promoted 1 year 8 months ago, posted 2 years 7 months ago
| 1567 views
I just read this on the webs and decided to pasta it here.
I know it is long, but it is well worth the read. Do it. You'll thank me.
Once upon a time there were three men—Able,Baker, and Charlie—who lived alone on an island. Far from a tropical paradise, the island was a rough place with no luxuries. In particular, food options
were extremely limited. The menu consisted of just one item: fish.
Using this inefficient cient technique, each could catch one fish per day, which was just enough to survive to the next day. This activity amounted to the sum total of their island economy. Wake, fish, eat, sleep. Not much of a life, but hey,
it beats the alternative.
And so, in this supersimple,sushi-based island societythere are….
Everything that is produced is consumed!
There is nothing saved for a rainy day, and there is nothing left to lend.
Although our island dwellers lived in a primitive society, it didn’t mean that they were stupid or lacked ambition. Like all humans, Able, Baker, and Charlie wanted to improve their living standards. But in order to do this, they had to be able to catch more than one fi sh apiece per day, which was the minimum they needed to survive. Unfortunately, given the limitations of their bare hands and the agility of fish, the three were stuck at subsistence level.
One night, looking up into the star-studded sky, Able began pondering the meaning of his life…. “Is this all there is? There must be more to life than this.” You see, Able wanted to do something besides fishing by hand. He’d love to make some better, more fashion-forward palm-leaf clothing, he wanted a place to shelter himself from monsoons, and ultimately, of course, he wanted to direct feature films. But with his daily toil so devoted to fishing, how could these dreams
ever come true? His mental wheels started turning…and suddenly an idea for a fish catcher was born…a device that could vastly expand the reach of the human hand while severely reducing a fish’s ability to escape after the initial grab. With such a contraption, perhaps more fish could be caught in less time! With his newfound time, perhaps he could start to make better clothes, build a shelter, and put the finishing touches on his screenplay.
As the device took shape in his mind, the orchestral music began to swell, and suddenly he conceived of a future free from daily fish drudgery. He decided to call his device a “net,” and he set about finding materials to build one.
The next day, Baker and Charlie noticed that Able wasn’t fishing. Instead, he was standing in the sand, making string out of palm bark. “What gives?” asked Baker. “Are you on a diet or something? If you keep sitting there tying those strings, you’re gonna go hungry.” Able explained, “I have been inspired to create a device that will unlock oceans of fishing possibilities. When I’m finished, I’ll spend less time fishing, and I’ll never go hungry again.” Charlie rolled his eyes and wondered if his friend had finally lost his mind. “This is madness, I tell you…madness. When it doesn’t work, don’t come crying for a piece of my fish. Just because I’m sane doesn’t mean I’m gonna pay for your crazy.” Undeterred, Able continued weaving.
That night, while Baker and Charlie slept with full stomachs, Able dealt with hunger pangs while images of luscious fish danced in his head. However, his pain was more than overcome by his hope that he had done the right thing and that a bright, fish-fi lled future awaited. The next day, Baker and Charlie made much sport of Able’s invention.
“Hey, that’s quite a nicelooking hat,” said Baker.
“A little hot for tennis, don’t ya think?” added Charlie.
“Laugh it up, boys,” responded Able, “but let’s see who’s laughing when I’m up to my armpits in fish guts.”
As Able charged into the surf, the ridicule kept coming as he awkwardly handled his strange new device. After a few minutes he got the hang of it and in no time snagged a doozy.
Baker and Charlie stopped laughing. When, in just another hour, Able landed his second fi sh of the day, the boys were in awe. After all, it generally took them all day to get just
one fish! From this one simple act, the island’s economy was about to change in a very big way. Able had just increased his productivity, and that was a good thing for everybody. For the moment, Able pondered his sudden boon. “Since I can provide two days of food with only one day of fishing, I can use every other day to do something else. The possibilities are endless!”
After witnessing the ease with which Able now catches his fish, Baker and Charlie asked him to share his innovative fish catcher.
“Hey, Able,” said Charlie, “since you use that thingy only every other day, how about you let me use it the day you’re out doing other stuff?”
“C’mon, share the wealth, buddy,” added Baker.
But Able didn’t just fall off the tuna truck yesterday. He remembers his self-sacrifice … he remembered their scorn, and he thought of the
“What if they break my net? What if they just don’t give it back? Then it’s back to square one for me. So long, designer leafwear!”
With all this downside, Able turned them down. “Sorry, guys, no can do. I made my own net, so can you. At least you guys know that the thing works!”
Although Charlie saw the efficiency of using a net, he was apprehensive about the prospect of building one for himself.
He responded to Able, “How do I know if I’ll get it right? I’ve never made one of those things before, and besides I don’t do well with hunger. I get the shakes. I might starve to death before I make a decent net!”
Baker stepped forward with another proposal. “Okay tightwad, so you’re not gonna do us any favors. We get it. But how about this? Lend us some of your surplus fi sh to eat while we make our own nets. That way we won’t starve as we build, and we’ll repay every fi sh we borrow from you from the extra fi sh we catch!”
Although the idea appealed to Able more than giving away his net, he was still very skeptical. “But if I lend you my fi sh, I have no guarantee that you won’t just lie on the beach and take the day off! Even if you build your own nets, they may not even work. Either way, you’ll never be able to repay me, and I would have lost my savings for nothing! You gotta do better than that.
Charlie and Baker conceded the point. They realized that they were asking Able to take a risk for no personal benefi t. But the lure of extra fi sh was too strong. Before long they came up with a way to entice him into taking a chance.
They thought, they crunched the numbers, and fi nally a fi nancial idea was born! Baker approached Able and said, “Let’s make a deal: For every fi sh you lend us, we’ll pay you back two. That’s a 100 percent profit. Where else are you gonna get a return like that on an island like this?” Able is persuaded, “Now that Interests me!” he said with no apparent irony. Able thought of the riches, “If I lend them two fi sh I’ll get back four.” I’ll be two fi sh richer without doing any work. I’ll be a fi sh tycoon!” To some it may appear that Able has crossed a line. If this were a Hollywood movie he would start twirling his waxed mustache. He would be making money off the backs of others’ labor, drawing profi ts from their toil!
But that image doesn’t hold water. Even if Able intends only to fill his own fi sh coffers, his greed, for lack of a better word, would provide a benefi t that would have otherwise been unavailable. It’s important to note that Able does not need to make the loan. He has other options, including these four:
1. He simply might hold on to his fi sh for
future use….This is the most secure
option. He would be guaranteed to not
have any losses, but of course his
savings wouldn’t grow.
2. He could simply indulge
himself and consume his savings.
3. He could build his own net rental
company. He reckoned that if he
consumed one of his reserve fi sh
a day for two days, he could build
two more nets.
He could then rent the extra nets to Baker and Charlie for half of a fish each day. With each of the two kicking in half of a fi sh every day to his net rental company, Able would have the one fi sh a day he needs to live, without ever having to go fi shing himself. Hello, early retirement!
In this scenario, Baker and Charlie would be able to catch two fi sh per day with their new nets. After paying Able their half fi sh rent per day, they would still have one and a half fi sh per day each. That’s 50 percent more than they would have had with no nets. It’s a win-win.
Although intriguing, Able noticed some flaws in his logic. Baker and Charlie might rent the nets for two days … then use their savings to build nets for themselves. In such a scenario he would be only two fish ahead … that’s a real risk!
4. He could lend out his two fi sh to Baker and Charlie and charge them 100 percent interest. In this scenario, he’d get four fi sh back if they paid him back in full with interest. But, there was always a risk that they’d stiff him.
Decisions … decisions … decisions!
To summarize, Able (and society) can do only fi ve things with savings:
1. He can save what he has saved.
2. He can consume what he has saved.
3. He can lend out what he has saved.
4. He can invest what he has saved.
5. He can try a combination of the other four options.
Unquestionably, Able’s ultimate decision will be based on his own desire for risk and reward. But whatever he does, he is benefiting the island economy and is imposing no burdens on
In the end, Able decides to make the loan.
To some it may appear that Able used his advantage to exploit his needy neighbors. And while it’s true that he made a profi t without working, it doesn’t mean he gets something for nothing. Able’s profi t is his compensation for the risks he takes. What’s more, his ability to profi t doesn’t hinder the advancement of his peers.
Because of Able’s desire to make a profi t from his savings, Baker and Charlie got the opportunity to build nets without having to under consume. If they succeed, they will have improved their economic futures without having to go hungry. The rest will be gravy… or more accurately, fi sh oil. At that point, they themselves will have excess capital. If they fail, and are unable to pay back the loan, it’s Able who takes the loss.
Essentially, the lender can benefi t only if the borrower benefi ts.
Of course, others may not see the mutual benefits as clearly. What if, upon seeing Able’s sudden expansion of wealth, Baker and Charlie grew envious and demanded a portion of his savings?
Imagine this alternative scenario:
Baker fretted, “Look at that guy lording it over us with his fancy palm-leaf tuxedo, while we sweat it out in the waves every day wrangling slimy fish. Hasn’t that guy ever heard of charity? Couldn’t he just spare me a fi sh or two so I could take a day off once in a while? He’s got so many fish piling up, he’d never even know one was gone.”
Charlie concurred, “Share the wealth, elitist!”
Or, what about this scenario:
Let’s suppose Able, feeling somewhat guilty about his
comparative wealth, was swayed by their arguments and gave away his fi sh, asking for nothing in return. What would Baker and Charlie do with the extra fi sh?
If they were free from the burden of repayment, they would most likely use the gift to increase their leisure time. And while there is nothing inherently wrong with leisure (in fact, it is the goal of most human activity), Baker and Charlie’s vacation would not increase the island’s productive capacity by a herring. And so while the charity option sounds more magnanimous, and may improve Able’s popularity, it doesn’t provide the economic boost that a business loan would.
