the short end of the stick

It was one of the greatest heists in history. The scene? London, 1660. The perpetrator? England’s King Charles the II. The loot? All the gold he could con out of the country’s goldsmiths, bankers and businessmen. The tool?

A tally stick.

Tally sticks were a brilliant invention. But they were also insidious, as they formed the foundation for the fiat currency systems we still have today. One where the root of a currency’s value is in a promise from a faceless institution, and not in the actual value of an object.

Put into use about a thousand years ago, they were a common sense solution for a young gold-and-goods economy where gold was scarce. By the time of the heist they were used in everyday transactions.

Here is how it worked. When a loan was made, the debt was carved in a standard fashion on the surface of a small (preferably hazelwood) stick, and then the stick was split in half through the center of the carving. The longer end of the IOU was given to the purchaser, and its handle was called the “stock” — the root of the word’s use in today’s markets.

Even a mostly illiterate public could read the amount scratched into the wood, and the stick would only fit perfectly with its original other half. That way, when the debtor returned with the money (or goods) owed, the sticks would be matched and the debt would be “tallied.”

In that fundamental use, they worked perfectly. But of course, as is governments’ way, the King was tempted to stretch those bounds.

Charles II ruled at a time when royal power was still based on a divine mandate. His government and institutions — and indeed he himself — saw the king as the Chosen One, which was a real shame for him because it bound him to the laws of Christendom. And Christianity at the time still forbade lending or borrowing with usury (interest). When financing several failing wars against neighboring countries depleted royal coffers, Charles II needed some quick cash to continue living in kingly fashion.

King Charles II turned to the trusted tally and the keen idea of selling his (government) tallies (debt) at a discount. That way he could allow his lenders to profit without charging interest — the basis for government debt being sold at a discount today.

And the King could issue advance tallies for emergency spending, an idea that proved all too tempting. He sold the tallies collected by his Exchequer (tax collector), essentially trading future tax receipts to the country’s goldsmiths (bankers) for quick cash.

The tallies were receipts for taxes to be paid later in the year. This is a crucial part of the story: they weren’t trading on the value of the objects being traded, but on the cost of waiting for a return and the government’s ability to collect taxes and stay honest. If the government is not honest, this is an outright Ponzi scheme, one where new debt issue could theoretically pay for passing bills. For a while.

The King realized that he’d stumbled onto something big. He could wage all the war he wanted and pay his bills with the gold he got for hazelwood. The King spent and spent, and the goldsmiths’ vaults filled up with more and more sticks.

Goldsmiths were handing out certificates for fractional gold reserves and inflating the young economy in a con all their own. And since the King played along with their early building of a banking system, they played along with the sticks-for-gold investment strategy.

Over time, the market got wise to the game. Buyers started attaching larger and larger discounts to the King’s debt to offset the perceived risk in loaning money to the King. The discounts prompted the King to issue even more tallies, promising out more future tax revenues just to meet his short-term spending desires. But remember only the discount was changing here. So the mountain of taxes to be redeemed in order to pay off his debts grew in comparison, soon overwhelming the King’s income.

By the time the whole Ponzi scheme came to an end, the King’s sticks were trading at a 10% discount (to put that into perspective, short-term T-Bills are currently trading with discounts of one-tenth of one percent or less). The payments on his newer issues trading at that discount soon outmatched all the Kingdom’s tax revenues, effectively bankrupting his Exchequer and threatening to put the monarchy in the poorhouse.

So with the stroke of a pen, the King simply declared those debts illegal and ceased payment.

With that single stroke he stole most of England’s gold — having already spent it — and forced the young economy to fall flat on its face. The King’s various creditors ended up on “the short end of the stick” and all credit in the country evaporated very nearly overnight.

Pretty scary, huh? I’m glad such a thing could never happen today.

the bad shipping news

The whining and hang-wringing about the "credit crunch" is getting on my nerves. It was this supposed crisis that led to the $700 billion bailout and we're told every day that it must be solved quickly, no matter the cost, or we're toast. But why? How many of us are actively seeking credit right now? Surely the developers and retailers want us to have lots and lots of it so we can keep hyper-consuming their goods; the bankers want us to have it so they can collect their interest and fees but, seriously, is free-flowing credit what the American public needs right now? Living beyond our means is what caused the credit meltdown in the first place!

Here's a meaty statistic: the Baltic Dry Index, which measures the demand for global shipping capacity, dropped from 11,793 last May to, get this, an inconceivable zero. The complexity of the BDI is beyond the scope of this post but, suffice it to say, there are lots of cargo ships sitting at anchor today. The collapse of the BDI augurs a rapidly evaporating demand for foreign goods. Combine this with the massive deterioration in domestic consumption during the fourth quarter of 2008, and wager a guess as to the meaning of it all. We're not buying anything and the world is following suit! So tell me, Wall Street wizards, why the continued hyperbole about a credit crunch?

