Power of Story: Banking

The last half dozen articles I have written have dealt with the question: What is Money? The conclusion was that over the past two hundred years our concept of money has slowly changed. Cash has become a concept and not a commodity. No longer do we think of money as a bar of gold or silver from which we peel off enough shavings to fulfill the requirement of the balance scale. We instead, fancy money as simply a credit or debit stored in the memory chip of a computer and backed up solely by confidence.

The money system has morphed into what it is because of our demand for convenience, and it is based strictly on the confidence that someone else will accept our ethereal numbers from the computer to satisfy what we owe. There is now no such thing as gold or silver to back up the value.

Here is a confession: I actually went back and read again what I had written about money. My question was: Why did I write that material as if I were an economics professor delivering a lecture in front of a classroom?

I am one of the diehards who still wholeheartedly believe in the power of story. We usually understand best through story. If we are to understand:

  • our fractional reserve system of banking,
  • how and why the Federal Reserve System exists without control of the US government or the banks,
  • how the phenomenon of inflation takes wealth away from you like a thief in the night without the necessity of even one vote of congress,

it will be absolutely necessary to understand some very simple and basic facts that will probably not be gleaned from an economic lecture.

So, please indulge me to try to utilize the power of story to explain in the next set of writings how all of this works together in the real world of money and finance:

The story of banking begins with the ancient goldsmiths. When “Barney Businessman” was fortunate enough to accumulate a sizeable amount of gold or silver as a result of his business dealings, he was then confronted with the problem of keeping it safe from those who had intention of forced wealth redistribution, i.e., thieves and robbers.

Because “Gaffney Goldsmith’s” business was that of dealing in precious metals, he had been forced to construct a thief-proof vault. It was only natural then that Barney Businessman would go to Gaffney and request of him space in his vault to store his accumulated gold. In fact, Barney was willing to pay Gaffney a fee for the “safekeeping” of his gold.

Of course, when Barney deposited his gold into Gaffney’s vault, he requested and received a receipt of deposit which he had to present whenever he wished to reclaim his gold. Other people in the community began to realize that Gaffney Goldsmith’s vault was an extremely safe and convenient place to keep their gold. In fact, Gaffney’s vault became somewhat of a warehouse for gold.

Gaffney was pretty intelligent and he had taken mostly honors classes in school, so it didn’t take him long to realize that on any given day, eighty to ninety percent of the gold in his vault simply sat there collecting dust. He became convinced that there would never be a day when everyone would come to his vault and want to withdraw all their gold at the same time. Any daily withdrawals of gold would be offset by that day’s receipts of gold. And since gold is gold and gold is gold, no one seemed to care whose gold he received when he wanted to make a withdrawal.

Therefore, Gaffney usually made all of his transactions out of the few bags of gold in the front of his vault while all the bags in the back sat there collecting dust and taking up a lot of valuable vault space. Gaffney realized that he had a good thing going. And his books always balanced!

GAFFNEY GOLDSMITH

*        LIABILITIES &

ASSETS          *            NET WORTH

  --------------------------------*---------------------------------

GOLD             $2000       *        RECEIPTS      $2000

The gold was an asset to Gaffney, because it was under his control. The receipts were a liability to him, because they represented the owner’s claim on the gold, and sooner or later, he would be called upon to return the gold.

Question for next week: How was it possible for Gaffney to keep his books balanced and at the same time create more money in the community? 

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

So, What is Money? Part 5

As we have discussed, the only reason printed paper money has purchasing power today is because people accept it as having value. You accept paper money in payment only because you have confidence in the fact that other people will accept your paper money when you wish to pay for something.

 It is not too difficult to see how check writing came into practice. It, too, was based on convenience and confidence. The practice of check writing was somewhat of a throwback to the old idea of signing over to someone else the receipt that the goldsmith had issued when you gave him your precious metal to hold in his vault for “safe keeping.”

The explicit instruction on that paper check allowed a depositor to tell the holder of the value to transfer the funds from the depositor’s account to the account of another to whom the payment needed to be made. As long as the intended recipient of the funds was convinced he would actually end up with the funds, he would accept the written check as payment.