Hey, Rocke-fi sher,” griped Baker. “Maybe you should take a break from fi sh counting and lend me and my pal Charlie a couple of fi sh so we can kick back a day or two. You’re not the only one who deserves a life of leisure. And besides, we’ll pay you back.” “Believe me, I know that fi shing can get to be a drag,” responded Able. “But remember, if I lend you one fi sh, I’ll still want two fi sh in return to compensate me for the risk.”
“No sweat, Kingfi sh,” countered Charlie. “We’ll be so well rested after our vacation, we’ll be able to fi sh even harder and pay you back, with interest.”
But how will Baker and Charlie be able to repay the vacation loan, with interest, if they do not expand their productive capacity? After taking a few days off, they will still only be able to catch one fi sh per day. To repay Able, they will need to cut their consumption to less than one fi sh per day in the future. Their living standards would have to drop to repay the loan!
Knowing this possible consequence, Able tried to be reasonable. “Look guys, why borrow now and go hungry to repay the loan, when you can just sacrifi ce now, go hungry for one day, build your own net, save up for the future, and then rest up whenever you want?”
“Listen,” said Baker and Charlie. “Save the holier-than-thou bunk. Just give us the fi sh!”
Able should deny the loan. Not only would such a transaction put his savings at unnecessary risk, but it would mean that the capital would be unavailable for more productive loans. And while he will earn their scorn, he will actually prevent future hardship. In actuality, loans to consumers that do not fundamentally improve productive capacity are a burden to both the lenders and the borrowers.
As it turns out, Able’s rejection of Baker and Charlie’s “vacation” (consumption) loans was extremely fortunate. A week later, both are struck by a freak outbreak of the Pokalani Pox, which prevents them from fi shing for a week.
Now, when this emergency arises, Able is in a position to make a hardship consumer loan out of his accumulated savings so that Baker and Charlie can eat and live to work another day. Although he also understands that the risk of nonrepayment is high, he understands that the risk in not making the loan is higher. Unlike the consumption loan, Baker and Charlie can perish if the emergency loan is not made. If this were to happen, the island would lose productive capacity.
This emergency loan would not have been possible if Able had already given away his savings through unproductive consumer loans.
In fact, savings can mean the difference between the life and death of society.
After a few weeks, Able, Baker, and Charlie had been raking in the fi sh with their newly built nets, and a two-fi sh-per-day catch had become the norm. After a threadbare one-fi sh- per-day diet, who could blame them? But having experienced the benefi ts that fl ow from self-sacrifi ce, they decided to save a good portion of that potential consumption. Every couple of days, they made do with just one fi sh apiece.
Released from the need to fi sh every waking moment, the islanders fi nally had the freedom to undertake other productive and enjoyable activities. Able was able to devote some time to designing and constructing more functional—and more fl attering—palm-leaf clothing. Baker expanded his diet and culinary skills by gatheringcoconuts, and Charlie built the island’s fi rst hut.
Things were going well, but Baker was convinced they could be even better. He said, “If we can expand production with hand nets, why not kick it up a notch and go industrial?” He envisioned a larger and better piece of capital equipment.
He sketched out the plans for an elaborate fi sh-catching device that would revolutionize the island’s economy. The gizmo involved a huge underwater trap with one-way doors that could catch fi sh continually day or night. That’s right—fi sh check in, but they don’t check out. If it worked, they would never have to fi shagain!
But, Baker soon realized that the he was unable to handle such a complex project by himself. He thought about the materials necessary, the netting, the framework, the construction. His savings, brawn, and ingenuity were simply not enough for such a colossal project.
With these thoughts in mind, Baker decided to propose a joint venture. The three could form a company, underconsume for a while, pool their savings, and dedicate an
entire week to construction.
Having listened to Baker’s plan, they began to discuss the potential risks. As with Able’s fi rst net, there was no guarantee that the project would work. Even if it did, the whole contraption could fall apart in its fi rst exposure to rough seas. But this time it wasn’t just one fi sh they were risking, but more than 20! However, their demand for more fi sh overpowered their fear of losing their savings.
They moved forward.
After a supreme effort, the three succeeded in building the island’s fi rst mega fi sh catcher. The trap delivered as advertised and racked up an average of 20 fi sh per week, with no fuss and barely any muss. Outside of some minor repairs and maintenance, the trap was almost entirely automated. Soon they were swimming in fi sh.
With the savings that quickly piled up due to this latest advancement in productivity, the three soon built another mega fi sh catcher.
Fish became so abundant that they were able to dedicate all their time to other projects.
Charlie used his savings to build surfboards, resulting in a new ultracool leisure activity.
Able used his savings to establish a clothing company
that would produce items not just for himself but for any islander who wanted to freshen up their image. In his spare time, he began working on his one-man stage play.
For his part, Baker used his free time to focus on the island’s vexing transportation problems, and developed designs for the island’s fi rst canoe and cart.
The same economic rules that operate in a simple economic society also apply to a more complicated one.…
Able’s initial willingness to create capital through his own personal sacrifi ce benefi ted the other islanders. As a result of his prudent lending program, the islanders built many hand nets, and then capitalized on the increased productivity to fund much more effi cient fi shcatching machines. In addition to allowing a better diet, more fl attering attire, and easier transport, the increased productivity gave rise to leisure time and a burgeoning surfi ng scene.
Tales of this unprecedented luxury soon spread to other islands, where fi shing was still done by hand and no one had time to surf. In search of a better life, immigrants soon arrived.
The greater productivity of the island meant that it could support a greater population, which in turn led to greater economic diversity. Some new immigrants went to work servicing the mega fi sh catchers, while others borrowed the
exra fi sh to clear the land for farming—at last a balanced iet! Others took out loans to go into other trades.The diversifi ed island economy soon gave rise to hut builders,
canoe builders, wagon builders, you name it.
Society had become so good at producing food and tools that some people didn’t need to produce anything physical to survive. As a result, a service sector was born.
Looking to improve on the delectability of the raw fi sh, some islanders developed specialized systems of fi sh preparation, often involving spices and fi re. The skills of these chefs became so highly prized that the more prosperous fi shermen and hut builders would pay them fi sh in exchange for their delectable food and culinary skills.
Other service jobs developed soon after.
The allure and social benefi ts of surfi ng became so widely prized that Charlie’s descendants founded a surfi ng school. As the society grew and more trades and services were offered, a medium of exchange was needed so that the hut builder, chef, or surfi ng instructor could be paid.
Up till now, the island had functioned on a barter system, where one person traded one good or service for another. But this process was cumbersome and ineffi cient. A spear maker may want a chef, but a chef may not want a spear. Even if their desires did converge, how many cooked meals would a spear be worth, anyway?
To replace this system of haphazard deal making, the island needed something that could be traded for anything and that was accepted by everybody. In other words, they needed money.
Since everyone on this island ate fi sh, it was decided that fi sh would serve as money.
In short order, all wages and prices were quoted in terms of fi sh. And since subsistence was still imagined at one fi sh per day, one fi sh had a value to which everyone could relate. The island’s price structure therefore was related to the real (or intrinsic) value of fi sh.
An economy in which workers can specialize in a specifi c trade or service is always better than one where everyone does the same thing. Specialization increases production, which in turn raises living standards.
Let’s say that it took the average islander fi ve days to make a canoe. If it is assumed that every islander could catch two fi sh per day (with a net), then each person would have to forgo 10 fi sh of income in order to build a canoe. However, suppose one islander named Duffy was a little better at cutting, hauling, and chopping wood and could make a canoe in just four days.
Rather than fi shing like everybody else, Duffy would be much better off if he just made canoes. As he would only have to defer eight fi sh in income to build a canoe, he could make a profi t by charging nine fi sh for one of his canoes. He could raise his income through specialization.
Given these advantages, other islanders would be wise to buy one of Duffy’s canoes for nine fi sh. (Left to themselves, they would have to give up 10 fi sh in income.) By paying only nine to a specialist, they could save one fi sh.
But suppose nine fi sh represented a fairly steep price…after all, who has that many fi sh just lying around? Perhaps at those prices only the wealthiest islanders could afford a new canoe. Those who didn’t have that level of accrued savings would just have to keep swimming until they had saved enough to pull the trigger.
But let’s imagine that after years of cutting and shaping his logs with rocks and sharp shells, Duffy used his accumulated savings to build specialized canoe-making tools. Like Able many generations before, he was underconsuming in order to generate a capital good (tools).
Because of his better equipment, let’s also imagine that Duffy cut his building time down to two days. With this increased effi ciency, he would now only have to charge four fi sh instead of eight fi sh per canoe to break even. If he lowered his price to six fi sh (from nine) he would be more profi table on each canoe he sold (two fi sh per canoe instead of one), and he would be able to crank out twice as many units.
This increased productivity benefi ted not only Duffy, but all the islanders. More could afford a canoe priced at just six fi sh, so his customer base increased.
For instance, Finnigan, a new arrival on the island, was a very strong man. His talents were wasted as a fi sherman, so he decides to specialize in fi sh transport. Relying solely on his brawn, Finnigan was able to deliver 100 fi sh per day from the beach to people’s huts. At a 2 percent freight charge, Finnigan could earn two fi sh per day working for himself.
However, having previously taken out a business loan to build a fi sh cart, Murray’s Cart Company was stiff competition. Using his own cart, Murray could deliver 300 fi sh per day, even though he was not nearly as strong as Finnigan. Based on his high level of productivity, he charged only a 1 percent rate, thereby earning three fi sh per day. So because of his capital he was able to charge a lower rate and still earn more than Finnigan.
