I found this lengthy quote from Thomas Edison in a recent book by James Rogers called "Power Currency." I will be reviewing his book in a future post. In this post, I'd like to quote Edison as he was responding to an interviewer about Henry Ford's idea in 1921 of having the government build power plants (like hydroelectric dams) by issuing currency against the power plant instead of getting people to invest into interest-bearing bonds. (Note: this is an idea that James Rogers totes throughout his book, so I'd like to present the argument before I point out the problems with this idea of having the government issue currency to build power plants rather than having the private sector build power plants via issuing bonds and stocks. Note also that there is a general level of paranoia that runs throughout this Edison quote and which echoes in Roger's book. For those of you have read my previous posts, I have a severe distrust of our current fiat currency, but that doesn't mean that I have a severe distrust of making money. I think that the decision on where and what type of project to invest in should come from those people who are investing their own money...not by politicians who use taxpayer money to invest in projects, and certainly not by politicians that can create money out of nothing to invest in projects, even power plants as suggested by Ford & Edison.) And now, I present to you Edison's stance on allowing government to issue currency (rather than bonds) to build power plants:
"Make it perfectly clear that I'm not advocating any changes in banks and banking," said Mr. Edison (in 1921). "Banks are a mighty good thing. They are essential to the commerce of the country. It is the money broker, the money profiteer, the private banker that I oppose. They gain their power through a fictitious and false value give to gold.
"Gold is a relic of Julius Caesar and interest is an invention of Satan," Mr. Edison continued. "Gold is intrinsically of less utility than most metals. The probable reason why it is retained as the basis of money is that it is easy to control. And it is the control of money that constitutes the money question. It is the control of money that is the root of all evil.
"Then there is another way--the method my friend Ford proposed the other day. He proposes just to go along and forget about gold. He says that the government can finance Muscle Shoals without applying to money brokers for permission, and I think that he is absolutely right about it."
"But would not Mr. Ford's suggestion that Muscle Shoals be financed by issuing currency raise some objection?" Mr. Edison was asked.
"Certainty. There is a complete set of misleading slogans kept on hand for just such outbreaks of common sense among the people. The people are so ignorant of what they think are the intricacies of the money system that they are easily impressed by big words. There would be new shrieks of 'fiat money,' and 'paper money' and 'greenbackism.' And all the rest of the it--the same old cries with which the people have been shouting down from the beginning.
"Maybe they can't shout down American thinkers any longer. The only dynamite that works in this country is the dynamite of a sound idea. I think that we are getting a sound idea on the money question. The people have an instinct which tells them that something is wrong, and that the wrong somehow centers in money. They have an instinct also, which tells them when a proposal is made in their interests or against them.
"Now here is Ford proposing to finance Muscle Shoals by an issue of currency. Very well, let us suppose for a moment that Congress follows his proposal. The required sum is authorized--say $30 million. The bills are issued directly by the government, as all money ought to be. When the working men are paid off they receive these United States bills. When the material is blocked, it is paid in these United States bills. Except that perhaps the bills may have the engraving of a water dam, instead of a railroad train and a ship, as some of the Federal Reserve notes have. They will be the same as any other currency put out by the government; that is, they will be money. They will be based on the pubic wealth already in Muscle Shoals, and their circulation will increase that public wealth, not only the public money but the public wealth--real wealth.
"When those bills have answered the purpose of building and completing Muscle Shoals, they will be retired by the earning of the power dam. That is, the people of the United States will have all that they put into Muscle Shoals and all that they can take out for centuries--the endless wealth water power of the great Tennessee River--with no tax and no increase of the national debt."
"But suppose Congress does not see this, what then?" Mr. Edison was asked.
"Well, Congress must fall back on the old ways of doing business. It must authorize an issue of bonds. That is, it must go out to the money brokers and borrow enough of our own national currency to complete great national resources, and we then must pay interest of the money brokers for the [project]...
"That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.
"Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, but for the loan of $30 million of their own money to people of the United States should be compelled to pay $66 million--that is what it amounts to, with interest. People who will not turn a shovel full of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues, the interest is always greater than the principle. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 percent to the stated costs.
"But here's the point: if our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good, also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.
