MONEY AND THE DIVISION OF LABOR

BIBLICAL ECONOMICS TODAY Vol. XVIII, No. 3 ©1997 Gary North April/May 1997 MONEY AND THE DIVISION OF LABOR by Gary North And there was a great famine in Samaria: and, behold, they besieged it, until an ass’s head was sold for fourscore pieces of silver, and the fourth part of a cab of dove’s dung for five pieces of silver (II Kings 6:25). In times of great crisis, money dies. The things that money could buy in normal times are not available at any price close to that which prevailed in normal times. So revelatory are prices of the underlying social conditions that Elisha prophesied the end of a siege by forecasting a dramatic fall in prices: "Then Elisha said, Hear ye the word of the LORD; Thus saith the, To morrow about this time shall a measure of fine flour be sold for a shekel, and two measures of barley for a shekel, in the gate of Samaria" (II Ki. 7:1). Before it ended, silver did not count for much. Or put differently, they had to count out a lot of silver to buy anything worth owning. What was worth owning was food. Normal pricing reveals normal times. When prices today are close to what they were yesterday, we can be confident that society tomorrow will be pretty much what it is today unless something totally unforeseen happens. Rarely does it happen. Money is a measure of social events. Gold reached its highest price, denominated in U.S. dollars, the week before Gettysburg. On July 3, 1863, Lee’s army was defeated. On July 4, Vicksburg fell to Grant’s forces. The dollar price of gold fell the following business day and did not reach these heights for a century. The world believed that the Union would win the war, no matter what the South’s politicians and generals said in public. What was the South’s leadership to say? "Well, that does it. It’s all over but the shouting. The North’s shouting. We might as well surrender now. Why continue this bloodbath? The yankee dollar is up. Gold is down. Gold says we’re beaten. We might as well face it." Had any politician said this, he would not have served out his term. Yet this was exactly what the South’s leaders should have said. They continued the bloodbath, yet the outcome was what the price of gold had projected. All of this is to say that the price of gold, back in the days when governments tied their currencies to it, was a better indicator of social conditions than the speeches of politicians. Even today, when government-created monopolies, the central banks, can push gold’s price lower by threatening to sell large quantities, the movement of the price of gold is a better indicator of future inflation than almost any other economic indicator. (Economist Mark Skousen has done the preliminary work on this: gold as an inflation forecaster two years early.) No matter what politicians want people to believe, if they preach good times while gold and interest rates are rising, the public would be wise to discount the politicians’ words. Free men make evaluations of the state of the world, and the price of gold reflects their judgment. So do interest rates. They can be wrong in their forecasts, but their forecasts are best reflected in these two market prices. The Focus of Attention Why should gold be the focus of attention, the ultimate indicator? One reason is because it usually has been. When gold is not widely used as currency, silver has served the same function. These two precious metals are the most familiar indicators of underlying economic trends. People have learned after millennia that the purchasing power of gold and silver also reveals a great deal about social stability. When the price of either or both keeps rising, the world is alerted to a nation’s underlying crisis. When the prices of basic commodities rise faster than the price of gold and silver, that society is becoming desperate. Ludwig von Mises has defined money as the most marketable commodity. For most of the twentieth century, gold has been legally severed from currencies. These currencies have served as money. Also, bank deposits serving in lieu of paper money have become money. Forms of these deposits have multiplied. Today, economists are not sure exactly what constitutes money or how to measure it. There are numerous competing measures. Gold and silver rarely serve as money. But Mises’ definition remains accurate: money is the most marketable commodity. You can buy what you want: (1) immediately, (2) without offering a discount, and (3) without advertising. In this sense, money is said to be liquid. It is the supreme measure of liquidity. Inside a national border, gold and silver are no longer as liquid as what a solvent national government calls money. In this sense, gold and silver are not money. They are not the most marketable commodities. This raises an interesting question: Is our era an anomaly? Are we living in a monetary new world order? Is this situation likely to persist? Or will we see a return of gold and silver as the most marketable commodities? If fallen men are today trustworthy, if politicians tell the truth, if central bankers can be trusted not to inflate whenever there is a recession, and if things continue to operate smoothly, then the modern world will have escaped the unsentimental constraints of gold. Gold will not again become money, except as an accounting device for settling international payments among central banks. Yet this raises another question: Why do central banks stubbornly refuse