Without his own capital, Finnigan was in a pickle.
Assuming that the burlier guy could deliver 400 fi sh a day with a cart, Murray sensed an opportunity. As Finnigan could generate four fi sh per day in income with the cart (using the 1 percent delivery rate), Murray offered him three fi sh per day as an employee. Murray could keep the fourth fi sh as profi t.
If Finnigan took the job, he would increase his productivity, lower his delivery rate, and earn more than he could by himself.
With the one-fi sh-per-day profi t, Murray could stop delivering the fi sh himself, and focus on building more carts and expanding his business by hiring more delivery people. Meanwhile, proliferation of carts will bring down freight costs for all islanders.
Sensing a solid business opportunity, an islander named Max Goodbank decided to launch a revolutionary service.
After guarding his own fi sh for years, Max knew there had to be a better way to store his savings. And after seeing so many of his neighbors get hoodwinked by slick fi sh borrowers, he also knew that most people needed help in deciding how their savings should be lent. With these thoughts in mind, he built a large, climate-controlled facility staffed by the toughest galoots on the island. The new “bank” would safely store the island’s collective fi sh savings and consequently solve the theft problem. But this was just the beginning.…
Being a true entrepreneur, Max knew that if all he did was charge a storage fee, his profi t potential would be limited.
He understood the value of savings and he knew he could do a better job at lending than a typical islander. As a top-notch mathematician, Max was particularly good at evaluating business plans and structuring equitable loans.
With the fi sh earned from the loans of his neighbor’s fi sh, he would pay interest to depositors and wages to his galoots. He would keep the leftover profi t for himself.
The Goodbank Savings and Loan was born!
For the scheme to work, Max had to keep a number of balls in the air at once. First, he had to keep his loan business profi table, which meant he had to carefully screen borrowers, scrupulously collect interest, and foreclose on collateral when loans failed. Second, he had to keep his depositors happy through regular interest payments. Last, he had to attract more borrowers to keep the cycle running. If he failed, he would be out of a job, and his investment would be wasted.
Naturally, with his ability to specialize in the tasks associated with effi cient and profi table lending, Max became the island’s foremost expert on fi sh economics. And whereas less specialized lenders tended to be infl uenced by factors such as personal history, family relationship, and emotion, with Goodbank, it all boiled down to dollars and cents, or rather fi ns and scales.
With his personal well-being so intertwined with the success of the bank, Max was in the ideal position to determine the best interest rates to pay depositors and to charge borrowers
On the lending side, he offered the lowest interest rate to the most secure borrowers (those with the highest ability to repay the loans). For dicier borrowers he charged a higher rate to compensate for the added risk.
These loan rates then determined how much interest the bank could pay depositors, who received payments on a similarly sliding scale. Longer-held deposits lowered the bank’s risk of a fi sh shortage. Accordingly, higher interest payments were offered to those willing to leave their fi sh on deposit for a while. People who could not commit to a longer time frame got lower rates.
Although Goodbank administered the rates, the entire interest rate system itself fl uctuated according to market conditions that were largely beyond Goodbank’s control.
Sometimes big gains in productivity made the island’s savings swell. When the vault was fi lled to the rafters with fi sh, the bank would bewilling to drop the rates charged on loans. That was because the losses would be easier to bear in relative terms, and the healthy economy that produced the savings in the fi rst place would provide a fertile environment for new businesses.
With little need to attract new savings, and with lower rates charged to borrowers, such an environment would also lead to lower payments to depositors, which would discourage savings.
When savings dipped (which is dangerous for an economy), opposite forces would come into play that would tend to encourage savings, thereby replenishing bank coffers.
When the fi sh were few, Goodbank had to be extra careful with loans. With thin reserves, loan defaults could be critical. In order to compensate for the increased relative risk, Max charged higher rates to borrowers, and offered higher rates to depositors in order to encourage more savings.
Higher interest rates would discourage borrowing and slow business growth. But the higher rates would also encourage savings. Eventually coffers would build up again and rates would then start to drop.
In addition, a lower savings rate indicated a preference for more immediate consumption. As a result, long-term capital investments designed to provide goods for future consumption would be discouraged.
This cyclical interest rate mechanism—fi rmly regulated by the desire to maximize the returns on the bank’s deposits, the fear of losing capital on risky ventures, and individual time preferences for consumption—produced a rate of interest that would stabilize the market.
Most importantly, the safety and convenience of the bank encouraged people to save. Deferring consumption to a later date provided fi nancing for capital projects that would increase future production and raise living standards.
Under Mr. Goodbank’s wise and conservative care, the island’s savings and commerce continue to grow.
Traditionally islanders drew their drinking water from the mountain streams and carried it to their huts in whatever vessel they could fashion. As a result, most people didn’t live or work very far from the water supply.
Poor access to water also made farming very diffi cult. These realities limited the island’s overall productivity.
One year, a terrible drought descended and dried up many of the mountain streams. The hardship just about wiped everybody out.
The islanders searched for a solution that could prevent such a calamity in the future.
The fertile mind of Able Fisher V (Able’s great-great-greatgrandson) tackled the problem. He noticed that rain runoff collected in ponds. Taking his cue from nature, he devised a runoff and reservoir system where rainwater could be collected and stored for future use. But this would be a big project, furnishing the entire island with water.
As Able V conceived it, the Water Works project would require working capital of 182,500 fi sh…enough to support a crew of 250 men for two years while they labored. He went to Manny Fund for a loan. Manny loved the idea but he just didn’t have enough fi sh. Fearing the worst, Able then tried the bank.
To his surprise, Maxine Goodbank (another descendant) had a receptive ear! Although the price was indeed high, when weighed against the potential rewards, the risk seemed justifi ed. If it worked, the project would pay for itself and ensure a better future for every islander! But no matter how much she liked the idea, Goodbank would not have been able to fi nance the project if the island had not saved enough to pay for it. There simply would not have been spare fi sh to feed 250 non-fi shing workers for two years. But upon completion, the Water Works delivered as advertised and allowed the borrowers to pay back their loan plus interest.
Islanders were happy to pay yearly fi sh fees for the running water. From these payments, Water Works employed more than 100 workers year-round to tend the system’s intricate bamboo pipe system.
The splashing success of the Water Works project fl owed through the island’s economy. Pipelines, available for a reasonable charge, brought water great distances, and allowed previously infertile land to produce crops.
The steady fl ow of water could be harnessed to operate machines, giving birth to new industries.
Relieved of the task of hauling water by hand, everybody now had more time available for the production of consumer goods and services and for the development of new capital projects. The increased productivity allowed society to catch even more fi sh, and living standards rose as a result.
As the island economy expanded, its ability to export production abroad increased as well. Soon giant cargo canoes were sailing over the open ocean, fully loaded with fi sh, carts, surfboards, spears, and canoes. In exchange for these products, which had gained an ocean wide reputation for quality and affordability, the cargo canoes returned with fresh fi sh and other trade goods previously unknown on the island.
As the island’s explorers came into contact with other islands, trade developed that further stimulated growth. When allowed to fl ourish unhindered, free trade benefi ts everyone.
Some islands (or cities, countries, or even people for that matter) often have a relative abundance of something that others don’t. Each person, country, or island will naturally use its own particular advantages to get the most reward for what it has.
For instance, the nearby island of Bongobia had a great quantity of—you guessed it—bongos. The natives had perfected the craft of bongo-making and their island was overgrown with the best trees for making bongos. As a result, there were so many bongos on the island that each individual drum was not worth much. As a domestic trade good, a pair of bongos didn’t go too far.
One hundred miles from Bongobia, the island of Dervishia was populated by natives who were smitten with bongos. Unfortunately, their environment lacked the right kind of trees to make them. As a result, on Dervishia bongos were a scarce and valuable trade good. What the Devirshes did have was an abundance of coconut tanning oil. But the darkskinned Dervishes had no need for UV protection, so tanning oil was nearly worthless to them.
But as fate would have it, the fair-skinned Bongobians suffered from chronic sunburn due to the island’s unrelentingly sunny weather. When the two islands fi nally made contact with one another, they instantly developed a robust trade in bongos and tanningoil. Each island used its competitive advantage to send the other island products that were more valuable overseas than they were at home. In this symbiotic arrangement, both islands benefi ted. Living standards rose…and well-toned drumming was achieved by all.
Trade on a national level is no different than labor specialization on a personal level. Each individual, or country, trades what it has in abundance, or what it does best, for the things that it doesn’t have or can’t easily make.
In the beginning, the island had no government…compensation at least for the limited diet. Able, Baker and Charlie were old friends and worked out disputes amicably. But as simple societies grow more complex, there inevitably arises the need for some central authority.
With more people on the island, misunderstandings multiplied. When words failed to settle the matter, spears were often employed to bring about a resolution.
With no organized mutual defense apparatus, occasionally gangs of fi sh fi lchers would go on a rampage and make life miserable for the islanders.
Every now and then the island would be invaded by the ngobians, who in addition to being great drummers were also fi erce plunderers. When the Bongobians got their mojos working, no saved fi sh were safe.
It was evident that the islanders needed to band together or mutual protection and security. They needed some leadership. But handing out power is always a risky business. nce given, power is almost always abused.
After experimenting with a variety of vainglorious chieftains and other losers, the islanders decided to put together a government that would be accountable to the people and would be limited in its ability to take away the freedoms that
had brought the island its prosperity in the fi rst place. It was decided that the islanders would elect 12 senators, including senator-in-chief with executive authority.
To protect the island from hostile invasion, the senate would create and oversee a navy of spear-packing war canoes.
To promote social stability, and to protect every islander’s rights to life, liberty, and property, the senate would establish a system of courts to settle disputes, and a police squad to enforce the decrees of the judges.
