money tree

MONEY: Don't count on it

The older you get, the longer your vision. And that can be good or bad, depending on whether things are getting better... or not. And the fact is: they’re not.

In the 1950s you could buy a decent house and pay for it over five, or at most ten years. Now many young people are buying a property and just paying the interest, while others are simply not prepared to take on the property challenge, which is largely seen as impossible or a dead-end road.

Saving for your old age now looks a dead loss, since money saved now will be worthless by retirement time. So how do you save for your old age? For many, the only answer would seem to be: back to Property again. Which largely explains why property prices have shot through the roof: people are using property as a way of saving.

But hold on. Surely money should be something we can save. Pennies in the piggy-bank and all that. And indeed, yes. Check any website which defines money and its functions, the IMF website for example... and surely you can’t get nearer Heaven than that. “Money,” say the Pundits blandly, “is useful as a medium of exchange, and a store of value”.

A medium of exchange: yes. I have tomatoes for sale, I want bread. So now I have to find someone who bakes bread, and wants tomatoes. Tedious. But with money as a common trading medium, simple.

But money as a store of value? Forget it. The days of “real” money, of gold and silver coinage, are long past. Indeed the fundamental fact is that our money has no intrinsic value whatsoever. It is simply an academic unit of account.

So this raises the question: What IS a Pound Sterling worth? Or a Euro, a Dollar? How do you define its value?

Of course money does have practical day-to-day value for all of us. Money has real meaning in terms of what you earn (wages), and what you can buy with what you earn (prices). We all use it, we value it in terms of the hard slog of earning it week by week. We value it in terms of what we can buy with it. Money has value in terms of pay and prices.

But then look at pay and prices; both are determined by disputation. The price is as much as the producer can squeeze out of the customer, the wage is as much as the employee can squeeze out of the boss. And since we all want more money for the same work – if we can get it – all of the world’s currencies are subject to continuing upward pressure for higher wages, and higher prices.

Is our money really so baseless, so meaningless that we can simply and with impunity demand more money for the same work or the same product or the same service? Yes it is. And the result is inflation. Even as we bank wages and salaries, or take cash earnings out to spend, in terms of purchasing power our money’s real value is slipping through our fingers.

Inflation is not the complex esoteric phenomenon economists would have us believe. Inflation is simply an expression of our natural desire to get more reward for the same amount of work, either out of simple greed, or through a sense of not being fairly rewarded in relation to others we see around us. Either way, it’s not economics, just human nature, and a floating monetary unit without any basic definition.

And the longterm effects on the economy and on growth (or any hopes of it) are far-reaching and seriously damaging. A country becomes prosperous when everybody is working, everybody is working productively. Not hard to figure. But pretty much impossible to attain. For growth leads to wage and price increases – inflation – which central banks check with higher lending rates, thus leading inevitably to recession. The Economic Cycle is hard-wired into our economic fabric.

Interest rates up, wages stable or down, prices down, inflation tamed. Mission accomplished? For economists and governments, perhaps. But real-world manufacturers see it differently. For them, and so inevitably for the economy as a whole, recession is a disaster, causing not just a temporary blip, but serious longterm damage.

Business, especially manufacturing, works best when machinery and backup facilities are operating at full capacity. And a steady, reliable economy encourages manufacturers to make further productivity-increasing investments, thus reducing production costs and increasing their competitive position.

By reducing consumer demand and forcing manufacturers to produce below capacity, recession actually increases production costs and therefore, ultimately and inevitably, prices.

And on the jobs front, the Economic Cycle demands a pool of permanent unemployment, mild in the prosperous regions, serious in the economic periphery. Its booms promote financial excesses, its busts produce personal and business bankruptcies, while the on-going climate of uncertainty does nothing to encourage the secure, substantial investment so vital to a productive industry – even if such were available.

The plain fact is that the so-called “economic cycle” of boom-recession-boom (with the occasional “bust”) is damaging to industry, largely ineffective, and it’s no way to run an economy. In addition, the constant aura of pervading uncertainty discourages longterm industrial investment by manufacturers who long ago learned never to trust a boom because it probably won’t last.

And it all comes back to the simple, basic fact: that money has no structural definition. It has real meaning solely in terms of what you earn (wages), and what you can buy with what you earn (prices). And both wages and prices are open to continuing dispute, leading to on-going upward pressure, which is let loose in boom times and cut back towards the top of the cycle leading to a downward slide.

Until we acknowledge this basic problem and take steps to provide some basic definition for our monetary unit, we will always have inflation (money useless as a saving medium), unemployment (essential to tame inflation), and the low productivity of an under-utilized economy – together with the continuing climate of uncertainty which is definitely not conducive to investment. Money, its lack of definition and its inherent instability, is indeed the root of all economic evil.