to abandon the "barbarous relic," as John Maynard Keynes derisively called it? If gold is not good for us little people to use as money, why is it good for central bankers to use in order to settle their accounts? If gold is just another commodity, why don’t central banks sell all of it that is stored in their vaults and invest the money in U.S. Treasury bills or some other nation’s interest-paying debt? What do they know that the public doesn’t know, and gold-hating economists don’t know? There is an answer: central bankers do not trust other central bankers. They do not trust the reliability of civil governments. They know that when push comes to shove in the business cycle, other central bankers will crank up the printing presses. When this happens, they all want to be in gold. So should the rest of us. To keep their credit worthiness in a crisis, they have to own gold. So do the rest of us. Because We’re Not Omniscient If I knew what is going to happen tomorrow, next week, and next year, I could plan my life to minimize the use of cash. I could put my money into a savings account and earn interest. Why keep cash when you don’t need it? The better your forecasting skills, the less you need it. Today, we have money substitutes. We can deposit money in a bank or money-market fund and earn interest. We can also write a check, or use a credit card, at any time to buy what we want. We can do this because of the remarkable fiction known as fractional reserve banking. We lend the bank money short-term – withdrawal allowed at any time – yet the bank loans it out for months or years. The bank is in the condition of being "borrowed short and lent long." As long as deposits come close to equaling withdrawals, this wonderful condition can go on without problems. It is a profitable system most of the time. We stop carrying much cash. We carry plastic cards instead. It is safer. It is easier. And it leaves us convenient records for our computerized personal finance programs (and also the income tax collector’s finance programs). But then comes some unforeseen development. You are in some small town, your car has broken down, and Bubba the car repairman deals only in cash. Bubba, you see, has figured out the system: the tax collector’s computer doesn’t trace what a credit card company or check doesn’t register. Bubba looks dumb, but Bubba is really pretty clever. Meanwhile, your car is not running. You ask: "How much will it cost to get this fixed?" Bubba, being pretty smart, answers: "How much cash have you got?" You tell him. He starts laughing. He shouts back toward the garage: "Hey, Sam, get a load of this!" All of a sudden, you would like some extra cash, since your alternatives are limited and your forecasting skills have been shown to be not all that you had imagined. Let us pursue this. What if, because of some unforeseen event, such as a meltdown of the stock market, a lot of people start thinking like Bubba? They think to themselves: "My bank may go bankrupt in this mess. Bankrupt, after all, comes from ‘bank’ and ‘ruptured.’ I’m getting nervous. I don’t know what’s coming. You never know these days. I think I would like to have cash. I think I’ll go down to my bank and get cash." All of a sudden, deposits do not equal withdrawals. People who lent the bank short-term money want it back today. How is the bank going to get the cash? It can sell off assets. So, asset prices start falling. The rush for cash means that interest rates start rising. Borrowers start panicking. Employers start firing. Fired people, filled with a new level of uncertainty, go down to the bank and demand cash. Cash is a substitute for knowledge about the future. When people are really scared about their economic futures, they want cash. In such a downward spiral of fear, uncertainty, and the rush for cash, the central bank will print up cash and deliver it to the banks. There is no other way to stop the panic and keep it from becoming a depression in which payments slow down, businesses cannot collect their money, and the economy collapses. This is called a break in the payments system. It does not happen often, but when it does, the result is an economic crisis of monumental proportions. A Break in the Payments System There is no economic event more terrifying than this one. This takes place when a society with a high division of labor, which relies on a predictable system of payments, ceases to trust the system of payments. People start looking for other, safer ways to buy and sell. They move from one monetary unit to another. In the meantime, prior forecasts are shown to have been wrong. Businesses fail, stock markets crash, and banks close their doors. As people abandon one form of money – checks, for example – in their quest for another form of money – cash, for example – those individuals who had previously relied on sales to people who write checks find themselves hard-pressed to find buyers for their products. Their buyers no longer write checks. No problem! Just start selling for cash. Problem: How do you send cash to your suppliers? In the mail? How can you prove that you sent it? You have to go to your bank. Your bank will wire the money to your supplier’s bank. But your bank is closed. The demand for cash has wiped it out. Maybe your supplier’s bank is also closed. So, how do you get shipments of goods so that you can sell them? You probably don’t. You go out of business. Now, let us consider