For Us, the Living

by Robert A. Heinlein

  “Surely.” Perry arose and returned with them. “Here are a couple of packs.”

  “Very well. Let each card represent one unit of production of equal value. They represent all sorts of items; clothing, food, air cars, games, stereo records, books, and so forth. For convenience we split them up into equal-valued units. Now take the chess men and give them their functions. The black king is our entrepreneur, industrialist, or farmer.” Davis wrote this on a slip of paper and tucked it under the base of the black king. “There. We will know him when we see him.” You will notice that his tag reads ‘Entrepreneur-Consumer’ to remind us of his dual function. The black queen is his wife. Place her with him. Put a pawn with them as their children. Now another pawn for her father who is dependent on them. He’s a crusty old gentleman who hasn’t worked since McKinley was shot and thinks the country is going to hell. The white king is the banker. We’ll write a tag for him, ‘Banker-Consumer’. This box you keep the chess men in will do as a bank, and this book can be a factory. Put tags on them, but don’t place the factory on the table yet. It has not yet been built. The black bishop owns the land on which the factory is to rest. He must first be satisfied. The white castle owns a process to be used in our manufacture of playing cards. Now take five or six pawns and mark them ‘Laborers-Consumers’. Mark the black horses ‘Owners of Raw Materials-Consumers’. Take the white bishops and mark them ‘Government Employees-Consumers’. Take a separate tag and mark it ‘US’ but don’t place a chessman on it, as we must not personify the government. ‘US’ is all of us, acting collectively.6

  “Now we are ready to run through a typical economic cycle. Call it one eon in length and let it be the time from the building of the factory until it is depreciated in value to zero and is obsolete. Something around twenty years if you must think in definite terms, but it isn’t necessary to do so. Suppose you identify yourself with the entrepreneur, Perry, and I’ll play the other pieces. You see a demand for playing cards and determine to manufacture them. You have your eye on a suitable site which you can lease at a reasonable price, and you know of a new process that you can buy up. But you haven’t the working capital, all of your wealth being tied up in tangible property which you don’t want to liquidate. So you go to the banker and ask for a loan of a hundred shekels. You explain your idea and offer security worth quite a bit more than a hundred shekels. From where we sit we see that the bank contains only twenty shekels, the capital reserve required by law. One might think that the banker would say, ‘Sorry, Old man. You’ve got a sound proposition and I’d like to accommodate you, but there isn’t that much money in the bank.’ But he says nothing of the sort; he lends you the money. How does he do it? You give him a promissory note saying:

  Dear Banker,

  I.O.U. 100 shekels at 10% per eon.

  Signed,

  Entrepreneur

  He enters that on the books as a bank asset, credits your account with one hundred shekels, gives you a bank book, and some blank checks, and you thank him for the money, which is new money, monetized by your security and existing only as bookkeeping entries. To symbolize this I hand you these hundred chips, which you must think of as bank credit, or check book money, not as greenbacks, nor metal coin. But you may use them as money in every respect for the banker will cash a few of them from time to time out of the small stock of cash he keeps on hand. He can afford to do this because only on rare occasions will all holders of bank credit ask for cash all at once, placing a run on the bank. Usually cash money paid out by the bank comes back the next day and is re-deposited.

  “You have your hundred shekels now and can commence operations. You lease a site for four shekels for the eon. Put four chips by the black bishop. You build your factory, eight shekels for raw materials, eight shekels for labor. Pay out your chips. Now pay the inventor four shekels for the use of his process. Your wages for labor during the eon amount to forty-four shekels. Pay it out. And for raw materials thirty shekels. You will have taxes of ten shekels during the eon.”

  “I can’t pay them. I’ve only two chips left.”

  “Never mind. You’ll be selling some playing cards soon, and can pay them as you go along. You now manufacture during the eon sixty-three playing cards. Stack them there by the factory. You need eight shekels profit in the course of the eon to support yourself and your family. You figure out what your market price must be for playing cards in order to accomplish this. What would it be?”

  Perry set down his expenses and added them up as follows:

  Land rent

  4

  shekels

  Factory (labor)

  8

  "

  " (material)

  8

  "

  Production (labor)

  44

  "

  " (material)

  30

  "

  Royalty to Inventor

  4

  "

  Taxes

  10

  "

  Profit

  8

  "

  Interest on loan

  10

  "

  126

  shekels to be recovered as price.

  63 produced units to be sold; therefore price must be 2 shekels each.

  Perry looked up. “I get two shekels per card.”

  “Correct. As you can see, I arranged the figures to give round numbers.”

  “But I can’t possibly sell sixty-three cards at that price. There are only ninety-eight shekels out there to buy my product.”

  “Don’t be in a hurry. Start selling and see what happens. We will assume this time that all these people that received money from you need all the consumption goods they can afford. Sell to them.”

  Perry dealt out cards to ‘Labor’, ‘Land owner’, ‘Inventor’, and ‘Owners of raw materials’, and collected two chips for each card.

  “How many cards do you have left?”