And to promote commerce, the senate would build and maintain a series of lighthouses to protect sea traffi c from the island’s treacherous cliffs.
In order to fi nance this modest apparatus, the islanders agreed to pay a yearly fi sh tax. All the fi sh sent in to the government would go into a special government account at the bank. The senate would draw on these funds to meet its
But as the island was populated by fi ercely independent citizens, many were wary of investing too much power in toofew hands.
In order to ensure that the senators did not play fast and loose with the island’s fi sh taxes, a constitution was drafted that clearly authorized certain powers to the senate. Powers not mentioned were reserved to the people alone. Just in case there was any confusion as to what the senate could and could not do, a supreme judge was put in place to enforce the constitution and maintain a check on the political ambitions of senators.
When the constitution was voted on and passed, the island nation was dubbed the Republic of Usonia.
The new government wisely decided to not spend all the fi sh it raised in taxes. The reserves could come in handy in case an unexpected monsoon temporarily sapped the island’s ability to fi sh or if the Bongobians launched a new and more elaborate raid.
For many generations the island government functioned as planned. A series of wise and restrained rulers came and went, maintaining a strict focus on encouraging business expansion and personal savings. Taxes were comparatively easy to bear and regulation of industry remained light. As production expanded, businesses profi ted, prices steadily fell, and purchasing power rose. After a few generations, almost every family owned a canoe. Some families even had two or three.
Since it took only a few dedicated fi shermen to provide for the island’s entire nutritional needs, labor and capital were freed up for other purposes. New industries and services were developed that had been
completely unknown in the days of hand fi shing. Hut furnishings, witch doctoring, and drum making companies sprouted and fl ourished. Things got so prosperous that a theater troupe opened on the island’s west coast. The premiere production of The Fishman Cometh opened to rave reviews.
Along the way, some senators made the emotional case that the Constitution’s original linkage between tax payment and voting eligibility was fundamentally undemocratic. Out of a spirit of progressivism, this restriction was removed, bringing to the polls a great many voters who were far less interested in government budgetary prudence.
As the government payroll grew along with the economy, the job of senator inevitably gained in status and appeal. Originally a position for just the most revered and accomplished of the island’s elders, the Senate now began to attract ambitious go-getters.
One of the more innovative of the senatorial hopefuls was Franky Derp, who noticed a strain in human behavior that provided him with a path to power.
He observed that people loved getting stuff for free. Similarly, they hated paying taxes. So, he devised a plan: if he could fi nd a way to make it look like he was giving something to the islanders for free, then he could gain their unconditional support. Unfortunately, all the government had was what it raised in taxes. The Senate didn’t catch any fi sh. They could only give by taking. How could they give more away more than they took?
After a particularly bad monsoon, Franky sensed an opportunity (politicians never let a crisis go to waste).
He preached, “My fellow islanders, the storm we have just been though has wrought untold hardship on our people. Many of our citizens are now hutless and fi shless. We cannot stand idly by and do nothing. If elected, I will institute a government reconstruction program for our neediest citizens to repair the damage.
But he assured the citizens that the cost of the construction would be paid for by the economic activity the spending generated.
His opponent, Grouper Cleveland, offered nothing, except wise stewardship of the island’s savings and a promise not to interfere with the liberties of the citizenry.
Not surprisingly, Franky Deep sailed into offi ce as Senator in Chief.
His election victory did not change the fact that there were not enough fi sh reserves to fi nance the spending plans he envisioned. To cover the gap, Franky came up with another plan. The government would issue paper money called Fish Reserve Notes, which would be redeemable for actual government fi sh stored at the Goodbank. Citizens could get their fi sh immediately or use the notes to trade for other goods and services just as they would have done with real fi sh.
Disgusted, the island’s chief judge weighed in, and pointed out that the Constitution gave the Senate no authority to take money from one citizen for the sole benefi t of another, nor did it have the authority to issue paper notes for fi sh.
Franky solved that problem by nominating one of his political buddies to sit as judge. The more cooperative jurist declared the Constitution to be a “living document” whose precepts could be actively interpreted by new generations confronting issues unforeseen by the founding fi shers.
At fi rst, the citizens were a little uncomfortable with the new Fish Reserve Notes. They were used to paying for things with actual fi sh. But after a while the new paper notes caught on. Most had to admit that they were easier to carry and the odor was a distinct improvement.
Meanwhile, Franky’s advisors scoured the island looking for worthy projects to fund (maintaining unvarnished objectivity, of course). When they found a project that would be guaranteed to have enough support from potential voters, they handed out the new notes to make it happen.
The new bank director, Max Goodbank VII, was not crazy about the new fi sh notes. He thought the ease in which the notes could be printed would create dangerous incentives for the senators. Yet, he could sleep soundly at night provided that the government maintained enough actual government fi sh in the bank to redeem all the notes.
Not surprisingly, his confi dence didn’t last long.
Soon, Franky and his agents had handed out far more Fish Reserve Notes than the government’s account had fi sh to redeem. When Max Goodbank noticed the dwindling reserves, he headed to the Senate to sound the alarm.
“Franky, stop the presses!” shouted Max. “I have only nine fi sh available for every 10 notes that you guys have handed out. If the savers fi gure out that there really aren’t enough fi sh to cover their deposits, there will be a run on the bank and I’ll be out of fi sh. You have to stop issuing Fish Reserve Notes and raise taxes. We’ve got to replace our reserves.”
Franky and his top advisors, Hughey Humpback and Tad Anemone, burst out laughing. “Raise taxes and cut spending…that’s a good one! You’d be a real force on the campaign trail! Got any other bright ideas?”
Goodbank explained, “Sorry, guys, but there really is no choice. Once the savers on the island realize that there is really no safety in bank deposits, they’ll stop saving! They’ll keep their fi sh at home like they used to. There will be no pool of capital available to maintain the equipment we now rely on, much less to fund new projects! Our whole economy could collapse!”
“Listen, worrywart,” said Franky. “We thought of that, and we have a plan. Why should the savers have to know that their savings are shrinking and not growing?”
Franky explained, “My economic advisors have degrees from our new University, where they mingled with some of the island’s top scientists. It’s amazing the things that some of these guys come up with. And they have really hit the jackpot. It’s time that we let you in on a little secret. Bring in the technicians.”
At that a number of lab-coated scientists walked in with three regular-looking fi sh. “Look!” said one. “We’ve been scouring the beaches and garbage dumps collecting discarded fi sh skins and skeletons…especially the ones with head and tail intact. Just watch the magic.”
Then in a blur of cutting, splicing, gluing, and sewing, the technicians took the fi sh and began construction of a new fi sh around the discarded fi sh parts. They sculpted, molded, glued, and sealed. Using this process they were able to produce four passable fi sh out of the three. What was once garbage now looked like a genuine fi sh!
“The secret is in the glue,” said Franky. “This new sealant never comes undone. The fi sh will hold together indefi nitely, and the dupes…I mean citizens…will be none the wiser. We’ll call these new fi sh ‘offi cial fi sh’ and we’ll use them to pay back the depositors. Let our boys into your vault for few days and your fi sh crunch problems will be solved!”
Goodbank was stunned. He had to admit that the trickery was mpressive. The corners of his mouth crept up in a smile. He was tired of having to say “no” all the time. It was no fun. Nobody liked him…they called him a tightwad behind his back.
“Maybe this is the way out,” he thought. “Maybe this is a ticket to popularity. First I get the fi sh…then I get the power…then I get the women!”
But then his good sense rushed back. “These people aren’t magicians,” he thought. “Fish don’t grow on trees! All the senators can do is create fake fi sh by diminishing the value of the island’s savings!” He tried to reason with them.
“Come on, the depositors will get wise. Look, your ‘offi cial fi sh’ looks skimpy next to a genuine fi sh! After all, people have been eating fi sh a long time around here. Everyone knows the value of a fi sh. They may not be that easy to fool.”
Answering in his most diplomatic voice, Franky tried to calm Goodbank’s fears. “We thought of that. So for a start, ‘offi cial fi sh’ won’t need to be too much smaller. We’ll make 10 offi cial ones out of every nine real ones, so they’ll be only 10% smaller. In addition—and this is the genius part—we’ll pass a law to prevent islanders from comparing them to real fi sh!”
Tad Anemone chimed in, “Yes, that’s right. We’ll say our scientists have discovered a new disease among unprocessed fi sh, and we’ll require everyone to turn in their genuine fi sh for offi cially decontaminated fi sh as soon as they are
The senators and technicians described how the decontamination process would explain why “offi cial fi sh” were not quite as fi lling.
To keep people from seeing real fi sh themselves, and to supposedly increase fi sh production, the senators also decided to establish a Fishing Department, which would have sole responsibility for catching fi sh. Goodbank could take no more of this. “This can’t work! If people stop fi shing for themselves and rely on the government instead, our total catch will diminish. Eventually we will run out of savings.”
“How can you be so sure?” countered Franky. “Our Fishing Department will be the wave of the future. We’ll put in only our most trusted friends as managers, and we’ll give special prizes to the workers who show the greatest civic spirit. And besides, we only need to keep it going through the next election. After that we’ll think up a more long-term plan….I promise we will.”
“In the meantime,” said Hughey Humpback, “this new fi sh expansion procedure will give you enough fi sh to cover all of your outstanding obligations and pay all the interest on your deposits. We will even have fi sh left over to spend in ways that will fi nally do some good for our people!”
Goodbank thought about it some more. “It can’t work. The people will get wise. They will worry about their savings and withdraw their deposits.”