"It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the government were no good, then the bonds issued would be no good either. It is a terrible situation when the government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold.
"Look at it another way. If the government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt-edged paper. Why? Because the government is behind them, but who is behind the government? The people. Therefore it is the people who constitute the basis of government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest-bearing currency on Muscle Shoals, instead of the bankers and receiving the benefit of the people's credit in interest-bearing bonds?
"The people must pay anyway; why should they be compelled to pay twice, as the bonded system compels them to pay? The people of the United States always accept the government's currency. If the United States government will adopt this policy of increasing national wealth without contributing to the interest collector--for the whole national debt is made up of interest charges--then you will see an era of progress and prosperity in this country such as could never have come otherwise."
Now that you've seen Edison's thought on Ford's idea of letting the government issue currency to pay for power plants, I'd like to discuss the problems with this idea. It's the basic problem of socialism vs. free-market capitalism. Who should make decisions about what projects to build in our society? Should the government decide or should people who have invested their own money decide? (There is no right answer to this problem. There's only history to give us suggestions as to which route to take.)
My opinion is that the decision on which projects to invest in should be made by those people who have invested their own money into the project. And those people should be rewarded for their investment by receiving interest on their loans. I do not believe that interest is "the invention of Satan," as Edison believed. Making money via interest is a good thing because it shows that the project is successful. People should be rewarded for making good business decisions. Making good business decisions require years of hard work...figuring out good projects from bad projects...years of training and skill go into making good business decisions, just as it takes years of training to be a skilled technician.
Ford and Edison have an interesting idea (even though their version of it is complete socialism.) The idea is that the amount of money should somehow be proportional to the amount of power that the US can generate. This is the basis of an electricity-backed currency. (In the type of electricity-backed currency that I support, the government does not decide where or what type of power plants to build, and does not set the price of electricity; instead, the Federal Reserve either prints money or removes currency from circulation so as to maintain a constant average price of electricity in the US.) I think that Ford and Edison had a glimpse of the connection between electricity and currency, but unfortunately, their connection relied on government making the decision on where to build power plants, not individual investors.
Here's the problem. What happens if nobody wants to buy the electricity from the power plant? Or what happens if the operators all decide to go on strike? What if the power plant was poorly designed and doesn't generate nearly as much power as expected? Or worse, what if the money issued for the project just goes into the hands of the campaign contributors who gave money to the politicians who voted for the project?
If any of these things happen, who ends up paying for the project? The answer: American taxpayers. They pay for it because there will be more currency on the street, but no more power/wealth to back up the money. This means that there will be slight inflation, and all of their money will be less valuable. Their purchasing power will have decreased because the government printed money to pay the workers on the project, but here's the key point: there is no more power available than there was before the currency was printed to pay for the failed project.
In the case of Muscle Shoals, Edison and Ford were right. The American taxpayer would have greatly benefited had the government printed money to pay for the project rather than go out for loans. Why? Because the project was and is still successful.
But there are as many cases of government corruption as government success. Based off of my understanding of the dynamic history of the human species, my opinion is that the government should not be making business decisions on where or what type of projects to invest in. We need to let those people who actually have money invested into a project make that decision. This also means that we can't bail out investors who make bad decisions. This means not bailing out bankers and it means not bailing out car dealerships/companies.
This gets back to the whole idea of risk vs. return. Edison had no conception of the idea of the 'time value of money' or 'rate vs. risk.' (For that manner, neither does James Rogers.) If investors make large risks, then they should expect higher average rates of return on investment. But this also means that they should pay the price for their bad decisions, and not get bailed out. If you fly too high, the Sun might melt your wings, causing you to crash into the sea. Don't expect us flying in the middle to come rescue you if you went for the high risk investment while the rest of us played it safe in the middle.
So, that's my analysis of Ford's and Edison's idea of government-backed currency to build power plants. Ultimately, the decision on where and when to build projects should be make by investors who have skin in the game and who will not be bailed out if the project goes sour. In the long run, this is the best way to grow our economy and to grow life. Requiring interest payments and striving for high rates of return on investment is not the work of Satan (as suggested by Thomas Edison.) The goal of life is to obtain high rates of return on investment so as to grow society and life at the fastest rate possible.