previous: #7: Virtualization in Early Banking
Consider a small city served by a single banker-merchant. He has built a safe room to store coins and has a clerk to keep accounts. He has lent out all his own money and, it being a prosperous era, in the past his loans have always been paid back on time and with interest. There are all these coins, really a lot of the coins of this city, sitting in his safe. He can't help thinking that if he could lend them out not only could he earn interest on them, but it would be good for the community. One client wanted a loan for a second fishing boat, which would surely be paid back, since the demand for fresh fish is high. The banker thinks of other clients who would be helped if only he could make loans to them.
Then it strikes him! Like a jolt of lighting, like a burning bush, like Christ speaking to him from the crucifix of the local church. Every day a client or two comes in and deposits or withdraws money. Over time the pile of coins has grown. On no one day do enough clients come in to withdraw all the coins. Eureka! He calls his clerk Big Data and says: go back through the ledgers and find out what the lowest count of coins we've had on deposit in the last five years.
A week later Big Data says: in the last five years we have never had less than 4,000 gold coins on deposit. And how many are on deposit today, our banker asks. 5,282, says Big Data. The banker sends out his clerk to get another blank accounting book.
The new account will record loans to clients that are made using the coin in client deposits. The fisherman borrows 50 coins to buy a new boat. He takes it to the boat builder, who is worried about having 50 gold coins sitting in his workshop or house. So … he takes the coins to the banker and deposits them. The banker will make, perhaps, two gold coins in interest on the loan. The same number of coins are back in the safe as there were at the start. The two gold coins paid in interest along with the original fifty are not even new coins. They are from the banker's stash of depositors' coins. The fisherman has a new boat, the boat builder a small profit, the men who cut timber for the boat have made wages, and the banker is richer.
The banker sees that the system is a closed loop. Most of the coins he loans out come back as deposits. As long as the town is prospering, as long as the total goods owned and services provided continue to grow (as they did in many Italian towns during this period, until the Turks cut off the trade routes to the East and the Portuguese and Spaniards gained monopolies in the West), the Banker can loan out the same coins over and over again. Sometimes coins are traded to outside his loop, but other times coins come in trade from other regions. The coins left in the vault, the ones that are not loaned out because they may be demanded by their owners, are what we call a reserve.
The accounting system is now critical to the banker's success. He has to know who owes him principle and interest, as well as how much he owes depositors. He sees that while he does not have coins to pay all the depositors at once, he does have loans out that will cover the deposits.
Of course, sooner or later, the banker will find that due to a series of withdrawals, he is running out of coins. He knows he'll be okay over time because the loans are still good, and he expects them to be paid in coin. Perhaps his friend who started as a fisherman comes in wanting to make a large withdrawal of coins that will break the bank.
The banker enquires why such a large sum of money is required. The depositor is buying an estate so that he can retire from managing his fishing fleet, leaving it to his son, and enjoy life as the owner of a country estate known for its fine grapes and wines. It so happens that the current possessor of the estate, Luciano, has borrowed a sizable sum from the bank. The banker suggests that it is dangerous to carry such large sums around. He can facilitate the transaction by giving Luciano a note cancelling his debt along with the coin needed to make up the difference. The fisherman accepts this, and the bank is saved.
Of course in reality the system evolved over time and with many participants, but the idea of the reserve system was a major extension of the accounting system and the beginning of the end for coins. Over the centuries large numbers of banks have failed, some because of fraud but most because they did not keep sufficient reserves. It happened to a few American banks last year and it will happen again next year, and continue as long as the system is used. But on the whole the system of keeping small reserves of coin, and later paper money, and now electronic money, to back a larger accounting of loans and deposits, has worked rather well.
Next: #9: Virtualization with Checking and Credit Cards
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Showing posts with label interest. Show all posts
Showing posts with label interest. Show all posts
Wednesday, May 15, 2013
Sunday, January 8, 2012
The Republican Five Year Plan
Although I resolved to write no blogs while on vacation, watching just part of the Republican debate running up to the New Hampshire primary made my blood boil. Even allowing for the candidates needing to appeal to the most misguided wing of their party, the economic generalship they displayed can only be compared to plans for British mass infantry attacks on German trenches in France during World War I.
The central theme of economic planning, Republican style, is eliminating the taxes the rich pay. The truly rich, the already rich, actually don't worry that much about income taxes. Income taxes are for the working poor and the small class of professionals who get wages or salaries over $100,000 per year. The truly rich get their money from inheritances, capital gains, interest, and dividends. All the Republicans want to reduce taxes on these categories of non-income. Most of the candidates wanted to reduce the rates on these categories to zero. Mitt Romney, the moderate, settled for reasonably near zero. In addition, they want to cut the corporate tax rate.
They gave two rationales, both about as plausible as medieval Catholic tests for witchcraft. One is that these cuts only incidentally help the rich, but they really are aimed at helping the middle class. That might be true if by middle class you mean families with assets between $10 million and $100 million, which would indeed generate capital gains, interest and dividends worth worrying about.
The other is job creation, Want jobs? Stop taxing the rich!
