Saturday, April 11, 2009

Printing paper and buying drinks

A recent post of mine over on the Blog at Mises.org:










Printing paper and buying drinks

Jim Fedako


moneyprinting.jpg
It's the end of the growing season and farmer Bob has some big debts coming due. As he loads newly reaped grain onto his wagon, he feels his burdens lift with each emptied bushel. Bob is certain that, by the end of the day, his accounts will be cleared and his farm back in black.

Bob finishes loading, climbs onto the wagon, and whips his old mule. The wagon lurches and slowly heads toward the market. With each step, the tired mule increases its pace. The increase is imperceptible to Bob, but he begins to sense a burden lifting from the mule. "Maybe," he thinks, "this old mule is as relieved as I am that the farm will be debt free."

Just inside of town, Bob, thirsty from his long ride, halts his mule before the city tavern. He glances back to view the pride of his year's labor. He stops. Where there once was a packed wagon of grain, a half load remains.

"What." Bob jumps off the wagon and races toward the rear gate. He finds the gate slightly ajar, with a faint trail of grain extending into the distance. Bob crumbles to the ground -- his work for naught and his farm soon to be foreclosed.

As Bob sits in the road, tears falling onto the dust, Ben and Tim take notice from a window of the corner diner. Ben looks at Tim and smiles. They both recognize another hardship case awaiting their help. As they pick up their belongings, Tim flips a crisp twenty onto the table. The two exit the diner and quickly head toward Bob.

Moments later, Tim, looking down at a despondent Bob, asks, "What's the matter, my good man?"

Bob explains his story: the sowing, the reaping, and the loss. Ben says without hesitation, "We can help. You see, Tim and I love to assist those in need. I will buy your half-wagon load and pay you the full-wagon price."

Bob is taken back. "You will? You will buy my half-wagon and pay the full-wagon price? But you will suffer the loss. Won't you?"

"Oh, no," says Ben, "I will simply hold onto your half-wagon of grain until its value returns to the full-wagon price. It really is that easy. And likely, I will profit in the end. Well, it's my backers - the forgotten men and women - who will profit. But there will be money to go around."

Tim continues, "You see, your loss is the result of current market conditions. Once Bob and I clear those conditions, the traders in the market down the street will regain their confidence and your grain will miraculously reappear."

"But the grain is lost on the road. It has no value. It's gone for good," replies Bob.

"No, no, no," explains Tim, "It's not gone. It's simply leaked from the system."

Bob, eyebrows raised, says, "This isn't making sense."

"Oh, I don't know about that," Ben continues, "Tim and I have been working a scheme for years. He gives me an IOU and I print some paper notes in exchange. It's been working this whole time. How else do you think he could buy my lunch everyday, leave some pretty big tips, and never hold a real job? Since this deal has worked so well, I've decided to extend my assistance to others in need. So, now, amongst other things, I'm buying half-wagons to help folks like you."

"But your paper is worthless," a confused Bob replies, "It's backed by a lie."

"Sure, my paper is worthless," answers Ben, "But before anyone notices, the market will improve, and the traders will once again value your wagon as a full load. I'll then quickly exchange your half-wagon, and the other half-wagons I've bought and stored, for all of the paper I've printed. It will unwind nicely. But I won't bore you with the economics of it all."

Tim offers the farmer a hand and the three head toward Ben's printing shop.

Just moments after Ben starts the printing press, his wife enters the shop. "Ben," she shouts over the din, "What are you doing? You're not printing paper notes again? Are you?"

A sheepish Ben hits the stop button, waits until the presses halts, and then stammers, "Yes, but this dear farmer is in need. And if he fails, his creditors fail, the town fails, and we are all out of house and home. I must help."

"But, Ben, you simply cannot keep this up," cries his wife, "My friends are beginning to question your constant printing. They are no longer so trusting of your notes. When the trust ends, then what?"

"Honey, the trust won't end," replies Ben, "I am going to buy back my notes with the wagons of grain. It's so simple, it almost magic."

Ben hits the start button again and the paper notes begin rolling off the back of the printing press.

Cut to a few months later. Bob is struggling to find folks to accept Ben's paper. His creditors are demanding payment in the form of real goods.

And what of Ben and Tim? They are sitting at the bar in the tavern with another man, buying rounds for the town's traders. Ben turns to the third man and asks, "So, Alan, do you really think this plan will work?"

"Certainly. A few more rounds and these folks will be irrationally exuberant once again," Alan replies with a coy smile, "I've done it before."

Alan turns and shouts, "Bartender, another round for these thirsty traders. It's on Ben's tab this time around."


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