“We’ve got that covered,” explained Franky. “We will declare that all deposits will be guaranteed by a new government agency called the Fish Deposit Insurance Corporation (FDIC for short). Once people know that the senate stands behind their deposits, who’s going to withdraw their fi sh? With insurance in place, depositors will think that we are protecting their savings even while we loot its value.”
“So, Max,” said Franky, leaning in close and giving him a squeeze around them shoulders. “You’ll go along, won’t you?”
Goodbank was tempted to throw his lot in with the reformers, but he found his spine. While the politicians were worried about the appearance of solvency, and their own heroic self-images, he was concerned about the value of the fi sh.
“Absolutely NOT!” he thundered. “It’s fraud…deception! If there’s one trait you senators have in common, it’s dishonesty! I’ll close the bank and tell the people to save their fi sh at home before I go along with this.”
During this tirade the senators rolled their eyes and shrugged their shoulders, and eventually they could take no more. Franky summoned the Senate guards. He whispered a few words to the chief guard, and Goodbank was hauled away kicking and screaming…his parting words falling on deaf ears. “It’s too bad that chump wouldn’t play ball,” said Franky. “Get Ally Greenfi n in here!"
Franky then appointed Greenfi n as the new director of the bank with strict instructions to implement the fi sh expansion plan at full tilt. Furthermore, the Goodbank Savings and Loans would now be called the Fish Reserve
The next morning the body of Max Goodbank VII, the island’s trusted banker, was found tangled in the coral reef. The death was attributed to natural causes. Eulogies, bathed in crocodile tears, echoed from the highest halls on the island. Senator Franky ordered a lavish funeral.
With Ally Greenfin now chairman of the Fish Reserve Bank, the scheme worked to perfection. The transition from genuine fi sh to “official fish” was made….
The senators could not believe their good fortune. They could now make campaign promises and spend at will! There was no reason to balance the budget or raise taxes to pay for the spending.
So every year the government issued more Fish Reserve Notes than the bank had savings to redeem. When the deposits got low, the fi sh technicians worked their magic. The mix proved to be intoxicating. And despite their gnawing urge to contain the situation, and to get back to a sustainable path, the senators just couldn’t help themselves.
Some of the projects funded by government provided some benefi t to all. The island navy got bigger canoes, which kept the Bongobians at bay; and a new system of cart paths made transportation easier. However, the benefi ts provided by the controversial Clean Rocks Jobs Program were much harder to quantify. But whether shiny rocks were something the island actually needed did not diminish the program’s popularity to those who got the jobs. Meanwhile the new government Fishing Department got up and running. By offering generous benefi ts and salaries, the department easily hired workers. Those who got the jobs loved the steady work, and happily voted for their senatorial patrons.
But beneath the surface, there were real problems brewing.
With no personal incentives to take risks and make profi ts, the Fishing Department failed to become a model of effi ciency.
The rate of increase of actual fi sh production did not rise as fast as the supply of Fish Reserve Notes that the Senate put into circulation.
Greenfi n warned that without the stimulus that is provided by a steady dose of fi shfl ation, people would lose their appetites, and stop demanding fi sh, and the island economy would contract. He further theorized that a fi shfl ation level of only one-half of a fi sh belly per year would be optimal. Fishfl ation, he argued, was essential to an expanding economy!
“Nice fi guring, Ally. You could talk a shark out of a fi sh barrel,” said Franky. But nobody thought of pointing a fi nger at government, the real cause of fi shfl ation!
With a blank check to do whatever it wanted, the government continued to curry favor with citizens by issuing more and more Fish Reserve Notes. As it did, the offi cial fi sh continued to shrink in size and the fi sh became less and less valuable. Wages and prices, therefore, had to go up. Although in some years the fi shfl ation was barely noticeable because of offsetting productivity gains, two things were certain: the fi sh never got bigger, and prices rarely went down!
When fi shfl ation became rapid, islanders fi nally noticed that the fi sh they withdrew from the bank were smaller than the fi sh they deposited. So, despite the enticement of interest paid on their savings, they began to save less while many discontinued saving completely. Instead, fi sh had to be spent quickly to avoid losses due to rapidly mincreasing prices.
The real burden of this rapid fi shfl ation fell on retirees. Those who had deposited fi sh in the bank during their working years found that they had to eat two or three fi sh per day just to survive. The savings that they had hoped would last for 20 years, were gone in just four or fi ve.
Since fi shfl ation discouraged saving, bank deposits dwindled. As a result, there were less fi sh available to fund promising projects or prop up sagging businesses. In response, businesses cut back and workers were laid off. Desperate to offset the effects of fi shfl ation, many more islanders decided to risk thier savings with Manny Fund, whose promise of oversized returns gave investors the best hope of overcoming these losses.
When unemployment reached a crisis level, people demanded that the government do something.
In response, the Senate set strict limits on how much companies could pay workers, under what circumstances the workers could be hired and fi red, and how much the businesses could charge for their products. The resulting constraints made it more diffi cult to do business, and limited the ability of businesses to grow.
As time passed, a new senator, Lindy B., saw another electoral opportunity…this time to make a Great Society! Lindy promised that if elected not only would he furnish the canoe navy with bigger spears, but he would also help the sagging economy by providing emergency unemployment fi sh notes to all laid-off workers.
And so the process continued. Fish Reserve Notes were produced in ever greater numbers while the fi shing fl eet returned with fewer and fewer actual fi sh.
As offi cial fi sh shrank to just one-tenth of their former size, even Ally Greenfi n knew that he could not stretch the fish skin any further. When there were just bones left in the vault, he ran over to the Senate and called an emergency meeting.
When the senators convened, Greenfi n told them that there was nothing more he could do: the bank was simply out of fi sh. Some senators suggested that they tell the truth to the islanders. Those proposals died in committee. Lindy searched for better answers.
He asked the island’s brilliant economist Ben Barnacle to take over at the bank.
“No problem, sir,” said Barnacle. “The situation is that the citizens are losing confi dence. If we can start spending more of our Fish Reserve Notes now, that will restore confi dence and then the citizens will start spending again. If I have to, I’ll drop the Fish Reserve Notes from palm trees.”
Some of the senators were a bit confused. Although none of them had Barnacle’s economic training, some had the feeling that the problems stemmed from spending too much to begin with. Buddy Goldfi sh tried to talk some sense, but no one would listen.
Fortunately, the tough choices were avoided by a neat twist of fate.
Suddenly, the Senate door was fl ung open and one of the island’s far-fl ung ambassadors, barged into the chamber with some very strange-looking people.
The ambassador had discovered an island across the eastern sea called Sinopia, where all the citizens still fi shed entirely by hand. Lacking the benefi ts of a free and developed economy, Sinopia struggled under the autocratic rule of an
all-powerful king, who had subjected his people to whimsical experiments in social structure.
In Sinopia, all citizens were required to fi sh, but their catch did not belong to them. Instead fi sh were turned over to the king, who then decided which subjects deserved to get some back.
When the Sinopian king noticed that the diligence of some of the fi shermen began to lag, he decided to require them all to sing together patriotically while they fi shed. Those who forgot the words, or hit a sour note, would not be fed until they learned how to carry the tune.
Although this system did not produce much fi sh per capita, those in control did take a very signifi cant portion of what was caught. So while the king and his court dined on ocean delicacies, the average Sinopian got by on half of a fi sh per day.
Much like Usonia before the fi rst development of capital, Sinopia had no savings, no bank, no credit, and no business. From the Usonian perspective, the Sinopian economy was still stuck in the dark ages.
To his credit, the Sinopian king was savvy enough to realize that his island was going nowhere fast.
Upon hearing the tales of Usonia, the king was impressed by the luxurious lifestyle of its citizens, as well as the island’s advanced system of banking, credit, and commerce. He was determined to bring the same level of prosperity to his island. After observing how the oceanwide economy functioned, the king surmised that possession of Fish Reserve Notes was the key toadvancement.
Indeed, he was aware that the notes were used as money across the entire ocean. The Bongobians accepted Fish Reserve Notes as payment for their bongos, and the Dervishers took them in exchange for their coconut oil products.
Sensing that the possession of the notes would allow his island greater access to the transoceanic economy, the Sinopian ambassador offered to exchange fi sh caught by his citizens for Fish Reserve Notes. The senators looked at the Sinopians in disbelief. Then they looked at each other in giddy wonder. Could it be so easy? Access to fresh fish…in exchange for pieces of paper?
Without hesitation, Lindy B. stepped forward and agreed to their terms. Usonia would generously open the island’s markets to Sinopian fi sh imports…and by the way, when could they start unloading the fi sh? But before they drew up the paperwork, the Sinopian ambassador asked for reassurance that Fish Reserve Notes would always have real value.
“No worries,” said Lindy B. “Anytime you want real fi sh for those notes, you just mosey up to our bank’s fi sh window and we’ll be happy to give you whatever you need. Just take a look around…does it look like we’re short of fi sh
The treaty was signed and the Sinopian fi sh were delivered. In exchange, Lindy handed over a couple of stacks of freshly printed notes.
Barely containing a chuckle he offered some parting advice, “Be careful with these, fellas. These things are very hard to come by.” Turning to the head banker, he said, “Hey Barnacle, let’s get these fi sh over to the bank before we open for business.”
The relieved bank president needed no convincing. “No problem, sir. I’ve got a team of fi sh technicians waiting in the vault. They’re ready to slice and dice these babies as soon as they arrive. All the depositors will get their fi sh today. And unlike yesterday, there will be plenty of meat on the bones!”
And so a new chapter in Usonia’s economic history was born. Every day brought a new cargo canoe from Sinopia to make a deposit of fi sh, and every day the Sinopians got a new pile of Fish Reserve Notes in exchange.
