LESSONS LEARNED #4 “Wealth ain’t money; money ain’t wealth.” –Old Pithy

Posted by PITHOCRATES - March 11th, 2010

WEALTH COMES FROM human capital.  People making things or doing something.  And it’s what they make or do that has value.  They trade these valuable things and services for other valuable things and services.  The more complex and diverse these good and services got, though, the more difficult it got to trade them.  Money came into use.  Instead of trading directly, you could trade for money.  Later, you could take that money and trade (i.e., shop) for what you wanted.  Money was not the end; it was the means to an end.  Trade.

This is important.  It’s the goods and services that are valuable.  Not the money.  We don’t want money; we want the goods and services that money will buy. 

The producers of these things and services are wealth creators.  Those who don’t produce things or services are wealth consumers.  Farmers, craftsmen, truck drivers, entrepreneurs, etc., are wealth producers.  Thieves, the lazy, government, etc., are wealth consumers.

THE DECLINE OF the Roman Empire began in the third century.  With a military flung across the known world and a bloated government bureaucracy, she was engaged in some serious deficit spending.  The government was trying to expand the purchasing power of her money.  They just weren’t collecting enough in taxes.  And the tax rates were pretty close to confiscatory.  I mean, they taxed so much that there just wasn’t anything left to tax.

The silver denarius was the main money used by the Romans.  When first introduced, it was approximately 95% silver.  They kept debasing it until it contained less than 1% silver.  With less precious metal (silver) in each coin, they were able to make more coins.  But this did not create more wealth.  The wealth producers weren’t producing more wealth.  With more money chasing the same amount of goods, prices soared.  And the value of the silver denarius plummeted.

The silver denarius became worthless.  No one wanted to exchange their goods and serviced for it.  The Romans wouldn’t even accept it for tax payments.  And it was their own coin!  If you had gold, you paid with gold, for gold was still gold.  Precious and scarce.  Unlike the silver denarius.  If you didn’t have gold, then you paid ‘in kind’.  You gave the government some of the valuable things you created with your human capital. 

Having destroyed their medium of exchange, they cut out the ‘middleman’.  Instead of collecting tax coins to buy those things of value the empire needed, they collected those things of value directly.  The efficiencies gained by the use of money were lost.  And, well, we see why this Roman period has the word ‘decline’ in its title.

IN THE VERY beginning of the United States, everything was brand new.  The federal government.  The federal budget.  And the federal debt.  Well, the debt itself wasn’t brand new.  It was the states’ Revolutionary War debts assumed by the federal government.  And to help pay off this now federal debt the new nation introduced its first ‘sin’ tax.  On whiskey.  Well, sort of.  It was placed on the producers, not the consumers of whiskey.

This reminded many Americans of Parliament’s taxes on the colonists.  Taxation without representation they had cried then and rebelled.  Americans don’t like taxes.  Who does?  So they would rebel once again.  The only problem was that it was different now.  It was taxation WITH representation.  It was a tax levied by the new American government, not by British Parliament.

But they rebelled despite this difference.  We call it the Whiskey Rebellion.  Because it was, well, I guess that goes without saying.  With memories of Shays’ Rebellion (poor farmers in Massachusetts rebelling against debt they couldn’t pay off and high taxes) still fresh in their memory, government moved swiftly to put this rebellion down.  And they did.

Farmers in Western Pennsylvania said that the tax wasn’t ‘fair’.  But why?  Didn’t it only tax whiskey?  And wasn’t limiting whiskey consumption a good thing?  Well, the problem was the lack of money to facilitate trade.  And the lack of roads.  The farmers in western Pennsylvania (grain farmers) had good farmland.  And good crops.  What they didn’t have was a good way to sell those crops.  Not as grain, at least.

What can you make from grain that is ‘valuable’ and easier to transport than grain?  You guessed it.  Whiskey.   And this is why it was not ‘fair’.  Farmers converted excess grain (something of value) into whiskey (something of greater value).  Whiskey was more portable than grain.  Smaller amounts of it equaled the value of larger amounts of the raw grain.  Whiskey was more durable than grain (it aged, grain rotted).  It took farming PLUS distillation to make whiskey so whiskey was scarcer than grain.  So they used whiskey to trade for things of value they wanted.  It was a medium of exchange.  Because there was little money available, those farmers used whiskey as money. 

It wasn’t a ‘sin’ tax to the famers.  It was a tax on their money.  It was, therefore, a tax on everything they purchased with that money.  It was a national sales tax.  Or a national value-added tax (VAT).  That only they were paying.

ANYTHING THAT HAS the attributes (scarce, divisible, stores value, etc.) of money can be money.  It’s that thing that helps facilitate trade between the wealth producers.  It’s a medium of exchange.  It allows people with human capital to produce more goods and services.   And that’s what it’s all about.  The goods and services.  It’s what we want.  Not the money.  We want the house, car, TVs, cell phones, etc.  We’d rather have those things than the money.  It’s why we trade the money for them.  We trade our human capital for money.  Then trade the money for the stuff we want.  Goods and services created by other wealth-creators using their human capital.

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