In my last article, I introduced the topic of trust based credit… or how to make money without money. In today’s G’man dominated world, only fringe economic activities like street vending of umbrellas escape the all-smothering regulatory blanket. But imagine if the whole world economy could run on ‘trust based credit’… and escape the ‘vampire squid’ actions of the Bankster and the G’man… impossible you say? Just a pipe dream?
Well, the historic reality is that prior to the madness of WWI… the ‘War to End All Wars’… the world economy did indeed run on such a credit system, with the reality check of ‘trust your neighbor but tie your camel’ in full effect. So effective and efficient was this system of credit, that world trade volume seen before WWI was not matched till the nineteen seventies; almost three quarters of a century later, despite huge growth in population and wealth.
To fully understand the trust based credit system and the enormous and deadly ramifications of its destruction during WWI, we need to understand how the principles employed by the street vendor and umbrella wholesaler apply in the whole world economy.
We all know what a bill is; a paper record of what we purchase… in restaurants the bill is called a check, in bars a tab… but the idea is always the same. We buy some merchandise; a meal, an umbrella (in a retail store) or a pint of brew, get presented with the bill or check or tab, verify the bill… by confirming that what it claims we bought is true… then we accept the bill, and pay it.
The only difference between a retail bill and a commercial bill is the term; retail bills are COD… to be paid immediately. Commercial bills are almost never COD, but give terms; time to pay. Terms are like 30 days net, 60 days, 90 days etc. Thus, while a retail bill is paid immediately, and is ‘retired’… i.e. paid in full and only kept for bookkeeping purposes… the commercial bill stays ‘open’ or in effect until the due date, when it is paid… and only then retired.
A big trailer truck carrying 30,000 Liters of gasoline backs up to the gas station, fills the underground storage tank… and the driver heads to the gas station office to complete the paperwork. Suppose gasoline costs $1 per Liter… do you imagine the station attendant will pay $30,000 in cash? Not likely! Nor can the attendant write a check… he simply signs (accepts) the bill or commercial invoice. The invoice specifies that 30,000 L of gasoline have been delivered, and that payment will be due in say 60 days from the signing date.
Until paid in full, this bill represents value; the value of the 30,000 L of gasoline delivered, and the value of the payment that will be made in not more than 60 days. The holder of the bill, the gasoline wholesaler, may simply hold the bill till it is paid… in his ‘accounts receivable’… or may use it to pay the refinery that produced the gasoline. If he does this, he will assign the bill to the refinery, so that when the gasoline retailer makes payment, the payment will be made to the refinery, not the wholesaler.
This is the crux of the commercial credit system; goods are placed on consignment, a bill written and accepted, and payment made as per the terms of the contract… the bill. Notice credit is granted, goods change hands, but there is no borrowing involved. No borrowing, no interest charges, no collateral… simply trust that the retail gas station will indeed sell the gasoline delivered, and use the proceeds of retail gas sales to pay the bill when due. The bill thus created can circulate, that is clear credit… make payments. Such a bill, one that circulates, is called a Bill of Exchange.
Suppose the retail gas-bar makes a profit of 8% on gasoline sales, and the prevailing interest rates are 4%… reasonable enough assumptions under normal economic circumstances. The retail gas-bar owner has three choices to fund inventory; use bank credit i.e. borrow the funds; use his own capital; or work with ‘trust based’ credit. Today, most retailers except fringe operations like street vendors, and ‘vertical’ transactions within one industry like petroleum products, have only the first two choices available to them.
To make an 8% annualized profit, the gas bar owner will make a 2% profit by re-selling the gasoline in ninety days; he then buys another batch of 30,000 L… makes another 2% profit in the next 90 days… and repeats this four times a year. Four times 2% is 8%, the annualized profit. Now consider this; if the interest rate is 4% per annum that translates to 1% per quarter… the 90 day period that the 30,000 L must be funded. Isn’t this incredible; net profit is 2%, and cost of interest is 1%… half the profits go to pay the Bankster!
The second alternative is to fund the purchase with cash, the retailer’s own capital; this plays up the ‘you need money to make money’ rule spread by the Bankster… and yes, if the retailer has the cash, he can indeed fund the purchase… but then he falls prey to opportunity costs. The cash invested in gasoline inventory could have been invested in a bond that pays 4% annual interest income; so, the retailer is still hit.
With borrowed funds, he pays ½ his profit to the Bankster. With cash payment, the retailer loses 1/3 of the profit he could have made using the third option, trust based credit to fund the gasoline… and investing his own capital in something else. If he makes 8% on gas sales, and 4% on interest earned on his capital, that is a 12% per annum income on the $30,000; not bad at all, is it?
Now we start to see the benefit of ‘trust based credit’… cost of doing business drops drastically. Indeed, there are many enterprises… and job opportunities… that remain ‘in potentia’; they never materialize because the cost of doing business on a cash or borrowed funds basis is too high. These ‘phantom’ enterprises actually did exist under Gold, when all retail business not just the fringe ones took advantage of trust based credit. This is one major reason there was no structural unemployment under the Classical Gold Standard.
But really, we have just scratched the surface of the magical benefits of ‘trust based credit’, often called the Bills of Exchange system… or the Real Bills Doctrine of Adam Smith. The full vertical and horizontal circulation of Bills, the international BiIl market, the discount rate… these all depend on the free circulation of Gold and Silver coin. Much G’man and Bankster effort goes into suppressing Gold and Silver money, in order to suppress the Bill market… and to keep the world economy hooked up to the ‘vampire squid’.
Once the Fiat paper regime collapses and real money makes its comeback, circulation of Real Bills will again arise. Monetary debasement will be replaced by constantly increasing purchasing power of money. Structural unemployment and the dole will be replaced by full employment. Financial speculation will be replaced by real wealth generation.
I can hardly wait.