The plastic credit card was a phenomenon of my lifetime. In the beginning it was not really seen as money, because the credit card required another form of money, either cash or check, to pay off the monthly charges. But the convenience of the plastic credit and debit cards was so alluring and so addictive that the requirements for the factors of confidence were hardly given a second thought.  More and more usage of the plastic credit cards included the direct authorization of transfer of value from holder, through the financial institution, and on to the merchant.

Over time, the tangible aspect of money has come to be seen as a nuisance as well as a nescience. There is so much tacit confidence and presumption in the emerging system of ethereal money that to me it smacks of overwhelming incredulity. The full confidence is placed not in something that is even remotely tangible and protectable, but in the wishful thinking that envisions a failsafe system of convenience and absolute confidence placed in a collection of numbers stored in a computer. Cash has become a concept and not a tangible asset. That is a scary and very vulnerable position for a culture.

(Research ideas from Dr. Jackson's new writing project on Cultural Economics)

So, What is Money? Part 4

The first paper money in America came not from banks but from the governments of the new colonies.  In 1690, Massachusetts issued paper money, but it had no tangible asset to back it up, only a promise to redeem it later. That privilege was soon abused, and the market was flooded with the junk paper money trying to purchase any available goods. Prices soared.

The paper money drove the metal coins out of circulation simply because everyone began hoarding the metal coins.  By 1751, Britain demanded that no more paper money could be issued. The Mint Act of 1792, that has survived almost intact until the present, adopted the dollar as the standard unit of currency and the decimal system of counting. But what has backed up the U.S. dollar and given so many people the confidence in it as a secure store of wealth?

Some folks would tell you that the reason for the confidence is that there is one dollar worth of gold in Ft. Knox, KY for every dollar that is placed into our money system by the Federal Reserve Bank. Sorry, but that hasn’t been the case since the U.S. abandoned the gold standard in 1933. By August, 1971, we had sloughed off over $12 billion of the gold reserve in Fort Knox.

Saying that our currency was backed up by the equivalence of gold in Fort Knox was a sick joke. To make things even worse, it was agreed that if we owed a debt to any sovereign government, they could demand and receive our payment in gold from our reserve. In 1971, President Nixon realized that when the U.S. had trade imbalances with other countries, and we bought more from them than they bought from us in traded goods, they could and were demanding payment from us in gold out of our reserves in Fort Knox.  We possessed less than one penny at that time in reserves for every dollar issued.

On August 15, 1971, President Nixon closed the gold window. That severed the critical link between international currency and real gold. From that time on the U.S. would pay their balance of international payments in dollars. That was the first time that link had been broken in 1,500 years! Since that time the world has accepted the U.S dollar as the international standard of payment.

Other countries are now demanding to know how much real gold the U.S. has stored in Fort Knox to back up our standard of currency. That’s another sick joke. There isn’t enough there to even make a quantifiable difference. There is really only one thing that gives any form of money acceptance and usability: confidence! People will only accept U.S. dollars as long as they believe that someone else will have confidence enough in the currency to take it from them in true form of payment. That national and international confidence is very quickly melting away.

(Research Ideas from Dr. Jackson's new writing project on Cultural Economics)

So, What is Money? Part 3

Money can be any article agreed upon as a store of wealth by any number of people and used as a common medium of commerce to exchange what they have for what they want. Whenever the article fails to maintain people’s confidence in its power to purchase, it fails to remain money.

Whatever is agreed upon and used as money is relied upon because of convenience and accepted because of confidence. If something new comes along that is more convenient, and can still retain the confidence of the people as to its purchasing power, it has the possibility of becoming a new form of money.

The desire for convenience motivated people to begin to use pieces of paper as money instead of lugging around bags of heavy metal bars or clumsy coins. That took a huge leap of confidence until people began to trust in the fact that other people would accept their pieces of paper as payment for goods or to satisfy debts.

In the beginning, paper money looked a whole lot more like a receipt. For safety and convenience, people would take their gold or silver to a business (like a goldsmith) that was equipped to store the metal there for “safe keeping.” Sometimes, they would place the metal in a local bank vault.

The goldsmith or banker would give the owner of the metal a receipt to prove ownership. When that person wanted to make a purchase or pay a debt he would simply sign off the receipt and hand it over to the new recipient. Should the new owner of the receipt want to take physical possession of the metal he would go exchange his receipt for the real metal. Or, for convenience sake, he might simply sign the same receipt over to another person when making a purchase or paying a debt.