The major question for the Sinopians was what to do with all the notes. The best thing would be to trade them for goods made by the Usonians. Of course, the Sinopians needed nets to increase their fi shing effi ciency, and Usonian manufacturers made the best nets in the ocean. So, the Able Net Company landed a massive order. After all their buying, the Sinopians had some Fish Reserve Notes left over.
Given the lack of a banking system in their home island, they decided to leave this trade surplus on deposit at the Fish Reserve Bank, where it would at least earn some interest. The transactions were a huge boom to Usonia. Not only did the foreign demand boost the local economy, but deposits of Sinopian fi sh at the bank swelled the availability of credit. Even though the Usonians were spending more than they saved, there was still plenty of fi sh available to lend at low rates of interest.
With plenty of real fi sh to add meat to the bones of offi cial fi sh, Usonia’s problem of fishlation largely disappeared.
With plumper fi sh, prices stopped rising and living standards rose once again. In Sinopia things changed rapidly as well.
The Sinopian king belatedly realized the fatal fl aw in his domestic economic model. His islanders simply would not fi sh if they had to give up all that they caught. Knowing this, the king made a dramatic reversal in policy when the nets came in from Usonia. Those who purchased nets from the king could keep all the extra fi sh they caught. Not surprisingly, this resulted in an increase in the Sinopians’ daily fi shing activities.
But there was a hitch—in order to facilitate greater transisland trade, the king required his citizens to swap their extra fi sh for Fish Reserve Notes. With personal incentives fi nally in place, it didn’t take long for the Sinopians to accumulate savings and expand production.
As a result, Sinopian entrepreneurs were now able to build factories to make other goods, like spoons and bowls. And even though most Sinopians still lacked these things, they sold these goods back to Usonians, for, you guessed it, more Fish Reserve Notes.
With the infl ux of Sinopian savings pushing down interest rates, Usonian entrepreneurs descended on bank loan offi cers with their best business ideas. But as the jobs of fi shing and producing became increasingly outsourced to the Sinopians, the business plans they presented were very different from what the bank had seen in prior generations. Most business proposals now favored companies that required local workers to deliver a service. These jobs could not be outsourced and were generally less capital intensive.
In a celebrated oration given at the island’s fi rst economic conference, Ben Barnacle explained the changes. He argued that the Usonian economy had developed to the point where the lowly process of fi shing
and production could be relegated to poorer economies, leaving Usonians free to pursue more sophisticated “service sector” jobs like chefs, storytellers, tattoo artists, and the like.
Evidence of this change could be seen at Charlie Surfs, the venerable surfboard shop established by one of the island’s founders.
After generations of manufacturing success, the company was moving in a new direction. Charlie’s descendants landed a big loan to vastly expand their surfi ng school operations. Twelve new gleaming campuses were built across the island.
At the same time, the company struck a deal to manufacture its boards in Sinopia, paying off the foreign workers with Fish Reserve Notes, The higher-value activities of surfboard
Soon more service sector businesses began to take root. The manufacturing facilities that had once populated the island began to be replaced by retail operations that sold goods primarily made on other islands.
The outsourcing trend was accelerated by various regulations, fees and taxes imposed by the Senate to make businesses cater to voters concerns. These obstacles made it harder for Usonian businesses to compete in the new trans-ocean economy.
Meanwhile, across the ocean, Sinopia was being transformed as well.…
As expected, the imported net technology, combined with the energizing power of self-interest, caused fi shing productivity to soar. Eventually Sinopians saved enough to build numerous mega-fi sh catchers of their own (the copyright infringement lawsuit brought by the original designers went nowhere in the Sinopian courts). They implemented a 24-hour fi shing policy, with three shifts cranking out fi sh nonstop. A good portion of these fi sh were exported to Usonia.
As fi sh production became more effi cient, workers were freed up for other tasks, most notably, manufacturing. Since the king’s policy involved the accumulation of Fish Reserve Notes, he mandated that most of this new capacity be devoted to products that could be exported.
As canoe load after canoe load of fi sh and goods headed across the sea to Usonia, a fl ood of Fish Reserve Notes headed in the opposite direction.
In a typical trade relationship (like the one between Bongobia and Dervishia), Sinopian goods would have been exchanged for Usonian goods that were in demand back in Sinopia. But the Sinopian willingness to accumulate notes produced a completely different relationship in which one island largely produced and the other consumed. Why the Sinopian king would tolerate such an arrangement puzzled many. But in comparison to some of his earlier schemes, this one seemed downright logical. The policy kept the king fi rmly in control, but it was hardly a boon to the Sinopians who made surfboards but were too busy working to ever surf themselves.
Of course, the Sinopians believed that their ultimate reward would come in the future, when they could stop fi shing and live off their savings of Fish Reserve Notes. Little did they realize that Usonia lacked the fi shing capacity to feed its own citizens, let alone make good on all its outstanding notes.
At another island economic conference, Ben Barnacle claimed that this system represented the newest and most effi cient example of economic specialization.
He explained that Usonia had a comparative advantage in consuming, and that this capacity was a great benefi t to the entire ocean. No other island, he argued, had citizens of such voracious appetites, who could always be relied on to demand more. Usonians’ wide roads, big carts, and big huts made them the most effi cient consumers!
The optimistic, can-do spirit of Usonia also meant that its citizens never feared to spend…even when they didn’t have two guppies to rub together. As a result, other islands could effi ciently outsource consumption to Usonia!
On the fl ip side, Barnacle explained that the Sinopians were considered the best at generating savings and manufacturing products. Therefore, he argued, “It is simply more effi cient to outsource production to Sinopia.”
Eventually, as Fish Reserve Notes continued to pour out of Usonia and pile up on islands throughout the ocean, some foreign holders began questioning the ability of Usonia to redeem them with actual fi sh.
Chuck DeBongo, the charismatic leader of the Bongobians, gained favor at home by deriding the arrogance and power of Usonia. Believing that the acceptance of Fish Reserve Notes was unnecessarily enhancing Usonia’s economic power, he started to send more and more of his fi nancial agents to the bank’s fi sh window to exchange his notes for real fi sh.
When those withdrawals started to make a real impact on the fi sh reserves, the technicians had to get busy again. As they sliced and diced, offi cial fi sh once again became noticeably smaller, causing fi shfl ation to rear its slimy head.
Consequently, the island’s economy deteriorated once again.
The new Senator-in-Chief, Slippery Dickson, was told by his economic advisors that if other islands followed the Bongobians’ lead, an oceanwide run on the Fish Reserve Bank could empty the vault of fi sh and wipe out the value of thenotes. Barnacle and the senators started to worry.
Lacking the spine to ask for tough choices from his citizens, Slippie (as he was known), decided to pin the losses on foreigners. He took the bold step of closing the bank’s fi sh window to foreign depositors! From now on, the value of Fish Reserve Notes on the international market would be determined only by what someone was prepared to trade for them, not because they could be redeemed for fi sh. In truth, the notes’ value would hang on Usonia’s status as a great economic and military power.
The breaking of the “fi sh standard” caused many islands around the ocean to lose confi dence in the notes. Not surprisingly, their value dropped sharply. But as they were still the most common form of money across the ocean, the fall eventually stabilized. Fortunately for the Usonian Senate, the closing of the fi sh window allowed the currency crisis to pass without bringing on a regime-changing catastrophe (the only real danger as far as the senators were concerned). Slippie breathed a sigh of relief. Chuck DeBongo fumed and made threatening speeches. But his efforts proved largely symbolic—Usonia’s power was unassailable.
Unfortunately, Slippie himself was later brought down by the subsequent Watersnake Scandal, in which he was caught with a large cache of stolen reptiles. With the currency crisis in the past, fi shfl ation largely under wraps, and Fish Reserve Notes maintaining their status despite the closing of the fi sh window, the Usonian economysettled down. A few years later, a boost toward prosperity was provided by the election of Roughy Redfi sh to Senator-in- Chief.
Roughy succeeded in lowering taxes, rolling back some burdensome regulations, and reducing barriers to free trade with other islands. However, he failed in his promise to reduce government spending. Despite the favorable business climate he instilled, the difference between what the Senate spent and what it raised in taxes continued to grow. In fact, under Roughy’s watch, the gap widened dangerously. Fortunately, fresh fi sh from foreign sources continued to roll into the bank. The notes that were used to pay for these fi sh were exported and never redeemed for actual fi sh. With such a favorable dynamic in place, Usonia set sail into what appeared to be an era of unprecedented prosperity.
Despite the success achieved by Charlie Surfs’ switch to the service sector, bank loan offi cers remained somewhat leery about providing funds for risky service sector businesses. Looking for a safe bet, they soon cast their eyes at the island’s sleepy hut loan market, which seemed to offer a good source of low-risk loans.
Up until that point, the hut market had never fi gured prominently into the overall economic picture. The huts themselves were typically modest affairs well suited to the islanders’ tropical lifestyle. But with prosperity growing and interest rates low, demand for newer, bigger and better huts began to emerge.
Traditionally, islanders would save for years, and then pay for a hut up front in full with cold, hard fi sh. But over time, the bank started making hut loans to the island’s more secure borrowers. These loans meant that borrowers did not have to defer their purchases and could buy huts whether or not their savings equaled the purchase price.
Although such lending did not expand the island’s productive capacity, or increase the borrower’s capacity to repay (as a business loan did), these loans did have good underlying security. That was because, unlike a loan made to an entrepreneur with an unproven business idea, a hut loan came with a piece of solid collateral attached…the hut itself. If the borrower couldn’t pay back the loan, the bank would take possession of the hut, which it could resell to pay off the loan.
Even with this collateral, there was no guarantee that the bank could get all its money back after such a sale. As a result of this risk, the bank demanded that borrowers come up with a substantial amount of fi sh for a down payment. This commitment would provide the bank with some assurance that the buyer would continue to pay. It would also limit the bank’s losses if the borrower couldn’t pay back the entire loan.
