The Federal Reserve Gilligan, and The
Skipper,
by Tom Mullen
01/18/2012
Now here's another tale of our castaways.
Imagine if life on the island were different. Instead of seven
stranded castaways, there were only four: Gilligan, the
Skipper, Mr. Howell, and Ben Bernanke.
Besides non-existent ratings without Ginger and Mary Ann,
some other things would be different. Imagine that there was
only one thing to buy on the island, coconuts. Now, of
course, this takes a willing suspension of disbelief, because
we know that these four people would need more than just
coconuts to survive. They would need clothing and shelter
and might want other comforts that the island might
conceivably provide. They would all provide different services to each other and trade them for
the services of their fellow castaways. But in this example, the only thing that they trade for are
coconuts.
Mr. Howell owns the coconut orchard, which produces 100 coconuts per year. Mr. Bernanke is in
charge of the currency, the Island Reserve Notes (IRNs). In order to purchase the only available
product for sale on the island, one must use IRNs. Barter or the use of other commodities to
make this purchase is prohibited. Each coconut costs 1 IRN.
Gilligan and the The Skipper each perform different services for each other and the other two
which they trade for these paper notes in order to buy
coconuts. At a given point in time, Gilligan and The
Skipper each have 50 IRNs.
There are a few things that are true. The first is that the
IRNs held by Gilligan and the Skipper have no value of
their own. Their value is wholly derived from the
coconuts that they can buy with the IRNs. Neither do
the ISNs have any value off the island. Back in
civilization, the currency is not recognized, although if a
mainlander were to acquire some IRNs, he would be
able to purchase coconuts with them if he ever found
himself stranded on the island.
Secondly, Gillligan and the Skipper are equally wealthy,
not because they both have the same amount of IRNs,
which don't have any intrinsic value, but because they are
both able to buy an equal quantity of the available
products. They are each able to buy one half of all
coconuts produced in one year in Mr. Howell's orchard.
In other words, each has the same purchasing power in
the island economy.
Now, suppose Mr. Bernanke decided to print 5 additional
IRNs and give them to the Skipper. The Skipper would
immediately be wealthier, as his purchasing power has
now increased by 10 percent. He can now buy 55
coconuts instead of 50. But where did this new
purchasing power come from? Was it really created out
of thin air just by printing additional IRNs?
Mr. Bernanke might say yes. However, there are still only
100 coconuts available to purchase. Since there is no way
for Mr. Howell's orchard to produce more than 100
coconuts during the current year, it would seem that Gilligan can still buy 50 coconuts, the
Skipper can likewise buy 50 and his 5 additional IRNs are worthless until there are more coconuts
available to purchase. How can the Skipper take advantage of the additional IRNs?
Obviously, there is only one way. Rather than trading 1 IRN for each coconut, the Skipper will
now offer Mr. Howell 1.10 in IRNs per coconut. This is the new market price, which Gilligan has
to pay as well. Mr. Howell certainly isn't going to sell coconuts to Gilligan at 1 IRN apiece when
he can get 1.10 from the Skipper. So, with Gilligan and the Skipper each paying 1.10 per coconut,
the Skipper is now able to buy 55 coconuts, while Gilligan can only buy 45.
What we have seen is a transfer of wealth. The Skipper is now 5 coconuts wealthier. However,
this new purchasing power was not magically created simply by printing the 5 extra IRNs. It was
transferred from Gilligan, who can now afford only 45 coconuts, even though he has the same
amount of IRNs that he had before. No one
snuck into Gilligan's hut and removed any of his
money. He still has the exact same amount. But
he has been robbed nonetheless. Regardless of
how laudable the reasons given for printing the
new IRNs and giving them to the Skipper - to
stimulate the economy, create new jobs, etc. - it
was nevertheless accomplished through theft.
It should also be noted that no additional wealth
has been created. The total number of coconuts
that Gilligan and the Skipper are able to
purchase is still 100. The wealth has simply been redistributed from Gilligan to the Skipper.
Imagine if this were to go on for decades. At some point, the Skipper would be fabulously
wealthy and Gilligan would be destitute. Now, the only reason that this theft is possible is the law
that forces Gilligan to use the IRNs. If he were able to pick bananas and offer them in trade for
the coconuts, he might be able to produce enough in bananas to buy more coconuts than the
Skipper. Only the power invested in Mr. Bernanke allows him to transfer wealth and it is the only
power he has. He doesn't produce a single coconut himself. He simply decides how those
coconuts are going to be distributed. One might also argue that the Skipper might invest the extra
5 IRNs in capital goods and thus expand production on the island. It is possible. However, it is
less likely that the Skipper is going to make wise decisions on what capital goods to invest in with
purchasing power that was stolen from someone else than with money he saved himself. After all,
if he decides to invest in a scheme that doesn't pan out, he can go back to Mr. Bernanke and get
more IRNs. In reality, these funds are loaned to the Skipper and he must pay them back with
interest. However, he is really getting an involuntary loan from Gilligan and using Gilligan's
purchasing power to acquire capital goods. Each time he does, he becomes wealthier and Gilligan
becomes poorer. Adding insult to injury, the Skipper gets to retain ownership of the new capital
goods and keep all of the profits from the investment – with the cost of the investment provided
by Gilligan! Eventually, production might expand, but it will have expanded far less than if the
Skipper had been forced to accumulate his capital by consuming less coconuts. This would put
downward pressure on the price of coconuts, making Gilligan wealthier while the Skipper became
wealthier still once he realized a return on his investment. Of course, no economy is this simple.
There is never only one product or service to purchase in any economy. Neither have we
accounted for the coconuts that Mr. Howell consumes, nor for the presence of Ginger, Mary Ann,
the professor, or Mrs. Howell, who could all conceivably produce other products or services to
offer each other in the island economy. However, even if there were seven castaways - or 300
million - the principle would remain the same. There would be some finite amount of wealth that
all of their efforts combined could produce. All other factors being equal, printing new IRNs and
distributing them unequally among the inhabitants would produce the same increase in prices and
the same redistribution of wealth.
The only honest way to expand production would be for some of the islanders to save some of
their earnings and invest them in capital goods. This would have the effect of raising the overall
wealth of the island and any disparity in individual wealth would be the result of those individuals
producing more for the other islanders to consume, not from redistribution through the
production of new paper currency. Moreover, since production could only be expanded by real
savings, instead of by a privilege granted by Mr. Bernanke, they would all have an equal
opportunity to save themselves and compete with those producing more. All of these factors
would tend to make income disparity decrease, instead of increase as it does under the IRN
System.
There is only one question that remains. Why does Gilligan allow the IRN System to continue?