Over the years we have moved in the direction of a cashless society, but certainly not a moneyless society. Convenience and confidence will always determine what will be used as money. Is each article used as money always backed up by gold or silver somewhere in a vault? 

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

So, What is Money? Part 2

It might be possible to imagine a cashless society, but not a moneyless society. People will always fabricate some kind of money in order to help them facilitate trading the things they have for the things they want. What’s your preference to use as money?

Historically metal has been used most. It is a whole lot easier to make change with pieces of metal than with raw eggs. Economist Adam Smith said in the mid 1700s: 

    Metals cannot only be kept with as little loss as any other commodity, scarce anything be less perishable than they are, but they can likewise without any loss, be divided into any number of parts,  as by fusion those parts can easily be reunited again; a quality which no other equally durable commodities possess, and which more than any other quality renders them fit to be the instruments of commerce and circulation.

It became inconvenient over the centuries, however, to stand in line at the marketplace and pull out your bar of gold and whack off an amount for your purchase and weigh it with accuracy. So, the usage of coins became more convenient. Minted coins were easily identifiable and had their weight and purity stamped on them.

It was also common for the coins to bear the image and guarantee of some governmental leader. Sooner or later the governments have always taken over the sovereign control of the minting of coins. Even in the US, under the Mint Act of 1792, the debasement of coins by an individual was made illegal and a crime punishable by death. The government likes to have control of the monetary system. Down through history, however, sovereign governments have repeatedly abused their rights of minting coins.

Would some people accept commodities to be used as money? Yes. Would most people accept precious metals to be used as money? Yes.

But why would any reasonable person accept a small printed piece of paper as money?

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

So, What is Money? Part 1

Has there always been money? Where does it come from? Who determines its value? Are credit cards really money? Does the value of money always shrink with age? What happens when money fails to maintain its power to purchase? What would a totally cashless society look like?

In 1758, philosopher/economist David Hume stated: 

Money is not, properly speaking, one of the subjects of commerce, but only the                  instrument which men have agreed upon to facilitate the exchange of one                            commodity for another. It is none of the wheels of trade: It is the oil which renders the motions of the wheels more smooth and easy.

We have come a long way since David Hume’s discussions regarding money in the eighteenth century. In my travels I have observed different cultures using some pretty strange things as money: salt, animal hides, wives, cattle, wheat, and beads.

By the way . . . how is your confidence level these days in having all your store of wealth represented by numbers in your bank’s computer?

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

Production of Goods and Services

In order for a country to experience a functional economy, it must produce goods and services. Through that production income is created.

If the country does not successfully utilize its natural resources and encourage its human resources to produce, it will be poor. Production that results in income is mandatory.

In order to break the cycle of poverty in a developing country, income must be produced. Income can only be created when resources are efficiently used to produce the desired goods and services needed within that country, or can be traded in a broader market to meet the needs of another group of people.

Countries like Vietnam, Cambodia, and China, who now are beginning to understand and encourage that concept, are increasing their wealth.

Those countries that do not encourage or allow such practices, like Zimbabwe, Mauritania, and Cuba, remain in poverty.

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

Enterprise

We have no way of predicting where or when we might be confronted with the opportunity to rewire our personal priority grid. It is not a one-time purchase from the app store.

Each day we are introduced to new pieces of information that come to us forming a lifelong adventure of filtering, redefining, and choosing. It is our choice to set into motion the best of consequences.

It makes for a great economic principle to let go of what we can never keep in order to lay hold of what we can never lose.

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

Good Things Happenin'

For the past three years Winston-Crown Publishing House has carried my short stories and published them every Tuesday morning at 10 o’clock on the internet. I am indebted to them for allowing that to happen, and thank them sincerely. Every week the number of people reading the essays has increased and the acceptance has grown. That’s fun. 

Winston-Crown is very excited, and so am I. As soon as the book The Happiest Man in the World: Life Lessons from a Cultural Economist was released, people began requesting to have access to more adventure stories from around the world. Those requests prompted the next book Love and Common Sense: Stories from Around the World to Challenge your Mind and Ignite your Compassion. That book, released in 2013, has also been very well accepted. 