Some islanders resented the fact that access to hut loans was unequal. The wealthy usually got loans easily, but those who had no savings or poor credit had a much harder time. Some felt that the poor were being denied access to the island’s upper echelons of wealth. Sensing a potent campaign issue, the Senate got into the game to fi x the problem.
Arguing that hut ownership lay at the very core of the Usonian Dream, Senator Cliff Cod devised a plan where the government would ensure that everyone could get a hut loan. Not only would the Senate mandate ultra-low interest rates with very low down payment requirements, but it wouldstand behind the loans and pay the bank back if the borrower
In order to facilitate the process, Cod created two agencies—Finnie Mae and Fishy Mac—to buy hut loans from the bank. The hut buyer would then pay back the agencies directly. The bank would immediately get back its principal, which it could use to make new loans (and be rewarded with a generous fee for its efforts). With the Senate guarantees in place, the bank dropped interest rates as it no longer needed the extra revenue to protect itself from losses due to defaulting loans.
The hut lending program was a huge hit with the bank, which was able to make nearly risk-free profi ts. It was also popular among voters, who no longer had to save half their lives to buy a hut. Based on his shrewd maneuvering, Cod was rewarded with a nearly lifetime Senate term.
Another agency, Sushi Mae, was devised to underwrite loans for youngsters wishing to enroll in surfi ng school. Guaranteed tuition loans on the table enticed more and more islanders to brush up on their cutbacks and nose riding. With easy access to Sushi Mae loans, Charlie Surfs was able to raise tuition rates aggressively, without worrying about pricing its customers out of the market. Soon, tuitions began rising much faster than the overall rate of fi shfl ation. Most economists assumed that the higher prices simply refl ected the increasing social value of a surfi ng degree. To keep pace with tuition increases, Sushi Mae continually increased the size of loans it was willing to guarantee. In a few years, surfi ng school tuition became one of life’s most daunting costs.
Similarly, with Finnie and Fishy on the job, the island’s hut building, hut selling, and hut decorating industries took off. These activities sucked up more and more of the island’s productive energy, without doing much to bring in any more
actual fi sh or increasing anyone’s ability to repay hut loans.
As interest rates for hut loans dropped due to the Finnie and Fishy guarantees, islanders were able to take out bigger loans. As a result, just like surfi ng school tuition, hut prices started moving noticeably higher. With steady price increases, islanders began to perceive hut ownership not just as an expense worth shouldering but as a vital investment. To guarantee a prosperous future, hut ownership was considered better than saving.
The Senate further stimulated the hut sector by declaring that profi ts made from buying and selling huts would be largely tax free, and that interest paid for hut loans could be deducted from the yearly fi sh tax. As a result, looking to buy and sell a hut for profi t became a much more bankable fi nancial plan than trying to start a business or saving for the future. Not surprisingly, the island got more new huts. But it also got less savings and fewer new businesses.
When the pace of hut price increases really gathered steam, loan amounts bumped into the limits that the Senate had placed on Finnie and Fishy loans. When that happened, Senator Cod inevitably stepped in, declared the fundamental soundness of both institutions, and urged the Senate to increase loan limits so that huts could remain affordable. He always prevailed.
The head honchos at Finnie and Fishy, both old friends of Cod, rewarded the senator’s efforts with generous contributions to his reelection campaign and a sweetheart loan on his own hut.
Given that Finnie and Fishy paid a higher rate of interest to its investors than did the Fish Reserve Bank, the Sinopians piled some of their surplus fi sh notes into Finnie and Fishy.
They took confi dence from the fact that the Senate seemed to stand behind the solvency of the two lending institutions.
The influx of Sinopian investment fi sh into the hut loan market swelled the availability of credit and brought down interest rates even further. This meant bigger loans became even more affordable. In turn, the ease of getting a big loan allowed buyers to throw caution into the wind and bid up hut prices even higher.
Sensing the profit potential, Manny Fund VII jumped into the market with both feet. The descendant of the island’s first venture capitalist noticed that there were some loans that were so ridiculously risky that even Finnie and Fishy wouldn’t touch them. But given the mania for hut investment, he believed he could rely on the old Manny Fund panache to convince buyers that the loans were solid.
Manny began offering islanders a new type of loan, which he called “hut fi sh extractions,” in which hut owners replaced existing mortgages with bigger loans on the huts that they already owned. The new fi nancing would pay back the original loan and put the extra fi sh into the borrower’s pocket. The rise in hut prices justifi ed the bigger loans. With Manny’s “fi sh-traction” loans, anyone who owned a hut could get his hands on essentially free fi sh!
With the relatively high interest that Manny charged to fish-traction borrowers, his investment fund was able to offer even better yields to its investors. Not wanting to be left out of the party, Fishy and Finnie asked Cod to let them buy these riskier, higher-rate loans as well. When the approval came through, the two agencies became the biggest lenders in the fishtraction market.
Fish equity extractions provided a huge shot in the arm to the hut improvement industry, which became a major focus of economic activity. Hut Depot, an islandwide chain selling primarily imported hut improvement paraphernalia, employed dozens of specialists to show the islanders how to make more money through the magic of hut improvement. It was widely accepted that every fi sh spent on hut improvement would result in two fi sh in higher sales prices. No one was really sure why this was so…but why question
Huts became much more luxurious than ever before. Fire pits were lined with polished abalone shells; water buckets were pulled aloft on the fi nest silk ropes. Many huts were fi tted with designer thatchings and came with built-in wide-screen windows.
Soon islanders began demanding not just primary hut residences, but also investment and vacation huts. Some islanders even built vacation huts on top of their regular huts.
But then a strange thing happened. With all the demand for huts created by fish-traction loans, low (or no) down payment requirements, tax-free profit policies, and all the fish showered on borrowers by the bank as a result of the Finnie and Fishy guarantees, hut prices really started to go wild. Prices had always gone up a few percentage points every year, but now they were going up by that much every month! Bidding wars broke out for even the dumpiest huts.
Things got to the point where traditional measures of affordability no longer applied. It used to be that islanders would pay no more than two or three times their yearly income for a hut. Now they were paying 10 or 20 times. People bought huts that they knew they could not afford in the belief that they could sell in a few years for far more than they paid. With that kind of profi t potential, no downside risk, and oodles of government incentives including subsidized loans at artifi cially low interest rates, nobody could resist.
But the rapid rise in hut prices was a boon to the senators. The easy riches made voters feel wealthy and provided circumstantial evidence of wise economic leadership. Naturally the senators took every effort to keep the merrygo- round spinning. Ben Barnacle, and even the elaborately esteemed Ally Greenfi n, assured all that there could be no such thing as a hut glut, because hut prices simply could not fall.
Not just politicians talked up the mania. The island’s most respected private sector thinkers were the loudest cheerleaders. The dapper Barry Codroe had a popular stage show, where islanders discussed current events. The always
optimistic Codroe dubbed the expansive era the “Goldfi sh Economy.” Regular panelists like Carp Gaffer assured islanders that hard times were nowhere in sight and that bank policy had never been better. One occasional guest, Piker Skiff, often brought in for comic relief, warned of the pending hut collapse. His foreboding elicited howls of laughter.
It’s hard to say when the market fi rst turned. Perhaps it was the high-profi le demise of the Crater View Condominium Huts, which, despite their amenities, ample square footage, and unmatched ocean and lava views, somehow failed to attract buyers.
As Manny Fund was the principal underwriter of the project, the investment company took a big hit when the developer defaulted on the construction loan. When nervous real estate investors saw the losses at the Crater View Condos, many of them took a hard look at some of their other risky real estate holdings. A distinct apprehension began to spread.
Soon, buyers—both large and small—fi gured the market had peaked. Many decided that they should sell their current properties, take their frothy profi ts, and wait for a more favorable time to reinvest.
There was just one problem—everyone was thinking the same thing at the same time. Most of the owners in the market never intended to hold their properties very long to begin with. So when the market began to turn, everybody wanted out. In short order, the island was awash with sellers and devoid of buyers. When that happened, the unthinkable occurred—prices didn’t just decline in a modest, orderly fashion…they started plummeting. The hut glut had quickly turned into a massive hut rut.
Suddenly, hut ownership, once a surefi re ticket to easy wealth, became a decidedly riskier proposition. With prices no longer rising, huts did not create any fi sh equity to extract and profi ts from quick resales were no longer possible. With the pot of gold no longer looming at the end of the rainbow, uncomfortably high loan payments became a burden hardly worth bearing
This situation was further complicated when temporally low introductory teaser rates reset higher, which made the homes instantly unaffordable for those borrowers whose only hope had been a quick resale or fi sh-traction. With homes worth less than their underlying loans, the temptation to walk away from big payments became intense. This was especially true for those who did not put any fi sh down at purchase. Having made no prior commitment of funds, these borrowers had nothing to lose by not paying their mortgages and allowing the bank to foreclose.
As more and more borrowers defaulted, Manny Fund’s securitized loan business was soon declared bankrupt. The losses overwhelmed the venerable institution. Shortly thereafter both Fishy and Finnie admitted that they too were belly-up.
With consumers no longer extracting hut equity, the industries that grew up around the hut glut also fell into crisis. Hut builders, design consultants, window trimmers, and appliance salespeople werelaid off in droves.
Other seemingly disparate industries were impacted as well. The Usonian donkey cart makers had benefi ted greatly from hut equity extractions. Effortlessly pulling fi sh out of their appreciating huts had allowed islanders to buy bigger and
bigger carts. In the go-go days, many of these wagons became so large that four or fi ve donkeys were needed to pull them. (This was problematic as most of the donkeys were imported.) With no more hut equity to tap into, sales of these “grass guzzlers” plummeted, and the cart companies fell into bankruptcy.