  “Fourteen.”

  “You have a lot of money on hand. Better pay your taxes.”

  “Okay.” Perry placed ten chips on ‘US’.

  “Now I’ll act for Uncle Sam and pay the public servants four shekels, buy raw materials for four shekels, and use two shekels to buy consumption goods from you.”

  “Here you are.” Perry handed Davis a playing card who placed it on ‘US’ and gave Perry the remaining two chips.

  “Now sell goods to ‘Public servants’ and ‘Owners of raw materials’.”

  Perry did so, handing out four cards and receiving back eight shekels.

  “Now pay the interest on your loan. You’ll be doing so in the course of the time period.”

  “Okay, here’s ten shekels.”

  Davis placed them in the bank. “The banker, with his family, clerks, and so forth, needs some consumption goods. Here are two shekels.” Perry solemnly received them and proffered one card to Davis.

  “Now pay yourself your profit of eight shekels. Turn it over to your wife. She handles the money in your household. She takes it and spends it for consumption goods.” Perry took eight shekels, placed it by the black queen, then picked it up again and placed it by the black king, and placed four cards under the black queen. Davis added a comment. “That operation is symbolic of thousands of wives of entrepreneurs spending their husbands incomes on all manners of goods produced in thousands of factories.

  “The eon is over. The cycle is finished. Your factory has depreciated to no value at all. I must remind you that your note is due at the bank.”

  “Wait a minute. Why do you assume that the factory is now worthless?”

  “It isn’t necessary. Had you figured for a shorter period, the cost item labeled ‘Factory’ would have been just the percentage of depreciation during the shorter period. There would have been a smaller number of articles manufactured, smaller items in all respects. The final cost per unit would have been the same, but we decided to run through a full cycle, from the beginning to the end of a p
roducing unit. But come, come, you are stalling for time. What about my note? You owe me one hundred shekels.”

  Perry counted up his chips and grinned at him. “You’ll have to whistle for it. I have only ninety-two shekels. I have four playing cards you can have for the balance.”

  “I’ve no use for playing cards. I’m a banker and I have your promise to pay.”

  Perry shrugged his shoulders and did not reply.

  Davis continued. “Very well let’s get on with the next stage of the game. You have four units of ‘over-production’ and can’t quite pay your note at the bank. But your banker respects your ability. Your original security is still good, and the banker says that conditions are essentially ‘sound’. He re-finances you to go into production again. You sign a new note, this time for one hundred and eight shekels and now have one hundred shekels to your account. But your banker cautions you not to be guilty of ‘over-production’. You go away, feeling somewhat confused as you don’t see where you made your mistake, but the banker must be right for you certainly were left with four playing cards that you could not sell. You decide that the market only requires fifty-nine cards instead of the sixty-three you produced. So you do it all over again, producing only fifty-five cards which with your carry over of four gives you fifty-nine to sell. What is the result?”

  “Why, I come out even I suppose.”

  “Do you? Last time you spent forty-four shekels on wages and thirty shekels on materials to build sixty-three playing cards. How much do you spend this time?”

  “Let me see. Forty-four and thirty is seventy-four. The labor and materials cost per unit is one sixty-third of that.” Perry set it up on his slide rule. “It comes to one point one one seven five (1.1175) shekels per card. I’m producing fifty-five cards this time. Fifty-five times one point one seven five is sixty-four and seven-tenths shekels.”

  “Those people bought thirty-seven cards with their seventy-four shekels last time. What can they buy this time?”

  “Thirty-two and a fraction.”

  “Exactly. You sell your best market five fewer cards than last time. As a result of doing the only reasonable thing, you have more cards left over than before, you’ve thrown some people out of work, you have created less real wealth for the community to use and you are even farther from being able to pay off your note at the bank for you now owe one hundred and eight shekels and have only ninety-one with which to pay.”

  “Ninety-one? I figured ninety-two.”

  “No, ninety-one? Perhaps you forgot that your interest is eleven shekels on a hundred and eight.”

  “That’s right. I figured ten, like last time. Now what happens? It looks like I’m going broke.”

  “Wait a bit. Do you see what caused the original ‘overproduction’?”

  “Why yes, the banker got money out of me that he didn’t turn around and spend with me. Everybody else spent their money as it came in.”

  “Then what’s the trouble?”

  “Well, it looks to me as if it was the interest you expected me to pay. If I hadn’t had to pay you that interest I’d have come out even.”

  “Not so fast. They weren’t exactly equal and could not therefore have been the same thing. Even bankers have to eat. Why should he run a bank if he isn’t paid to do it? Tell me, what would the effect have been if anyone else had saved part of his income instead of spending it?”

  “Ohhhoh!” Perry slapped his thigh. “I see! If anyone saves income that he receives from the cycle, it is thrown out of balance and over-production results.”

