I don’t know if you heard about it, but there was this little bit of a blip on the stock markets this week. Well, maybe more of a pothole than a blip. Okay, so maybe its the beginning of a grand canyon style stock drop. But still, its only the beginning and we’re just starting to see where it will go.

Economists are complaining that the “bail out” needs to happen. That the bail out by the US Government must happen or else we face the brink of a great depression worse than that seen in 1929 and the 1930s. Personally, I say we need that recession to happen.

The entire Western economy is built on a basis of debt. People with lots of money make a profit by “loaning” those with less money in exchange for a rate of interest. In order to pay that interest, people have to work longer to pay not only the principal, but also the interest on top.

The situation we have here is that people in the middle wanted a larger slice of that pie. So they started selling mortgages to people that couldn’t really afford it. As long as the value of the property kept climbing, the mortgage wouldn’t have been an issue because even if the person that took out the loan defaulted, the value of the property still covered it. In their arrogance, they assumed that the housing market would continue to appreciate and at no point decline or contract. Suddenly, lots of properties started declining in value and then other market factors (such as the increased living costs) caused people to default on their mortgages. Of course, as the housing market contracted and those properties devalued, the mortgages were suddenly worth more than the properties.

Now the middle men are in bad situations. They have property worth less than the money they’ve loaned out. They cannot liquidate the property to recover the debt and so they are in a negative situation. As you know, you cannot run a business based on a negative profit. If you can’t pay your bills, you can’t continue to work. This applies to a family (which should also be run as a business) as much as it does to Main St.

The problem we face now is that the general public see the bailout by the Federal Government as being a bail out for Wall St. Its seen as the government giving the bankers a break for their bad business practices, while the average Joe on the street has to suffer the consequences, and then pay the increased taxes to pay for the bankers to get let off the hook. Of course there is going to be a massive backlash over this.

Officially, silver was settled upon as the basis of the American value system in the 18th century and the Silver Dollar was born from the thaler. Gold, silver and other commodity precious metals were used as the basis of currency for an extremely long time. That was screwed up entirely in the 1920s and 1930s when the value of the US Dollar was no longer pegged to the quantity of Gold and precious metals the country held in its reserves.

The original idea for paper based money was that the piece of paper you receive from a bank is actually an IOU from the Reserve Bank. The bank is making a statement that this piece of paper, if traded back to the bank, has a value equal to $20 or whatever is on that piece of paper. Originally that was based on the value of Gold at the time. The bank held a “reserve” of the amount of gold it had given out in promissory notes. This is was called the Gold Standard. There was enough gold held in reserve to cover all notes issued.

In the 19th century, that changed. The introduction of Fractional Reserve Banking saw things change significantly in the way money was managed. These notes of tender that the banks gave when you deposited your physical money (precious metals and such) became tender themselves. The banks were putting the real money into other ventures in an effort to turn that money into profit bearing resource. Investing in business with the expectation of a dividend for example. They didn’t actually hold on to all the money you put into them, but would keep a small amount in reserve to cover any deposits someone might make.

What ended up happening was that people would take the promissory note from the bank and use that to trade for goods and the like. After all, it was as good as the real thing, right?

In the 1920s and 1930s, the US Government decided that the value of the currency did not need to be defined by the amount of Gold or Silver held in reserve. After all, money was a human construct and so it could be defined by anything. All that was required was that the people believed the money had value. And this is the most important part of where things started going horribly wrong.

If you want to understand it further, I strongly recommend you read the Wikipedia article on Fractional Reserve Banking because it will give you a much better insight into how things work after the fateful changes of the 1920s and 1930s.

Personally, I strongly believe that we need to return to a situation where value is defined by a commodity rather than some intangible concept. That my services have a value, your produce has a value and it should be agreed upon that my services are equal to a certain amount of said commodity, and your produce is equal to a certain amount of said commodity. If I want to buy your produce, then I need to sell my services to someone in exchange for that commodity so I can buy your produce with that commodity. And that commodity needs to be something real, beyond a piece of paper. Or at the least, a piece of paper that can be exchanged directly for an amount of the commodity.

This would break us from the current debt based economy we live in today and allow all economies to know exactly what they’re worth.

Who knows. With the way people are trading carbon, maybe that commodity will be oxygen one day soon. :-P