Mr. Shostak described capital consumption in his excellent article. The mechanism he described here, counterfeiting, leads people away from producing real goods and into financial “services” (aka counterfeiting). I think everyone would agree that post World War II, this country was very productive and was producing a huge amount of real wealth. Over the years, we have lost productive industries and our “economy” has become financialized. Our big industries are known as FIRE or Finance, Insurance, and Real Estate. This is where counterfeiting leads – capital consumption. FIRES burn everything up and leave you with nothing. Here is Mr. Shostak:
The existence of the system of fractional reserve banking permits commercial banks to generate credit not backed by real savings, i.e., the generation of credit out of “thin air.”
For instance, let’s say that farmer Joe sells his saved kilogram of potatoes for ten dollars. He then deposits this money with the Bank A. The ten dollars are fully backed by the saved kilogram of potatoes.
Now let us say that Bank A “lends” $5 to Bob by taking $5 from Joe’s deposit. The money hasn’t really been lent, because Joe still uses his $10 as if it it hadn’t been lent out at all. This means that whenever he deems it necessary he is entitled to take the $10 out of deposit. No additional real savings have been accumulated to back the $5 loaned to Bob.
Once Bob, the borrower of the $5, uses the borrowed money, he has in fact engaged in an exchange of nothing for something, the reason being that the $5 are not backed by any real savings—it is empty money.
What we have here is $15 that are only backed by $10 proper. The $10 are fully backed by one kilogram of potatoes—real wealth that has been saved.
As you can see, printing money/credit is much easier than growing potatoes or another crop.
One of the posters made a very interesting point, assuming freedom to issue notes:
The point is that outside of knowing what a single bank has issued, there is no concern about some national aggregate of currencies. Without currency aggregates, inflation is also rendered meaningless. If prices in two currencies go up and in three they go down, what’s the inflation rate?
I think the post made an error in its use of the word “inflation” and I think the post meant this to mean a measure of the general rise in prices. That being said, the post imagined a nation with multiple currencies. Multiple currencies would render the government’s statistic collection irrelevant and it would no longer be able to set economic policy for the nation as a whole. A world/country with multiple currencies would have much MOAR liberty and the government would have much less control.
Come to think of it, it is a shame that we ever had a Bretton Woods agreement in the first place.