  “Exactly. In the problem that we have just gone through I cast the banker as the thrifty villain simply because banks were the worst offenders. They charged as much interest as they could get, and spent very little on consumption, whereas the workers, by and large, had to spend all they got as they went along. But all were guilty of the economic crime of not spending all their purchasing power and thereby saving themselves into bankruptcy, even a father with his life insurance policy and baby with his penny bank.”

  “Wait a minute, Master Davis. It seems to me that money saved eventually finds its way back into purchasing, even after several years. It all balances out in time. There should have been some consumers spending their savings in that first cycle to make up for those who managed to save.”

  “There were, of course. If savings are actually tucked away in a sock, it doesn’t do much harm. It balances out with just a small carry over of inventories. But most money is not saved that way. Ordinary people invest in life insurance and savings accounts. Industrialists and financiers put it into capital expansion—use it to increase production. In each case it goes into new production.”

  “But how can that be harmful? We have just shown that money used for production creates new purchasing power to buy the goods produced.”

  “That’s true but you are looking at just one part of the picture. Listen to me carefully. This is the crucial point: Potential purchasing power not spent for consumption but saved and invested for production in a later cycle has appeared as cost in both cycles. When it reappears as purchasing power in the second cycle, it is needed there, and still leaves the first cycle out of balance. For example, if money saved out of your playing card cycle were saved to finance a jelly bean production cycle every shekel of it would appear as cost in the jelly beans and would be needed to purchase jelly beans. It’s not available to buy playing cards. To make this exposition rigorous I should mention the possibility that capital funds are occasionally spent on consumption and that money is sometimes taken out of production entirely, but this also produces unemployment and its attendant evils. The Panic of 1907 was of this nature, artificially created by the Morgan Bank and associated interests.

  “But let’s get back to your playing card factory. It is in trouble. These cycles continue. Each time the bank owns a bigger piece of your business and more of your employees are out of work. Eventually they are in dire distress and private charity cannot carry the load. Congress provides relief. At first Congress tries to pay for relief with new taxes but you business men howl that you are losing money now, which is true. Taxes on everybody—such as the sales tax—rob Peter to pay Paul, and increases purchasing power not a whit. It helps a little to tax the higher bracket incomes but in the long run that inhibits production by striking at a source of capital expansion. Congress is forced to look elsewhere for money to subsidize purchasing power and provide relief, for the spread between production and purchasing power has grown enormous, more than thirty percent in your day, billions of dollars a year. Some congressman from the middle west who cut his teeth on the Bryan campaigns proposes that the government print greenbacks to provide relief for the unemployed, but the bankers condemn this as ‘unsound’, ‘inflationary’, ‘radical’, ‘striking at the roots of our institution’. They have great political power and carry their point. There is but one thing left to do and the government does it. It borrows for relief from the banks. True, the banks have very little cash money but the same law that permitted them to lend you money out of the inkwell enables them to lend to the government with the whole United States as security, the security being represented by interest-bearing tax-free bonds. The national debt climbs sky high but the system is held together a few more years, until the banks own practically everything, even the government.”

  Perry ran his hand through his hair and whistled. “You paint a pretty bleak picture. What is the answer?”

  “We undertook to set up a general problem which, when solved, would answer the question in all cases of ‘How much money does a country need?’ We set up the general production-consumption cycle and worked through some problems under the conditions of your period. We should now be able to work the problem in general terms to arrive at the general answer. I believe you could do it with a little thought, but I will state the general answer for you to inspect and approve or reject. Here it is:

  A production cycle creates exactly enough purchasing power for its cons
umption cycle. If any part of this potential purchasing is not used for consumption but instead is invested in new production, it appears as a cost charge in the new items of production, before it re-appears as new purchasing power. Therefore, it causes a net loss of purchasing power in the earlier cycle. Therefore, an equal amount of new money is required by the country.

  “This money must be a new issue, not borrowed from the banks, for there is no way to pay it back. To tax it back from the country as a whole is to destroy necessary purchasing power at a later date. To tax it back from the bondholders is a polite name for cancellation. But that was necessary and was eventually done, in a roundabout manner.”

  “How?”

  “By paying off the bonds with new money, then getting it back with inheritance and income taxes. There are several interesting corollaries to our main proposition. Here is one, ‘No economic system can create its own new capital.’ That must be done by the fiat of the sovereign state. The banks can’t do it, even when they are permitted to create money, as they must recover the money they create and loan, plus a charge for the service, or ‘interest’. Furthermore, banks should not be permitted to create money at all, because they are, of necessity, interested only in making a profit. They will inflate or deflate the currency to make a profit regardless of the monetary needs of the country. Their interest rates are a reflection of an artificially created money market with no relation to the cost of the service. No, banks must be required to loan only deposits placed with them for that purpose, that is to say, their reserves must be 100%, not 10% as in your day. They must keep entirely separate the funds left with them for commercial exchange, i.e. commercial checking accounts, funds placed with them to invest or loan, and funds deposited for safe keeping. In such a case the customer pays for the service of checking and exchange, pays for the service of safekeeping, and receives interest on funds deposited for investment. But the banker no longer manipulates the money supply of the nation to suit his convenience.