technology. Your local bank has your money stored in its computer. Well, of course, it really does not store money in a computer. Or does it? Are those blips really money? They are for as long as you can write a check, or use a credit card, that can subtract from that computer entry. But if the check no longer works, or the credit card no longer works, or the bank’s ATM cash machine no longer works, your computer entries cease to function as money. If the banking system’s computer system does not allow additions and subtractions from those digital entries we call money, most people no longer have any money. Money is no better than the technology that stores it. It is no better than men’s faith in the technology that stores it. It is no better than the ability of those in authority to persuade users of digital money that the computer technology on which the banking system relies is reliable. Money rests on faith. Now, who are you going to believe? In normal times, you can believe your banker. What about in abnormal times? The Millennium Bug When 1999 becomes 2000, computers that have not been programmed to recognize 2000 read it as 1900. This means almost all mainframe computers. For four decades, computer programmers have built the world’s infrastructure of mainframe computers on a two-digit entry. They left out 19 in front of each year. Now the computers will recognize 2000 as 1900. Every date-sensitive operation in every traditionally programmed computer will misread the year. This will affect almost every mainframe computer system on earth, beginning with the governments’ computers and moving down to most large businesses. The ability of computers to transfer information will be called into question. The data being transmitted by unrepaired computers will be corrupt in every date-sensitive application. Even if an organization’s computer has been repaired, its data will be ruined if it accepts data from a computer that has not been reprogrammed. This means the end of virtually all computer networks. To lock an unrepaired computer out of the network is to lose the data inside that computer. It does not take many locked-out computers to destroy the system. Banking is the big one. If any bank’s computer is not Year 2000-compliant, it is a threat to every bank that is compliant. The problem is, the largest banks are not yet compliant. It matters not at all if the Farmers & Merchants Bank of Hog Jowls, Alabama, is compliant if Citicorp, Chase Manhattan, and other New York money center banks are not. Similarly, it matters not at all if Citicorp and Chase Manhattan are compliant if the Japanese banks are not. In the case of banking, the accounts of every small bank are so intertwined with the accounts of the money center banks that anything that closes the doors of a money center bank threatens the survival of small banks. Citicorp has 400 million lines of code to examine. Chase Manhattan has 200 million lines. Let us put this in perspective. The Social Security Administration’s team of 400 programmers began repairing its code in 1991. By June of 1996, SSA had gone through 6 million lines of code out of 30 million. Citicorp got started on its repair in 1995. They have estimated that the bank’s computers have between 25 million and 50 million lines of code to repair, compared to SSA’s 30 million lines merely to examine. Am I reasonable to conclude that there is at least an outside possibility that the world’s money center banks may not complete all of these repairs plus devote a year of full-scale testing by the year 2000? But what if the Farmers & Merchants Bank has reinvested all of its money in the local economy? This is not the case, but what if? How will debtors in the local economy get paid by buyers who live outside the community? Not by checks drawn on large, urban banks. Not by bank wire transfer. No man is an island, John Donne wrote over three centuries ago. He should have been writing about the international payments system. If the big banks are locked out of the system because they are not compliant, the system collapses. If they are not locked out, the entire system will be awash in erroneous data, which will escalate like a computer virus. Only if every major bank becomes compliant, and only if each bank’s solution conforms to the one adopted by every other compliant bank, can the system hold. But there are no agreed-upon standards, even including where you put the new century: at the beginning or the end. There is no enforcement agency at the national level, let alone the international. There will be no universal repair manual. Then how will the repaired computers, if any, interact with other repaired computers? And how will they block the data sent by noncompliant computers? Today, we use digital money. I have serious doubts that we will be using digital money after 1999. If there are bank runs in 1999, we will abandon digital money even earlier. From Digital Money to. . . ? How can you get out of digital money? In other words, what other form of can you buy with it? Today, you can buy gold and silver coins, real estate in the country, and bulk food. But if all money except cash today is digital money, then only fiat money serves as money. You get your choice: digits or paper. To get out of a lot of digital money and into paper money is difficult. Basically, most people cannot move into non-digital money from their pension funds. They can buy only non-money