Earlier this year my lovely wife, Dr. Anna Marie Jackson, joined me in authoringHistorical Heartbeat: Project C.U.R.E.1987-2012, a book of info graphics and narrative celebrating the first twenty-five years of the life of Project C.U.R.E. 

Last week the manuscript for my newest book, Simplicity and Sophistication, was sent off to the copy editors and then it will go to the proofers. From there it will progress to the typesetters and finally to the manufacturers. Hopefully, it will be released in time for Christmas. It will be another book of seventy short stories of wisdom and kindness from around the world. 

In March we were notified that The Happiest Man in the World: Life Lessons from a Cultural Economist and Love and Common Sense had been included as “finalists” in the 19th Annual CIPA EVVY Book Awards. At the Gala Award Presentation on May 18, 2013, it was announced that The Happiest Man in the World had been selected to receive the First Place Gold EVVY Award for Autobiography/Memoirs. A little later in the program it was announced that Love and Common Sense had been selected to receive the First Place Gold EVVY Award for Travel. Yes, of course we were shocked off our chairs!

Now Winston-Crown is even more excited, and I have signed two additional contracts with them. One is for them to publish all my field journals from my nearly thirty years of international travel. The other contract represents a thrill of a lifetime for me. My former major professor from the University of Colorado Economics Department, Dr. Paul Ballantyne, and I have each signed a contract to co-author a book on Cultural Economics, where we will investigate how the economics of a culture affect the people and how the people affect the economics of a culture.

So, starting next week you will probably notice a bit of difference in the Tuesday morning blogs. They will probably be shorter, more to the point, and tend more toward the everyday world of culture, economics, and stewardship of resources. As I begin doing the research for the new book projects I can already guess that there will be some concepts and stories that I won’t be able to wait to share with my internet friends in book form. Those ideas will probably show up through the inbox of your computer. We are still traveling on this adventure of helping other people become better off. Let’s keep traveling and learning those lessons together!

Not Just Best, But Legendary

I knew I was in trouble. There was no domestic air service from the Chinese city of Shaoyang to Zhengzhou. I would have to take an area transport bus for four hours to a city called Changsha. There I could catch a train to Zhengzhou for my next hospital assessment. 

Traveling in northern China was not easy. As soon as the Chinese people began to work their way out from under the restrictive and oppressive restraints of the government, and began to once again exercise their natural DNA talents for business and enterprise, the nation as a whole began to awaken like an aroused giant. Such things as transportation systems were still trying to catch up with the new demands. 

I successfully boarded the old rickety bus headed for Changsha, but mechanical problems with the bus had us stopping periodically to refill the leaky radiator. We were losing precious time, and I could see that it was going to be a close call for me to get to the train depot before my train left for Zhengzhou. As our driver approached the outskirts of Changsha, we encountered a stand-still traffic jam. 

I explained again to my young translator just how important it was that I not miss the train to Zhengzhou. When we realized that the bus could never possibly get us to the station on time, we agreed on a risky and creative option. We asked the bus driver to open the door and let us out. We scrambled out with my luggage and ran across the road to the lane of traffic that was traveling away from the city. It was not deadlocked. Within two minutes I was able to hail a local taxi. My translator explained our urgency to get to the train depot immediately. The driver was a young, aggressive man who liked the looks of the U.S. dollars I was holding in my hand. He took the next side road and we were off like the down of the thistle in a wind storm. 

The little taxi came sliding to a stop at a side entrance to the train depot with dust bellowing around us. I graciously paid the aggressive driver, and my translator and I went running down the platform to coach number fifteen in spite of all the train attendants waving their arms at us. The door on our coach was still open and I tossed my luggage up into the coach as the conductor began blowing his whistle to start the train rolling. Our goofy gamble had paid off and we had made it! 

The train coaches were completely packed, but eventually we were able to find a place where we could hunker down for the balance of the fourteen-hour trip to Zhengzhou. Upon arrival we located a small, clean hotel room where I was able to sleep a couple of hours and take a refreshing shower. I was ready to visit the next two hospitals. 

Zhengzhou is located in the province of Henan that claimed a population of over 100 million people. Our first hospital to assess was the Zhengzhou Affiliated Hospital, a one thousand bed hospital that was involved in some very extensive remodeling. Our second hospital to assess became the delight of my entire trip. 

