Part II:
The Islanders have begun to fight amongst themselves. Whenever anyone went to the store to buy a coconut to eat, or a stylish hat to wear, there were always others there willing to bid higher. This was creating tension among the Islanders who blamed each other for overbidding and the store owners for taking advantage of them and gouging them with the high prices. One shopkeeper decided that it was immoral to raise prices and continued to sell coconuts at the original price of two coconuts; unfortunately, after selling out his entire stock in a matter of minutes, there was a small riot of the Islanders who were unable to get into the store fast enough. Some of them who were able to fill their carts risked being beaten and having their coconuts taken. Angry shouts of “Greedy! and “Hoarder!” were overheard by the Outsiders watching from the beach.
The Islanders could be forgiven for their panicked behavior, however, because now a famine had broken out on the island. It seems that as the Outsiders began to arrive in ever larger numbers (word has spread back to their ship of the island paradise, drawing them to shore for their share of the bounty) many of the Islanders had decided to join the booming massage industry. This seemed a logical move because every time a new Outsider came they brought shells, and more than anything they loved to be pampered all day, every day. The problem was that as the Islanders invested in building massage tables and training in massage techniques, they were neglecting their less profitable coconut trees. The ripe coconuts were harvested but the pruning was neglected; this meant that the trees produced fewer coconuts, and when the un-pruned trees grew unbalanced they sometimes fell over in the wind and died. Not only were the Islanders feeling bitter toward the shopkeepers, more and more had begun resorting to theft and fraud to feed themselves and their families.
The Outsiders noticed that the previously calm and well-balanced society was becoming strained. An attempt was made to create a security force, but as the Islanders had always gotten along so well it was not in their natures to dominate each other. So although they had to pay ever-higher sums, they convinced some of the Islanders to switch over to making clubs, bows and arrows. The Outsiders had told them that the weapons were to be used hunting game so the Islanders were surprised to find that the Outsiders had gone instead to the neighboring island and recruited those natives who had been previously exiled for thievery and other crimes. Having restored order, the new “security” force was greeted with a cautious enthusiasm by the Islanders.
The island was calm again, but the situation continued to deteriorate. The number of Outsiders living on the island yet producing nothing had grown to make up twenty five percent of the island’s population; including the new security force brought the total almost one third of the population living off of the production of the other two thirds. Coconuts were in short supply, hats were tattered, and it was impossible to find a massage table without a walrus sized Outsider, grown fat and lazy, draped over it. And when the coconut dealers lost their taste for shells and began instead to demand real goods in trade, the Outsiders had cracked down.
The Security Force was ordered to confiscate ninety percent of the shell stock of each Islander; then, a new set of prices was established and the Islanders were ordered, under pain of death, to sell at the established rates. The Outsiders called the shells “legal tender,” which was strange to the Islanders. They were accustomed to calling “tender” something that was either “soft or affectionate”, or then “something offered.” It seemed to them that making the money “legal” had changed its nature. In fact the nature of the whole island had changed. The Islanders were living daily with a sense of dread. The old and infirm had been called to work repairing the coconut trees. The young were being taught to inform on their parents. And for all of this the Islanders watched their standard of living drop while the Outsiders and their Security Force, the former exiles!, were living comfortably trading shells and fear for food and beer.
* * *
The Islanders have discovered, by its absence, sound money. They are forgiven for not understanding the nature of the change of their situation at first; when the Outsiders arrived the shells they had brought with them were valuable to the Islanders, and therefore trading for them was natural and correct. But for a thing to be sound money, it must be scarce relative to the goods it buys. Each successive shell, as with any good, is slightly less valuable to someone than the last because it will serve a less valued end. The first glass of water saves your life in the desert, but the fiftieth washes your feet. This is the law of diminishing marginal utility. When the Outsiders poured shells into the economy without a corresponding increase in production, prices had to rise. Where the shells were poured in, in this case initially into the massage industry, the prices rose first. The massage therapists had more money to spend, and when they and the Outsiders spent, it was before the prices everywhere else had risen because rising prices are a result of the increase in money. The Islanders would never have made the mistake that it was a shortage of money in the economy that made goods hard to sell, but they were fooled into thinking that a surplus of money meant wealth. By the time they woke up to their mistake the Outsiders had not only forced them to live with it, but had tricked them into paying for their own oppression.
The Islanders would have preferred not to provide services to the Outsiders, or to feed and clothe the Security Force, but they couldn’t have stopped if they wanted to. They were forced to accept shells in payment, and because they all looked the same the Islanders never knew if it was an original or one of the many from the boat that were being gradually filtered back into the economy as payment to the Security Force or for the maintenance of the Outsiders. Still, prices began to creep back up, and the Outsiders had to take ever more controlling measures to combat this tendency.
NEXT WEEK: Part III
Theodore Phalan is an economics student at George Mason University and a previous Sound Money essay contest winner.
Image by dan / FreeDigitalPhotos.net.