Property explosions, credit abuse, booms and busts, unemployment, austerity, bankers who’d rather gamble than invest in industry... it’s a “Wild West” roller-coaster world, economically dysfunctional and worse still – unproductive.

But we do have a choice.

MONEY: Releasing the Power

Job-creation requires capital – in sufficient quantity and with guaranteed longterm financial reliability to ensure a business is properly set up, and able to maintain the highest international standards in design, production and marketing. Our current banking system does not provide this.

A dedicated Development Banking sector can spread growth across the nation, creating jobs and providing the wherewithal for existing companies to increase their competitiveness, as well as for infrastructural improvements. Investment targeted regionally can bring industry and growth to traditionally backward areas.

The two broad principles of Development Banking focus on analysis, and commitment.

Development Banking secures the loan, not on the borrower’s personal property, but on the industrial or commercial project itself thoroughly researched and costed, and by making a long-term commitment based on an intimate involvement with the business or project in which it is invested. Involvement in the business ensures longterm commitment.

This facilitates the creation of new business and new jobs, as well as providing secure finance with which existing business can maximize its quality and productivity. Local infrastructure can also be financed. By setting up Development Banks to operate at regional level, focusing on regional and local needs, the benefits can be spread widely and uniformly, avoiding the usual pockets of non- or under-development.

This is important. As a nation’s economy expands, the more prosperous areas will begin overheating while the less developed regions have barely glimpsed the economic sunrise. By providing finance precision tailored specifically for each region, the traditionally less prosperous regions with high longterm unemployment, those which for example may have suffered the loss of an entire industry on which they were totally dependent, can be boosted up to match the nation’s better-performing areas.

The Regional Development Bank (RDB) would maintain a register of specialist firms, contractors, business advisors etc who can be called upon to verify loan clients’ cost estimates and provide setup advice in forms varying from design of factory premises to promotion and accounting. Skilled commercial, architectural and technical advice would be available, either to assist existing enterprises or to promote new ones.

Once launched, the new enterprise manages itself but the RDB receives a flow of data – production, sales, profits and so on – from which the new enterprise’s progress can be monitored and compared with projections. If anything begins to go wrong, the Bank can give timely help, with advice or further finance if appropriate.

An investment loan is best secured by ensuring the success of the project in which it is invested.

The banking-industry partnership would offer investment at a constant, and relatively low cost, possibly 2-3%, backed by the on-going monitoring of the recipient business ensuring safeguards for the investing bank, the recipient business and all those involved with and dependent on it.

A small percentage of the investment charge should also be set aside to fund apprenticeships and on-location training. A major and growing problem today is high and entrenched youth unemployment, largely caused by the mismatch between the skills that young people offer and those prospective employers need.

Indeed, countries with the lowest youth jobless rates have a close relationship between education and work. Germany has a long tradition of high-quality vocational education and apprenticeships,

Most significantly, Regional Development Banks, their loans firmly secured on the assets and ongoing monitoring of thoroughly pre-researched industrial and infrastructural projects, can create jobs and industries NOW, with the guaranteed longterm finance needed to maximize productivity and most importantly, maximize quality. And the availability of genuine, repayable investment loans avoids the need for deficit-increasing grants, now well beyond the means of debt-laden governments.

And the benefits will stretch into the future as a thriving, broadly based economy sends a positive signal to young people offering the prospect of a challenging, well-paid job as the sure reward of education.

Everybody working, everybody working efficiently, productively. That’s the key to prosperity. But prosperity... for whom?

There are people who work hard all their lives, contributing usefully to the collectivity, yet who end up with little or nothing for their old age.

And there are people who produce nothing of real value for anybody, yet so manipulate the power of shadow-finance and governance that they can retire early as multi-millionaires.

This is not the opening gambit for a socialist manifesto. Social consciences may indeed fret at the injustices, but the deeper consequences are far more pervasive and damaging, consequences of which we are now becoming increasingly aware.

The absence of any meaningful relationship between work and reward has indeed produced gross inequalities of wealth. It also results in industrial disputes, inflation with its ‘correcting’ recession, loss of productivity, and permanent under-employment. It represents a facet of anarchy, since it is a process of settling differences by unregulated dispute rather than by a system of debated and agreed guidelines. And its damaging effects on the economy and prosperity are substantial, on-going, and far-reaching.

What, if any, are the alternative options?

MONEY: Work and Reward


While economists and politicians debate the challenges of recession, growth, investment and financial stability at high-profile economic conferences, popular instinct remains firmly and unassailably convinced of certain fundamental beliefs rooted in common sense and common justice.

First, there should be some demonstrably fair and just relationship between work and reward. And second, as human invention and creativity develop ways of making products better and cheaper, so prices should also fall and life get progressively easier.