items. Gold and silver coins are non-money items. They are highly salable, but they are not money. They require a network of specialized dealers to create a market for them. What of the year 2000? Where will those dealers be? More to the point, where will sellers of coins be? What will they sell their coins for? Not for digital money if the banks are closed. Possibly not for paper money, assuming the banks are open. If the banking system goes down, holders of precious metal coins will sell mainly for goods and services that they use: consumer goods. This means that gold and silver coins will become money. Digital money will no longer be around. Neither will those institutions that rely heavily on digital money. Think about the number of institutions that do not rely at all on digital money. It is a very short list. Now think of institutions that are likely to survive a transition from digital money to gold and silver coins, but without fractional reserves. There will not be many of them. I can think of one that will not "make the cut": a national government in any nation larger than Monaco. The national governments of this world survive because they get those under their jurisdiction to send them checks. This means that they rely on the banking system. The alliance between central governments and central banks has been operating since the establishment of the privately owned Bank of England in 1694. That model has spread throughout the world in the twentieth century. It is the basis of the international order. If the banking system collapses in a sea of erroneous data, the humanists’ New World Order collapses with it. With this in mind, it is time to review some ancient history: the fall of Jerusalem in A.D. 70. It is worth noting that the time frame was one hour. In fact, it took many months for the city to fall. John prophesied regarding this event: And the merchants of the earth shall weep and mourn over her; for no man buyeth their merchandise any more: The merchandise of gold, and silver, and precious stones, and of pearls, and fine linen, and purple, and silk, and scarlet, and all thine wood, and all manner vessels of ivory, and all manner vessels of most precious wood, and of brass, and iron, and marble, And cinnamon, and odours, and ointments, and frankincense, and wine, and oil, and fine flour, and wheat, and beasts, and sheep, and horses, and chariots, and slaves, and souls of men. And the fruits that thy soul lusted after are departed from thee, and all things which were dainty and goodly are departed from thee, and thou shalt find them no more at all. The merchants of these things, which were made rich by her, shall stand afar off for the fear of her torment, weeping and wailing, And saying, Alas, alas, that great city, that was clothed in fine linen, and purple, and scarlet, and decked with gold, and precious stones, and pearls! For in one hour so great riches is come to nought. And every shipmaster, and all the company in ships, and sailors, and as many as trade by sea, stood afar off, And cried when they saw the smoke of her burning, saying, What city is like unto this great city! And they cast dust on their heads, and cried, weeping and wailing, saying, Alas, alas, that great city, wherein were made rich all that had ships in the sea by reason of her costliness! for in one hour is she made desolate (Rev. 18:11-19). What is described here can be applied to any city in which the means of payment breaks down. Why would merchants bring goods into a city if those dwelling in it cannot pay? It is the prospect of payment that keeps every delivery system operating. It is this prospect that puts a newspaper on a front lawn, electrical power in a line, water in a pipe, takes used water out of a receptacle and down a pipe, and so on. In short, if the means of payment breaks down, there will be fewer and fewer deliveries until those inside the city can begin to produce something of value for which they can obtain the new money. Problem: the productivity of a person who lives in a high division of labor economy is dependent on the existence of a universal means of payment. The value of his productivity collapses overnight – "in one hour" – if the traditional means of payment is not replaced immediately by a new means of payment. If the transition is not smooth, the person who was dependent on the social division of labor under the old system finds himself without money and without skills suitable for the new economy. For how long? On that question many lives may hinge. The Dial Tone What if the phones go down? What if AT&T does not complete the revision of its 500 million lines of code? The same question applies to all the phone systems worldwide. If one local company makes it, fine and dandy. That means those living in that region can get service, if they can pay for it. How will they pay for it? Not by bank wire transfer, surely. Not if the banks are gone and the other phone companies are gone. Development economists know that the single most important capital investment that a poor county can make is in its phone system. It is even more important than its roads. Conversely, we can safely conclude that the most important capital structure in any modern economy is its phone system. If it goes down, the society goes down. The division of labor shrinks dramatically, fearfully, and perhaps fatally. How vulnerable are the world’s phone systems? Those who are in control of them refuse