or nation? The reason is a well-known logical error called "the fallacy of composition." An example of this fallacy is: Each part of this machine is light-weight, therefor the whole machine is light-weight. Put this way, the mistake is clear. If there are many light-weight parts, the whole machine may be very heavy. But this is precisely how many people reason about money.
To an individual, more money means more wealth. I.e. When a person gets more money, he can buy wealth with it. Note that money is not wealth - wealth is food, farms, homes, iPods, clothes, and other good things in life. But what if a whole nation gets more money? Does the mere existence of paper bills create more food, clothing, and cars? Of course not. It simply bids up the price for these things. So it is clear that "stimulation," simply putting more money into circulation, does not make people collectively wealthier. It may enrich some - the first at the money spigot, but only by impoverishing the last it trickles down to - which is most people. Overall, monetary expansion does not increase wealth. At most it redistributes it from the subjects to the politically connected. And by messing with prices it promotes malinvestment, making society poorer.
But is this gloom and doom unavoidable? Perhaps not. All of these problems are pyramided on the first problem mentioned - monetary debasement. Historically, governments were severely limited in increasing their money supply due to a commodity standard. Government money generally, except in wartime, was a warehouse receipt for gold or silver. The original US dollar was defined as 371 4/16th grains of pure silver. The British pound was, you guessed it, a pound of sterling silver. For centuries, the money denominations referred to a certain weight of a certain purity of gold or silver.
After World War I, things started changing. For political reasons, the Federal Reserve Bank (founded in 1913) inflated the paper dollar supply in the 1920s. In 1933 Franklin Roosevelt confiscated citizens' gold and stopped redeeming paper money for individuals and firms. For foreign central banks, the US continued to redeem notes for gold, so there remained some fiscal restraint. If a government inflated the money supply too much, its gold would soon be exported to foreign banks. Finally in 1971, Richard Nixon killed the gold standard completely by refusing to redeem paper money at all, even to foreign banks. The incredible inflation since then is clear. A graph of the US money supply looks like a hockey stick, with the upturn starting in the 1970s.
There is only one way out of this mess - returning to a commodity standard. We must return to "hard" money. We must realize that real money is a certain amount of a commodity like gold or silver, and that paper bills can only at best buy money. Money is the metal, not a paper note promising redemption for metal. Can governments lead a return to hard money? Unlikely. We've seen their history. Even early kings would shave coins, or re-mint them with less precious metal and more base metal. Modern governments do not even pretend to have backed money. Current government "money" is called fiat money - money backed only by decree.
But private minters can still mint real money. There are mints in western US that do just that. But now, after generations of fraudulent fiat money, we have a chicken and egg problem. How do we get people, deceived by government propaganda and totally unaccustomed to hard money, to start using it again? The best chance to do so would be for a major retailer to prime the pump. If only people could buy consumer goods with gold or silver at major retail stores ...
Walmart to the rescue! What if Walmart started selling one ounce silver coins - "Silver Sams" - to its customers. This would give ordinary people the opportunity to protect themselves against the almost-certain coming hyperinflation of the dollar. Why should only rich investors get to hedge against inflation? And what if Walmart sold their goods for Silver Sams? Certainly other retailers would soon follow. This would kick-start the use of real money in a way that small firms (like Liberty Dollar) could never achieve.
What's in it for Walmart? First, buying silver would be an inflation hedge for them, too. Second, they would make money by selling the coins. Third, they protect their customers and themselves by having a backup currency when/if the dollar goes to shit. Instead of going down the economic drain in a collapse of the dollar, they will continue to sell products thanks to their foresight in providing an alternate currency. It's called "disaster preparedness," a smart move for any business. At first, Silver Sams may be a novelty, like trading stamps in times past. But who knows, it could lead to Walmart being as successful at coining money as it has been at retailing. And all this can be done at little risk - even if the economy miraculously recovers and the US balances the budget and ends deficit spending (ha!) Walmart has solid silver to show for it.
All indication is that the US dollar will go the way of the German Reichsmark and Zimbabwe dollar. Every fiat currency in history has done so sooner or later. But Walmart can save America, perhaps even the world. Walmart can be the difference between starving Americans whose money is worthless, who are reduced to "Mad Max" ultra-violence to get food and shelter, and a future of production and prosperity. Sam Walton would seize such an opportunity.
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