How could our purchasing habits change so dramatically overnight? Currently, Americans own an estimated 250 million personal computers and 175 million iPods. There are 9 million mobile homes within our borders, approximately 102-130 million single-family homes, and countless million apartments. One could safely assert that there's a home, an mp3 player and a personal computer for every man, woman and child in the United States. I'll go on. Everyone has a television, a cell phone. Nearly everyone owns a car. Most have closets full of clothes they never wear, and we all have too many shoes. So when Barack Obama, Ben Bernanke or anyone else talks about freeing up the flow of credit, we should ask ourselves why.

Recently, through the dense economic fog came a thin ray of revelation: I may actually have enough stuff. Perhaps, just maybe, I can stop buying new stuff for awhile. I can keep my slightly dented iPod for yet another year. My Toyota with 90,000 miles is probably good for another road trip or two. I won't move to a bigger house just yet, or buy the 52" flatscreen Santa forgot to leave under the tree. I may have to forego the spring sales and make do with last summer's tank tops, wrong color though they may be.

I don't mean to minimize the hardship of doing without, but we are a nation of excess inventory. Somewhere in our stuffed dressers and overfull garages, there is room to accommodate a changed perspective.

Wall Street is telling us that all will soon be well. If we just give them hundreds of billions, they'll take their cut and loan the rest to us so we can get back to "business as usual". But what if we don't cooperate with their economic "recovery" plan? What if we collectively turn our backs on Wall Street and Madison Avenue and live simply, buying what we need and paying as we go, stopping to share with others along the way?

Remember, our banks and investment companies built themselves toward inevitable failure during the economic boom. Don't expect them to act nobly in the coming recession because they won't -- you can bank on that. So stop worrying about their silly market indices and their credit machinations. Let the Federal government give them another trillion pieces of worthless paper. Help them plaster their walls with negotiable instruments. Make them eat derivatives for breakfast, sell them short against the box and leverage them to outerspace. Leave them with their excess shipping capacity and their phantom dollar bills.

It's time for the rest of us to disembark this sinking stinking ship for good.

Economic Democracy Now!

Richard C. Cook has written an excellent synthesis of C. H. Douglas, Keynes and Galbraith in Global Research repudiating the orthodox economics used to legitimate the Federal Reserve under which the world’s capitalist economies are in reality enslaved. Here’s an excerpt:

“Overall, banks have served four main purposes—one legitimate, one dubious, one puzzling, and one deeply flawed.

1. Legitimate
“The first purpose—a legitimate one—is to facilitate commerce. It is often cheaper for a business to borrow capital from a bank than to stockpile cash itself. This was the purpose of the state banking system in the U.S. prior to the Civil War. The state-chartered banks existed to provide working capital for commercial transactions, such as stocking inventory, or for business expansion. Use of banking for these purposes was tied to specific commercial activities—the “real bills” doctrine. Of course credit used for this purpose has a cost which is factored into prices. When these loans are repaid, they are canceled at the bank which thus removes purchasing power from the economy. This is another area, besides retained corporate earnings, that contributes to the gap between prices and purchasing power identified by C.H. Douglas. But lending for commerce itself remains a legitimate activity.

2. Dubious
“The second use of banking—the dubious one—is for capital formation in the creation of new businesses, a function which overlaps with capital markets such as the stock exchanges. But this use very easily turns into lending for speculation by permitting investors to borrow money in order to buy stock on margin or to “leverage” investing by borrowing money in order to purchase whole companies. The costs of this borrowing also show up in consumer prices without introducing any new purchasing power into the system.

“This practice has mushroomed in recent decades starting with the buyout/merger/acquisition mania of the 1980s and has reached disastrous proportions through the creation and growth of equity and hedge funds. The use of bank borrowing for such speculative purposes is an obvious abuse that should not even be legal. It is actually a form of theft from the nation’s natural and normal store of credit that should be carefully administered by competent public authorities as a utility as critical to social health as the water supply.

3. Puzzling
“The third use of banking—the puzzling one—is for consumer credit. This includes borrowing for big purchases such as buying houses and automobiles, or small ones such as items bought with credit cards. Increasingly it includes purchasing even the necessities of life such groceries.

“Buying an object with a credit card often means that a person cannot afford to buy it at the present moment. So the person is gambling that he or she will be able to pay off this loan—including interest—at some point in the future. What is puzzling is that in the midst of what is claimed to be the most productive economy in the history of the world, why are most people so poor that they cannot buy what they need to live with the proceeds of their present earnings? This is the ultimate repudiation of Say’s Law and its derivatives—Libertarianism, supply-side economics, and the like.

4. Flawed
“The fourth use of banking—the one that is deeply flawed—is the financing of government inflation through purchase of public debt instruments which allow deficit financing of public activities, most particularly the waging of war. Banking for the purpose of financing war has a long pedigree, going back to the medieval times where kings were perpetually in hock to the money-lenders. Today we have the national debt, which has been used primarily for war, as well as for the Keynesian pump-priming described previously. A classic case of the use of banking for deficit financing of war is the borrowing by the federal government under the Bush/Cheney administration to raise the trillion dollars already spent on the Iraq and Afghanistan wars.”