The last Hamill Economic Update left a number of people scratching their heads,
wondering how the money supply could be expanded through the following
example:
“Let me give an example. Your
friend has two $5 bills. You have nothing. What is the total money supply
between you and your friend? The answer is $10.
Your friend loans you
their $10 at no interest, with you verbally promising to pay them back at some
point. What is the value of the money supply now? Is it $10? No, it’s $20.
You have $10 that your friend lent to you. Your friend has a $10 loan that is
secured with your verbal promise to pay them back.
Now you decide to
return a $5 bill back to your friend as partial principal repayment. What is
the value of the money supply? It is $15. You have $5 remaining from the
original loan. Your friend has a $5 loan balance secured by your verbal
commitment to repay, plus a $5 dollar bill.
Do you see how the money
supply was reduced from $20 to $15 by you repaying principal on your loan? All
principal payments on all “credit outstanding” in our nation reduce the overall
money supply by the amount of the principal paid.”
Let me see if I can help to clarify things a little bit
more. It takes a little bit of thinking “outside the box” in order to have the
light bulb click on.
A debt-based economy is one where debt is created
first. Debt can be thought of as “a promise to perform future labor in return
for a commodity received today”. That commodity can be anything. Think of it
as the “Wimpy” economy for those of you who have watched Popeye cartoons. Wimpy
will gladly pay for the hamburger he eats today with labor that he performs
tomorrow.
“Money” is simply a “claim” on debt – a “claim” on the promise
of the future labor of others. If you have a claim on the future labor of
others then you have money, no matter what form it is in. It could be a $10
bill. It could be verbal – “his word is his bond” (promise of future
labor). It could be electronic entries on a computer.
My example used a
case where somebody had $10 – consisting of two $5 dollar bills. This $10 was
in the form of Federal Reserve Notes, which are claims on the future labor of
those under the civil authority of the US government.
When you receive the $10 loan from your friend then you are
the new owner of those claims on future labor. However, you also verbally
promised your friend that you would pay them back. You extended the promise of
your future labor to them and they claimed it. Therefore, you hold $10 of
claims on future labor and your friend holds $10 of claims on your future
labor. The money supply in our scenario is now $20.
It does not matter whatsoever that your friend cannot go buy a
hamburger with your verbal commitment of repayment. It is still money. A
person could not take a five-year Certificate of Deposit and buy a hamburger
either, but nobody would debate that it’s not money.
What happens when
you hand a $5 bill back to your friend as a partial repayment of principal?
What does that $5 bill represent? It represents a claim on the future labor of
those under US civil government authority. You can take these claims you own
and use them in place of $5 worth of your future labor that you owe to your
friend.
You now only
have $5 left of claims on future labor.
Your friend had claims on $10
worth of your future labor. Now they only have claims on $5 of your future
labor since you “completed” $5 worth of labor by substituting claims on future
labor that you owned. ALL “completed” labor in a debt-based money supply
represents money that disappears. It no longer exists. It vaporizes. You
cannot have money (claims on future labor) without having the debt behind it
(promise of future labor). It’s mathematically impossible.
Your friend
also holds the $5 bill that you gave back to them. It still represents claims
on the future labor of those under US civil government authority.
You
have a $5 bill. Your friend has a $5 bill plus the remaining claims on $5 worth
of your future labor. The total money supply is $15.
If you hand over the remaining $5 bill to your friend then
your friend will no longer have any claims on your future labor. Instead, they
will hold two $5 bills. The total money supply will then be back to the
original $10.
Conclusion
One cannot hope to comprehend
economic principles in a debt-based economy without first understanding that all
money is simply a claim on the future labor of others.
The paycheck that
one receives is a shift of existing money. It does not increase or decrease the
money supply, unless the employer takes out a loan or uses other forms of credit
to meet payroll. Your labor is paid by giving you claims of the future labor of
others. You become master over a certain number of debt slaves for a certain
period of time.
Your comments and questions are
welcome…
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