In fact popular instinct reaches right to the heart of our basic economic fault line. Yes, the absence of any defined relationship between work and reward is indeed a failure of social justice. Absolutely. But more seriously, it is also the root-cause of our structurally unstable monetary unit, which is, in turn the cause of inflation, and the ‘economic cycle,’ with its demands for a degree of permanent unemployment, and its block on the maximization of economic development and prosperity.

And quite rightly, in an ‘ideal’ economic environment where work and reward are directly related, increases in productivity, making better goods with less work, should translate directly into lower prices, raising purchasing power and thus prosperity for all.

But in reality the benefits of productivity gains have gone almost entirely to the ‘top’, leaving the average standard of living unaffected. The resultant near-static or falling purchasing power, combined with inflation and the mounting demands of taxation create an increasing economic and psychological burden, forcing an increase in hours worked and the rise of dual-earner households.

Is it possible to establish a more stable, just and meaningful relationship between work and reward, leading in turn to a measure of social justice and a structural, stable definition for our monetary unit? Fortunately, as with so many human problems, what might appear to be an insuperable challenge already has its solutions, up-and-running, working successfully and in widespread current use.

Can we measure work – accurately, fairly, acceptably to all parties involved? The answer is ‘ yes, and in fact we already do;’

There are several broadly similar systems of job evaluation, well tried and working successfully in major corporations and departments of government, systems which analyze, define and measure with considerable accuracy the work contributed by each employee in the organization.

Job Evaluation links pay with the requirements of the job, such as skill, education, experience, responsibilities, hazards, etc., offering a systematic procedure for determining the relative worth of jobs. An equitable wage structure is a natural outcome of job evaluation.

The job ‘value’ is then directly linked to remuneration. In this way, pay is fair, both in relation to the work done, and in relation to the pay and the work of others.

An unbiased job evaluation tends to eliminate pay and salary inequities by placing jobs with similar requirements in the same salary range. Individual employees as well as unions participate as members of the job evaluation committee while determining rate grades for different jobs. This broad participation ensures a basic stability, and helps in solving any wage related grievances quickly.

Job Evaluation may sound like something from the now-defunct Soviet Union, but its very practicality, and the stability it brings to remuneration structures has made it a virtual imperative. And the ‘ultra-conservative’ USA was in fact a pioneer in the field.

Formal job evaluation began in the United States with the Civil Service Commission in 1871. The first Point System was developed in the 1920s. During World War II, the National War Labor Board encouraged the expansion of job evaluation as a method of reducing wage inequities.

As companies became larger and more bureaucratized the need for a rational system of paying employees became evident. Wage structures became more complex and needed some way to bring order to the chaos created by supervisors setting pay rates for their employees on their own. Job evaluation became a major part of the answer, and is now widely used throughout the world.

The concept of Job/Remuneration Evaluation already exists, in widespread current use, and though there are differing approaches, they are all basically dedicated to measuring the work involved in a job, and from that, the appropriate remuneration. The establishment of a national standard, applicable at all levels and incorporating a maximum differential between top and bottom earners, would be a significant first step.

But pay has value only in terms of its purchasing power.

A Standardized Job and Pay Evaluation System would stabilize remunerations at all levels. Can prices also be stabilized?

The total costs of a factory’s output consist of three elements. First, the cost of bought-in raw materials and components; second, the direct labour added in the factory; and third, the costs of capital write-off, overheads and finance.

These are the costs of making a product, or supplying a service. From these costs a Unit Production Cost can be calculated for each product or service supplied. If this Unit Production Cost then becomes the Selling Price there would be a direct relationship between cost and price, and therefore between pay and purchasing power.

But the Unit Production Cost is not normally equated with the Selling Price. The difference between the two is commonly referred to as the net profit. Part of the net profit may be used for re-investment, either in research and equipment or to provide increased working capital. The remainder is currently distributed to investors and share-holders as the owners and primary beneficiaries of the company's activities and profits therefrom. But this view is changing.

In summer of 2019 CEOs from 181 of the world's largest companies, members of The Business Roundtable declared that the purpose of a corporation is not just to serve shareholders (their official position since 1997), but "to create value for all our stakeholders."

Business leaders are feeling pressure to rethink the role of business in society for a number of reasons. Social norms are changing and expectations from employees, customers, and even investors are rising. Big institutional investors like Blackrock are increasingly pressing the companies in which they invest to focus on their wider purpose and how they contribute to society.

Another major issue is growing social inequality, coupled with awareness that top bosses and directors make hundreds of times more than their employees. These are issues which the current shareholder-oriented system is ill-equipped to confront, and reverts to the relationship between work and reward.

Delving yet further into the issue of profits and profit distribution, there is one more claimant to a share in the profits, and that is the customer. It is the customer who pays the price and generates the profit; with this view a further claim on profits would come from the consumer in the form of lower prices.

