Lending
The dependable banker lies too, a little. He has one hundred pieces of gold stored. He initially wrote one hundred promissory notes in respect of them. He prints ten more and lent them to Lucy. He is lying about the amount of silver he has per note issued. Upon issuing more promissory notes, more money is in the system. The value of that money drops. More money is needed to purchase things. With all things being equal, prices of goods and services rise. The spending power of each promissory note falls. Inflation sets in. A little inflation greases the engine, a lot is troublesome.
Lucy gave some of her notes to the tool maker in exchange for the spade and saw. The tool maker gave them to the mill owner who returned them to the dependable banker. The dependable banker is paying interest on the equivalent of one hundred and ten pieces of silver. He is also earning interest on the equivalent of one hundred and ten pieces of silver. The interest he pays out is less than the interest he charges on loans. He lives off the difference between the two. All is well. Until somebody dies, absconds or goes out of business and fails to repay what they borrowed. Any natural disaster, war, plague or pestilence spells trouble for the dependable banker and those that hold their silver and gold with him. He needs an insurance policy.
Wealth is created and destroyed daily. Farmers create food wealth. Those that eat the food destroy the wealth. An artist can create wealth by painting a picture. The buyer destroys it when they rip it up and throw it away. The canvas and paint have a value, five pieces of silver. A completed picture has a value, fifteen pieces of silver. Ten pieces of economic value has been added to the canvas by the act of painting a picture on it. If the artist is admired, liked or is famous, a signature on the painting adds another ten pieces of silver to the canvas. Market value added. When the tool maker turns the iron into usable tools, the iron is worth more. Economical value added. If the tools are high quality and they gain a reputation for that high quality, the value added is significantly more. People will pay a premium for the brand of goods that they are buying.
The tool maker can sell fifty tools for five hundred pieces of silver to a wholesaler who splits the hundred into smaller parcels. The wholesaler sells the tools in lots of fives for fifty-five pieces of silver. He gains one piece of silver on each tool he resells. That is market value added. The shopkeeper buys the tools from the wholesaler and sells them for fifteen pieces of silver each. If the shopkeeper displays them well, advertises them, markets them, he benefits from the market value added. Shopkeepers add market value rather than economic value. Transforming materials, adds economic value. Making something more desirable, adds market value to an item. One can do both. Each item that I repaired added to its economic value. Once repaired and ready to sell, I can gain additional value by marketing it in my store. I did the repairs whilst waiting for customers, rather than sitting idle.
Demand and supply changes. The desirability and usefulness of items change. The weather is rarely constant. Goods can be held up in transit. There are thousands of factors that dictate the price of something at any given moment. Markets do not act rationally, nor predictably. Chaos dominates. The greater the incentive to work, the more people produce. Reliable economic projections are difficult to make especially when political policies are changed. More forecasters get it wildly wrong than get it right, yet people are prepared to place faith in economic projections. We can be right but for the wrong reason, but will take credit for our projections nevertheless.
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