The Shoemaker and the Hatmaker, Revisited

The IOU

By Robert Ringer

Now it's time to get back to the shoemaker and the hatmaker mentioned in Part II of this article. As you will recall, the shoemaker gave the hatmaker an IOU for the hat he purchased. The hatmaker accepted the IOU, because he believed the shoemaker to be creditworthy. He felt confident that he could use the shoemaker's IOU to purchase another product from someone else or, if he later decided he needed shoes, he could redeem the IOU for a pair of shoes directly from the shoemaker.

In the meantime, however, two things have occurred, and the hatmaker is unaware of both of them. First, the shoemaker has stopped making shoes. In other words, he has ceased to produce wealth. Second, he has discovered that he can persuade other people to accept his IOUs, which has motivated him to go on a spending spree.

The shoemaker has passed out an additional ninety-nine IOUs since he gave that first one to the hatmaker. None of those hundred people realize, however, that the IOU he holds is not the only one. Hence, each of them believes that his IOU is "as good as gold" (i.e., as good as the pair of shoes behind it).

The problem arises when each of the one hundred people goes out and tries to spend his IOU. Merchants, sensing the sudden increase in the demand for their goods, raise their prices. Due to the shoemaker's creation of excess IOUs, the hatmaker, who accepted the shoemaker's original IOU in good faith, theoretically has had the value of his IOU reduced by 99 percent.

To compound the problem, sellers of goods, realizing that an excess of IOUs has been distributed by the shoemaker, become leery of the value of his IOUs. As a result, they raise their prices even higher to compensate for what they deem to be a bad risk in accepting the shoemaker's IOUs at all.

Of course, this situation would correct itself rather quickly in a free market — i.e., a market with no government involvement. At a very early stage, the community would realize what the shoemaker had been doing, and not only would stop accepting his IOUs, but would demand that he make good on those that he had already distributed. The result would be that he would have to go to work in order to produce enough wealth to pay off his debts.

When government becomes involved, however, it destroys the smooth workings of the market. Government, in effect, legalizes the shoemaker's theft and, furthermore, allows the theft to go on indefinitely. It accomplishes this by forcing everyone to use government IOUs (fiat currency) as money.

To make matters worse, when the shoemaker stops working, the government continues to print up fake receipts (paper money) and gives the shoemaker a new supply of them each week, assigning names to these handouts such as "welfare" and "unemployment compensation." In fact, government gives large quantities of this "money" to millions of people — for a variety of reasons, ranging from "retirement benefits" to grants for special projects.

So, where does this leave the hatmaker who accepted the government's receipt in good faith as payment for the hat he produced? It leaves him as just another victim of paper-money inflation. Which, by itself, would be bad enough.

Even worse, however, he knows absolutely nothing about government's money printing policies, so he hasn't the vaguest idea why prices are rising all around him while he still has only one "dollar." As a result, he's open to the most outrageous "solutions" offered up by power-hungry politicians.

In fact, he might very well be among those fools pumping presidential candidate signs into the air at the endless rallies that saturate our television sets each night. The candidates realize that if they can convince the sign-pumping zombies in their audiences to accept false solutions (solutions that are guaranteed to further decrease the value of the paper dollar), it will put them in a position to exert even more power over the populace as a whole.

In the end, of course, it gets down to you, the individual. Which power monger are you going to vote for? Think about it, long and hard. And before answering, keep in mind that only one thing is guaranteed: You will always get the government you deserve.

Previous - Money VII - Buying Into the Con: The Inflation Rate

Next - Money IX - The Magic of the Mysterious Multiplier: Watch the Dollar Bill Disappear

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