This would require the establishment of public policy for profit distribution. This policy might first establish an overall annual profit ceiling. Profits could then be applied using an agreed formula of percentage shares, recognizing the claims and contributions of consumers, investors, co-workers, and the future security of the business itself.

Contentious issues indeed, but the potential rewards are significant. If both pay at all levels, and prices were stabilized, there would no longer be any danger of inflation. The economy could then be expanded steadily to a condition of permanent full employment.

Indeed, the gradual decline in overall price levels in line with productivity increases would be reflected in increased demand, creating its own beneficial effects on production costs.

In 1914 Henry Ford, without question one of the world’s great capitalists, instituted industrial mass production, thereby substantially lowering his production costs. He also understood that mass production requires mass consumption. Forgoing further potential profit he reduced the price of his cars, thus substantially increasing sales and indeed creating a whole new market in ‘affordable’ family cars.

The same principle, and its effects, apply equally today. Reduce your prices and your sales increase, first to those ‘marginal customers’ who fancied your product but couldn’t quite justify the expense. Then, your lower prices attract some of the competition’s customers, who defect to your product. And a ‘virtuous circle’ is set in motion. More sales lead to increased production, with lower costs derived from better use of capital equipment, and fixed overheads are spread over greater sales.

It all makes sound business sense.

Then consider the broader implications, if this principle is extended widely across the nation’s producers. Internationally, exports thrive, imports diminish further boosting domestic industry and employment.

But most significantly, as productivity rises, prices fall. And with a gradually falling cost of living, your money in the bank or under the mattress slowly increases in value and purchasing power... At last... money really IS a store of value.

Money which increases in value over the years.... an ideal which most ‘ordinary folks’ with ordinary common sense would heartily applaud. And yet governments and central bankers actually promote a degree of inflation, despite the fact that inflation represents a debasement, a devaluation of our currency. WHY?

Coinage debasement has occurred regularly throughout history, as governments and kings replaced the gold or silver content of coinage with a base metal such as copper. The continuing debasement of our currency by governments and central banks by promoting inflation is just as bad and damaging as any in our financial history. Why do they do it?

The main reason is that debt-laden governments can issue five-year bonds, happy in the knowledge that with a currency deteriorating in value the real debt will be that much lower in five years when repayment time comes up. And as long as there’s a good dose of inflation in the system, tax revenue should go up, even if the economy is stagnant.

But the fact remains: inflation is a manifestation of gross monetary mismanagement, for it is a denial of one of the basic purposes of money known to every first-year economics student: money should serve as a store of value. And no one, economist, financial advisor, banker... would ever suggest putting coins and notes under the mattress and hoping that by the time you retire they’ll be worth anything.

The longterm result of productivity maximization, combined with the stability of a labour-based monetary system, is negative inflation. Your money buys more each year, not less. This would in fact become a completely normal, natural process. As productivity increases, the labour-content decreases, and it becomes possible for goods and services to be produced and offered at lower prices, thus progressively lowering the cost of living.

This in turn means that as we get older we can look forward to increased purchasing power for our savings. A wild dream? No. This is as it should be, the normal course of events. We should be increasing productivity, producing more and better at less cost. And with a stable monetary unit, increased productivity involving less labour is reflected in lower prices.

Ultimately the idea of living in a society where the cost of living goes down slowly, year by year instead of up, where your savings are not only safe but increase in value, where your domestically produced goods get progressively better and cheaper, where a fair day’s pay for a fair day’s work in decent conditions is an accepted norm rather than an on-going battle... it may all seem utopian.

But it’s possible. And we can begin right now.

With the basic economic stability of Pay, Profit and Price Evaluation, and a positive strategy for growth and productivity, prosperity can be maximized.

This in turn requires that the nation’s credit flow, its most vital infrastructural resource, be protected from speculative abuse, and directed specifically towards productivity investment.

The resultant economic and social stability allows maximum economic growth, with increased purchasing power and prosperity across the nation... and money which finally reflects its ideal – a stable medium of exchange and a true store of value.

Yes, there would be howls of protest from vested interests and classically, traditionally oriented economists and politicians, but whatever the machinations of social and political debate and partisannery, the mathematics and economic facts are inescapable. Ultimately the prosperity of a nation, and its citizens individually can only be achieved through full, productive employment.

Critics should ask themselves whether the alternative – permanent unemployment, low productivity, boom and bust, on-going uncertainty for business and industry, labour disruptions, and money which fails to serve as a store of value – is really any better.

The prosperity of a nation, and its citizens individually can only be achieved through full, productive employment.

Productivity is the lifeblood of industry. Without it, or if it falls behind the competition, a business will set out on the downward slope to bankruptcy.

And government?

Government takes half the nation’s income. Yet it is subject to little or near-nothing in the way of financial discipline, operational efficiency, productivity and quality control. Government needs to maximize its own productivity.

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