August 9, 2011 § 2 Comments
A couple weeks ago, the boys and I hopped into the truck and drove a handful of miles to a small farm at the dead end of a dirt road. There, I traded $200 for a pair of chunky, copper-colored Tamworth-Old Spot cross piglets.
Piglets for $100. A few years ago, I couldn’t have imagined it, but now it’s pretty much the going rate, at least around here. Some charge a bit more, some a bit less, but $100 is pretty much dead-on average. Ten years ago, back when we first started raising pigs, the going rate was about half that. I’m almost certain we paid $40 each for our first piglets.
Now, I have no problem spending money on piglets because unlike money, a pig can be eaten. To my mind, a good chunky piglet is better than money in the bank, a truth that becomes particularly resonant when I consider that the bank doesn’t really have any of my “money.” Or, at the very least, would be hard-pressed to come up with it if more than a few percent of its depositors demanded their holdings on any given day. This is probably not the place to delve into a detailed explanation of how modern banking works, but this salient point is worthy of mention: It is highly likely, if not certain, that your bank does not hold enough cash to cover more than 10% of its deposits. Comforting, eh?
Believe it or not, there’s a direct connection between the rising price of piglets and the fact that your bank doesn’t actually have your money. This connection is what’s known as “fractional reserve banking,” and basically what it means is that banks are required to hold in cash reserves only a fraction of the value of the deposits they hold and the loans they write. When we borrow money from a bank, we tend to think that we’re borrowing the bank’s money. This is emphatically not true, as banks are allowed to loan at a rate at least 10x their cash reserves.
The obvious question is: Where does the loan “money” come from? To which the only honest answer can be: Nowhere. In essence, the lending institution creates it. Indeed, this is how most of the money in our economy is created: Not by printing, not by so-called economic stimulus, but by simple lending. And this is why our financial and political leaders will do everything within their power to stave off a credit crunch.
So what the hell does this have to do with the price of piglets? Only this: Because banks and lending institutions are the primary sources of money creation, and because money creation lays the groundwork for rising prices by flooding the market with currency and credit that must be absorbed by available goods and services, the fact is that our nation’s banking system (and that of most other nations) is directly responsible for my having to shell out 200 bucks for two piglets a few weeks back.
I am struck by this irony: It is the very worthlessness of our currency, the purchasing power of which is constantly being eroded by the leveraged means of its creation, that makes things seem expensive.
And the piglets? Why, they are doing just fine, fattening nicely on a diet of milk and woods forage. Frankly, I wouldn’t sell them for anything.