to say. Bob Bender of Sprint said in November, 1996, "It’s a very wide problem, but it’s not a deep problem. Once you identify it, it’s easy to fix." Mr. Bender should contact the Social Security Administration and let them in on his secret of easy fixes. Sprint has 100 million lines of code to repair, and got started in 1995. AT&T’s Year 2000 project manager told Computerworld: "Right now, it’s really not keeping me awake at night." I find that odd; it is keeping me awake at night. I keep thinking: "How will I make a living if the phone lines go down, taking with them toll-free phone numbers, the Internet, and communications with the police department?" That last one is worth considering if you live in a city. What happens to law enforcement if the dial tone is dead? Think of what else will be dead. But we cannot get straight answers. We rarely can get any answers. Everyone assures us: "Our system will be compliant by December 31, 1998, leaving a full year for testing." The response to this answer is simple: "Where will you get the extra mainframe computer capacity to run parallel tests of all data coming into your organization in the first half of 1999, to see if the data crashes your repaired software?" There is no excess capacity available; parallel testing will not take place. "The Temple, the Temple!" When Jeremiah brought the bad news of imminent captivity to the nation of Judah, men refused to take him seriously. God just wouldn’t do such a thing. Why, God dwelled among them in His holy temple! To which Jeremiah replied: "Thus saith the LORD of hosts, the God of Israel, Amend your ways and your doings, and I will cause you to dwell in this place. Trust ye not in lying words, saying, The temple of the LORD, The temple of the LORD, The temple of the LORD, are these" (Jer. 7:3-4). Today, there are no prophets. Bad news is not absolutely certain; similarly, time for repentance is not absolutely guaranteed. But automatic cries of "It can’t happen here" are as futile as they were in Jeremiah’s day. If the sins are similar, it will happen here. When men hear of the Year 2000 Problem, their first response is denial. This rarely move to stage two: hope in a magic technological bullet, a solution that comes out of nowhere and solves the problem at a competitive price. Those who make it to stage two rarely move to stage three: a realization that there will be no magic bullet. Then comes stage four: a consideration of what their lives would be like in a society with a division of labor that prevailed in 1940. Or perhaps 1900. There are several ways to discount mentally the magnitude of what could happen. One is to argue that the date-dependence of computers is minimal. Perhaps so, but when those who have been issued an incorrect check (too low) call in to clear it up, will they get anything but a busy signal, assuming that the phone lines are still working? Are the date-sensitive problems confined to billing rather than actual physical operations? The answer to this question will determine life or death for a lot of people. If the problem is billing rather than supply, then the larger the operation, the more difficult getting paid will become for it, assuming that the banking system is still operating. If an organization’s operations cannot be handled in a pinch by the substitution of 3 by 5 cards, then that organization may not be able to survive the Year 2000. The life-and-death question is: How many organizations are we dependent on that cannot possibly convert to 3 by 5 cards before January 1, 2000 if its software repair should fail? How many organizations are you dependent on? You had better find out before a million other people do, if the news is bad. Everyone cannot get out at the top of a market. This includes cities. I recommend living in an region decentralized enough so that its local government and public utilities can be run with 3 by 5 cards or a Year 2000-compliant desktop software equivalent. Conclusion Unlike that one other simultaneous worldwide transformation in man’s history – the language problem at the tower of Babel – this one can be dated in advance. If the worst-case scenario occurs, they will be writing about the year 2000 in a thousand years. Historians will be amazed that such a civilizational time bomb could lurk in a society for a generation, only to be discovered months before its detonation. Fact: under 15% of all major software development projects come in on time. God is in control. What He seems to have done, however, is to blind a handful of computer programmers a generation ago to the implications of a two-digit rollover. If this event brings down humanist civilization, as it very well may, those Christians who survive it will have the last laugh. In the meantime, And it shall be, if thou do at all forget the LORD thy God, and walk after other gods, and serve them, and worship them, I testify against you this day that ye shall surely perish. As the nations which the LORD destroyeth before your face, so shall ye perish; because ye would not be obedient unto the voice of the LORD your God (Deut. 8:19-20). Copyright 1997, Institute for Christian Economics P.O. Box 8000, Tyler, TX 75711 Donations are fully tax deductible; checks should be made out to Institute for Christian Economics. Released for informational purposes to allow individual file transfer, Usenet, and non-commercial mail-list posting only. All other copyright privileges reserved.