As we walked through the front doors of the Zhengzhou 5th People’s Hospital, we were met by three young, attractive Chinese ladies in white, crisply starched nurse’s uniforms and caps. Across the front of each uniform was neatly draped a bright red satin sash with gold writing. One of the nurses approached us with a beautiful smile and kindly asked us how she could assist us? My translator told her we were there for an appointment with Dr. Rang Da Zhong, the Hospital Director. 

The young lady informed us that the director was anticipating us and to follow her. The other two ladies stayed near the door in the front lobby. As we followed our hostess I, couldn’t help but notice that the hallways, the lobbies, and even the elevators were bright and shining clean. As we passed through the Ophthalmology department, I mumbled that we just as well could have been walking down the halls of an eye clinic anywhere in Chicago or Los Angeles. The new equipment was state-of-the-art and the facilities were attractive in every way. I later found out that their eye surgeons had been trained abroad and they were already using their laser and microscopic surgery machines to their fullest. 

Dr. Zhong was a personable fellow and genuinely glad that we had come. He was not only the director, but was also one of the chief surgeons. He was an interesting combination of pleasing personality, high energy, and dignity. Following a couple of minutes of introduction we got into the process of the questions of the assessment. In addition to walking the halls of the facility and visiting every department, I asked if I could dress down in scrubs and observe the equipment and procedures going on in the operating theaters. The director was gracious in every respect.

When finished, I was welcomed back into the conference room where I met the president and vice president of the hospital. They shared with me briefly about their plans for new construction, then frankly asked me for my input and observations about their hospital and how they could make it better.

I told them that I had walked the halls of thousands of hospitals in developing countries around the world but their hospital was different from any other. From the greeting I had received in the lobby to the observations in the surgery theaters there was a sense that everything was under control, everyone there was happy to be there doing what they were doing and they were all headed in the same direction philosophically and administratively. I told them, “No organization will rise above its leadership. What I have observed today is that the success of your institution has started with you the leaders. In my opinion, you are the greatest example of entrepreneurial, capital-intensive marketing that I have seen in a developing country. You are effectively leading. Keep at it!”

They sat there stunned for a minute and then replied, “How could you see so much by just briefly walking through our hospital? We want to take you to lunch.” There we continued to talk about China, economics, and the healthcare industry. At one point I asked them to tell me what had happened at their hospital that had made them so different.

They looked at one another and then began telling me the story. A man by the name of Sam Walton had come to China to open up some super markets. The people fromZhengzhou 5th People’s Hospital had all gone to the Sam Walton School. They showed me what they had learned:


Rule 1: Commit to your business. Believe in it more than anybody else and pretty soon everybody around will catch the passion from you — like a fever.
Rule 2: Share your profits with all your associates, and treat them as partners. 
Rule 3: Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. 
Rule 4: Communicate everything you possibly can to your partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.
Rule 5: Appreciate everything your associates do for the business; all of us like to be told how much somebody appreciates what we do for them.
Rule 6: Celebrate your success. Find some humor in your failures. Don't take yourself so seriously. Have fun. Show enthusiasm — always.
Rule 7: Listen to everyone in your company and figure out ways to get them talking. 
Rule 8: Exceed your customers’ expectations. If you do, they'll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses — apologize.
Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage.
Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. 
 

“Dr. Jackson, the government in China has stopped giving free medical service. We think that’s good for us. Now we need to figure how to finance the system because everyone still needs medical help at some time. We have decided that there will be enough money available to support our hospital, and if we are in competition with other hospitals for the money that is available then we will make the people want to come to our facility and buy our medical service from us. Sam Walton says that people want a good shopping experience. We will give the people the best medical experience. If they want good parking we will make good parking available.

“We will give the people friendly service from happy and helpful people. We will give to them clean and attractive facilities and the best and most modern equipment. But Sam Walton says most of all we must train our people to have teamwork and always attain excellence in everything. We must have goals and become the best. Dr. Jackson, if there is money in Zhengzhou for medical services, then we are going to capture that money for our hospital. We think people will find the money if we will give them good and happy results. When we receive the money we can continue to buy the best equipment and give even more excellent service. We don’t want to be just the best, we want to be legendary.”