If you believe that you probably also believe that God was so infertile he only could manage one child.
What will rich people and corporations do if their tax rates are lowered?
Oh, sure, they may add a job or two here or there. But mainly they will either spend the money on themselves or play financial games with it.
Rich people spending more money could create a few more jobs, especially for luxury leather goods workers in China (whose work product is labeled as Italian). A few people will upgrade from private prop planes to private jets, which I suppose would require a few more factory workers. More cocaine will have to be ponied into the U.S., which creates jobs. Mansions may be expanded or remodeled, expanding the construction work force by a few tens of thousands.
Let's talk about reality now.
Job creation and destruction is dependent on a large number of variables.Most jobs are created when employers (corporate and individual) think they can make larger profits by adding staff. Jobs of the self-employed type are also created by increased demand for services: if consumers are willing to pay (well) for a service, someone will provide it.
To increase demand, American consumers as a whole need to be able to spend more. This can be because more of them are gainfully employed, or because those that are employed are getting higher wages.
The Republican Five Year Plan, essentially central planning by capitalists to further enrich themselves at the expense of the working class, doe not address generating increased demand.
Jobs, and demand, would be generated naturally (in our mostly-free-market system) by increased employer and consumer confidence. Those rely, in turn, on a stable credit and money supply (the job of the Federal Reserve) and a lack of turmoil in Washington.
While the federal deficit and debt need to be addressed once we have an economic recovery, what we really need now is higher taxes on the rich and a closing of corporate tax loopholes and subsidies. The rich, unlike the poor, love money above all else. Tax them more and they will climb out of their $1000 bottle of wine stupors to make up the difference. To make up the difference, they will need to exploit more workers. To exploit more workers, they will have to hire them.
Higher taxes on inheritance, capital gains, dividends and interest are the best policy for job creation in the United States. The taxes could be set too high, but that is not our problem right now. When Republican President Dwight Eisenhower left office in 1960, during our period of greatest prosperity, the maximum tax rate was 91%. We may not need to go that high again, but rates should certainly be higher than they are now, if we want the U.S. to continue to be an economic leader of the world.
The central theme of economic planning, Republican style, is eliminating the taxes the rich pay. The truly rich, the already rich, actually don't worry that much about income taxes. Income taxes are for the working poor and the small class of professionals who get wages or salaries over $100,000 per year. The truly rich get their money from inheritances, capital gains, interest, and dividends. All the Republicans want to reduce taxes on these categories of non-income. Most of the candidates wanted to reduce the rates on these categories to zero. Mitt Romney, the moderate, settled for reasonably near zero. In addition, they want to cut the corporate tax rate.
They gave two rationales, both about as plausible as medieval Catholic tests for witchcraft. One is that these cuts only incidentally help the rich, but they really are aimed at helping the middle class. That might be true if by middle class you mean families with assets between $10 million and $100 million, which would indeed generate capital gains, interest and dividends worth worrying about.
The other is job creation, Want jobs? Stop taxing the rich!
If you believe that you probably also believe that God was so infertile he only could manage one child.
What will rich people and corporations do if their tax rates are lowered?
Oh, sure, they may add a job or two here or there. But mainly they will either spend the money on themselves or play financial games with it.
Rich people spending more money could create a few more jobs, especially for luxury leather goods workers in China (whose work product is labeled as Italian). A few people will upgrade from private prop planes to private jets, which I suppose would require a few more factory workers. More cocaine will have to be ponied into the U.S., which creates jobs. Mansions may be expanded or remodeled, expanding the construction work force by a few tens of thousands.
Let's talk about reality now.
Job creation and destruction is dependent on a large number of variables.Most jobs are created when employers (corporate and individual) think they can make larger profits by adding staff. Jobs of the self-employed type are also created by increased demand for services: if consumers are willing to pay (well) for a service, someone will provide it.
To increase demand, American consumers as a whole need to be able to spend more. This can be because more of them are gainfully employed, or because those that are employed are getting higher wages.
The Republican Five Year Plan, essentially central planning by capitalists to further enrich themselves at the expense of the working class, doe not address generating increased demand.
Jobs, and demand, would be generated naturally (in our mostly-free-market system) by increased employer and consumer confidence. Those rely, in turn, on a stable credit and money supply (the job of the Federal Reserve) and a lack of turmoil in Washington.
While the federal deficit and debt need to be addressed once we have an economic recovery, what we really need now is higher taxes on the rich and a closing of corporate tax loopholes and subsidies. The rich, unlike the poor, love money above all else. Tax them more and they will climb out of their $1000 bottle of wine stupors to make up the difference. To make up the difference, they will need to exploit more workers. To exploit more workers, they will have to hire them.
Higher taxes on inheritance, capital gains, dividends and interest are the best policy for job creation in the United States. The taxes could be set too high, but that is not our problem right now. When Republican President Dwight Eisenhower left office in 1960, during our period of greatest prosperity, the maximum tax rate was 91%. We may not need to go that high again, but rates should certainly be higher than they are now, if we want the U.S. to continue to be an economic leader of the world.
Subscribe to:
Posts (Atom)
