Wealth is Produced, Accumulated, and Destroyed

How Wealth is Produced, Accumulated, and Destroyed

As we understand it, when a depositor makes a deposit he is, in essence, lending money to the bank.  But what does the money represent? If the deposit is earned money, it represents something of equal value produced by the depositor’s labors. The deposit also represents something the depositor would rather save than consume.

For example, the deposit could represent a coffee table. In this regard, there are only a few things to do with a surplus coffee table. You could store it for your own future use.  You could trade it with a neighbor for something of equal value.

In each of these instances, there is no increase in capital. The coffee table remains a coffee table.  Nothing more.  Nothing less.  Alternatively, you could sell the coffee table for money.  If you then stuff the money in your mattress, you have the equivalent of one coffee table.  Again, there’s been no increase in capital.

But suppose you deposit the money at your bank and leave it there at interest.  You would’ve loaned the bank your surplus labor in the value of a coffee table.  And the interest paid represents the beginning of an increase in capital.

Now consider that after your deposit, an enterprising carpenter, who is without tools and materials, borrows your deposits from the bank to buy a table saw, doweling jigs, and red oak lumber. These tools and materials represent your coffee table.

But with these tools and materials, the carpenter gets to work and makes three coffee tables. One he keeps for himself.  The other two he sells. With the earnings of one of the coffee tables he repays the bank the money he borrowed to buy the tools and materials.  After that, he still has the proceeds of the third coffee table, which is profit.

Coffee tables to die for… and there’s a case of Stroh’s beer too! [PT]

Then, instead of spending this profit, he saves it.  He deposits it in the bank at interest. Now the bank has the capital of two coffee tables.  In addition, the carpenter still owns the tools.  All from one surplus coffee table to begin with.

Through this process wealth has been produced and accumulated.  And more wealth can be produced and accumulated in this manner, provided the labor is not lost.  Yet just as wealth has been produced and accumulated, it can also be consumed and destroyed…

Now suppose a third man comes and borrows all of the money that the carpenter had deposited.  But instead of investing it in his own labor and ingenuity, he uses it to make an ill-advised speculation on shares of General Electric.  The borrowed money, for both the lender and borrower, represents a loss.

Specifically, in this instance, the loss is equivalent to the amount of labor necessary to produce two coffee tables. Still, in this example, the loss is limited.  The borrower learns a valuable lesson from the school of hard knocks.  The lender can likely write it off without much effect.

Real wealth destruction, however, the sort that most inhabitants of the globe – including you – are subject to, is a whole different ballgame…

The Zealous Pursuit of State Sponsored Wealth Destruction

Remember, the value in money is in what it represents