The island became ensnared in the worst economic crisis since the great monsoon of Franky Deep’s era. Growing desperate, the unemployed workers converged on the Senate demanding solutions.
After years of denying any weakness in the economy, the island’s Senator-in-chief, George W. Bass, belatedly set to work fi xing the problem.
belatedly set to work fi xing the problem. With strong unanimity, his advisors recommended bold incentives that would get consumers spending again, especially on huts. Without any understanding of why savings and production fuel
economic growth, the Senate decided on a program of bailouts and stimuli.
Their fi rst rescue was for Finnie and Fishy, which were taken over by the Senate directly and were stocked with new Fish Reserve Notes to cover their losses. The reorganized companies were ordered by their new management (the
Senate) to offer ultra-low-rate hut loans to anyone who had the wherewithal to fi ll out an application.
It was hoped that the continued availability of easy credit would increase demands for huts, and thereby stop the slide in prices.
When these policies failed to stem the fall, Bass called an emergency meeting of his top advisors, including Ben Barnacle, who had previously assured him that prosperity would be endless.
“Hey, Barney,” said the Senator-in-Chief in his trademark folksy demeanor. “You sure sold me a bill of goods on this one. I thought this economy thing was supposed to be simple. You know, they make ’em, we eat ’em, and everyone gets a hut or two! I mean how do we get the shark to smell the chum on this one?”
The other senators searched for the meaning of his metaphor. Perhaps none existed.
“Well, sir, the problem is quite simple,” said Hank Plankton, the new head fi sh accountant. “Hut prices are falling, so citizens don’t feel as wealthy as they did before. As a result, they have stopped spending. If we can push hut prices back up, people will start spending again.”
“Cool, Plankie, I knew this was gonna be a breeze,” said Bass. “How we gonna do that? Do we have someone in charge of that? Sounds like a cool job. Maybe I’ll appoint one of my biggest donors.”
“Well, sir, it’s not quite that simple,” said Plankton.
“We can’t just mandate that hut prices go back up. As you know, we have kept Finnie and Fishy lending. Unfortunately, that alone is not enough. For some reason the people don’t want to borrow. Perhaps the loan application is still too complicated. But for now, we need to push interest rates lower and then give people more tax breaks to buy huts. That should create a lot of demand for loans, which should stop hut prices from falling and get hut
builders busy again.”
Plankton continued laying out his plans. “We also need to make sure that Manny Fund remains solvent. The company owes a lot of fi sh to a lot of people. If it were to go down, the entire island economy would utterly collapse. We also need to make sure that no one who invested in Manny Fund loses any fi sh. If we don’t do this, I’m sure that we would all starve… especially the children.”
“Well, that aint gonna happen on my watch, Plankie,” replied Bass. “Tell them that we’re gonna come to the rescue with a bailout. Hey, didn’t you used to work there?”
“Yes, Mr. Senator, I was the president of the company. But I really don’t see how that has any relevance to this conversation, and frankly, I resent the insinuation.”
“Aw heck, Hank, I was just funnin,” Bass continued. “Okay. After we get hut prices back up, and keep Manny and the boys in business, how are we gonna get people spending again? Where they gonna get the fi sh? I mean last time I checked, we were all a bit tapped in the tuna department. Isn’t that why they’re outside holding pitchforks?”
“Well, sir, we plan on distributing new Fish Reserve Notes to all the citizens. That should get them spending.”
“That’s cool. But where we gonna get the fish? Haven’t our technicians stretched the sturgeons about a far as they can?”
“Well, sir, we have some new commitments from the Sinopians. They have offered to buy the Water Works system for 100,000 fi sh.”
“Hold on honcho. Sell the Water Works? You’re talking about jeopardizing our national security! They’d have me tarred and feathered for giving up something like that to
those carpetbaggers. Couldn’t they just make it a loan instead?”
After months of tense negotiations, Bass’s ambassadors convinced the Sinopians that a sale of the Water Works was politically impossible. Instead, the Sinopians somewhat bitterly agreed to make a 100,000-fi sh loan.
“Hey, Hank,” said Bass, after word came back of the successful outcome. “Great news, we got the loan. Just one thing.How are we gonna pay it back?”
“Well, sir, I expect that we will just print up another batch of Fish Reserve Notes. But this time we will use our very best paper.”
“Yeah, but what if they won’t take them? Aren’t we getting a lot of guff from them people already about the value of our notes? It’s like that Chuck DeBongo guy a few years back. Won’t they just start selling if we issue so many more notes?”
“Highly unlikely, sir. Think about how many Fish Reserve Notes they already have. If they stop taking them, those notes will lose even more value. We’ve got them over a barrel. And if
things get dicey, we’ll just remind them of our ‘Strong Fish Policy!’”
“Oh, yeah. I forgot about that. It’s nice having that one in your back pocket. Is that where we go out and catch more fi sh to back up our notes?”
“No sir,” chimed Ben Barnacle. “The Strong Fish Policy is all about tone. We don’t actually do anything. We just say ‘Strong Fish Policy’ really clearly and loudly again and again. Also, it helps if you
clench your fi st and beat it on the table when you say the words.” “Right you are, Barney. Let’s just say I know a little something about acting tough. Mission accomplished! Now let’s go surfi n’!”
Despite the bailouts and incentives made by Bass and Plankton, the Usonian economy continued to deteriorate during the Great Hut Rut. Strangely, no one showed much interest in buying new huts. Instead of spending their stimulus fi sh, some islanders elected to save them. With spending stagnant, the cart companies teetered on the edge of extinction. Hut Depot was devastated. Unemployment got worse. Public
The next election proved to be pivotal. Barry Ocuda, a candidate for Senator-in-Chief, accused the Bass faction of inadequacy in the face of a national emergency. He pilloried the Bass moves as trifl ing half measures. Campaigning on a theme of transformation, Ocuda promised much greater government efforts to turn the island’s economy around.
Taking power, the young Senator-in-Chief got to work, and transformed the Bass policies by tripling them in size! He devised a number of new programs to push newly printed Fish Reserve Notes into the economy.
He increased the amount of assistance that the government would give to hut buyers—initially just to fi rst-time hut buyers and then to trade-up buyers as well. And, once again, he lowered the interest rates that Finnie and Fishy charged.
Noticing that the surfi ng school attendance had fallen off dramatically, he increased direct aid to schools, and made student loans even easier to get.
He authorized the building of a new lighthouse at Shady Swamp. When engineers pointed out that the facility was not entirely needed, Ocuda reminded them that the construction jobs alone would provide a powerful boost to
Ocular, also placed much faith in the need to develop alternative energy sources. He argued, “Society has become too dependent on donkeys. Llamas are far better suited to the island’s climate and topography. Not only do llamas consume less grass, but they are far surer footed, have better dispositions, and reproduce with more frequency than traditional donkeys. To top it all off, lama manure is far less offensive to the senses.”
Ocuda envisioned a multistage plan to transform the old economy.
First, he would hasten the adoption of llama-based infrastructure through massive stimulus spending. To this end, he called for an aggressive state-run llama breeding program. He also mandated that manufacturers (now run by
the Senate directly) redesign and refi t the carts for llama use. Last, he set about resurfacing all the island’s cart paths with a topsoil better suited for llama feet.
Second, Ocuda also came up with the “Carp for Carts” program, which offered government incentives to get people to turn in their grass guzzlers for more fuel-effi cient carts. (This was great news to the Sinopian cart companies that
made most of the smaller vehicles.)
As Ocuda and his senatorial ally, Nan ShallowSea, prepared to spend piles of newly printed Fish Reserve Notes, there was one small detail that they overlooked: Usonia was completely out of fi sh. All their planned spending had to be financed from abroad.
Solely as a result of the willingness of foreigners to trade real goods for paper, Usonians had been able to consume more than they produced. As a result, their current choices were simple:
1. Consume less and use the savings to pay back debt.
2. Produce more and sell the extra goods to pay back debt.
3. Borrow more to continue current levels of consumption.
The first two choices involved unpleasant outcomes for Usonians. Either they would be working harder, eating less, or both. The third choice dealt all the sacrifi ce to foreigners.
Not surprisingly, the senators courageously chose to ship the pain abroad. In so doing, they hoped the renewed spending
would restore economic health at home.
The unemployed knew that jobs were being created in Sinopia as fast as they disappeared at home. This resulted from Sinopia’s Fish Reserve purchases, which pushed up the value of Fish Reserve Notes and made Sinopian products cheap and irresistible. As a result, Ocuda and ShallowSea publicly lobbied for the Sinopians to dial down their purchases, which would allow Fish Reserve Notes to lose value and make Usonian products more competitive.
Of course, no one had any idea how Sinopia could simultaneously lend the fi sh necessary to fi nance the spending envisioned by Ocuda while rolling back the Fish Reserve Note purchases that were the means of the funding. No one even bothered to ask the question. Even while they prepared to borrow more than they ever had before, the senators forgot that someone had to do the
On the other side of the ocean, the Sinopians were not nearly as enthusiastic about the senators’ plans. Things started to get a little unsettled when the workers got wind of how many more real fi sh they would be asked to devote to buying Fish Reserve Notes.
Most Sinopians were frustrated with working so hard and getting so little. Since their own government did not provide the social safety nets available in Usonia, the average Sinopian saved lots of money just so they would not be hutless and fi shless in old age. Everyone worked, no one had a donkey (let alone a cart), and hardly anyone surfed. Even if they did, they usually went four or five to a board.
The Sinopian king was also losing enthusiasm for the arrangement, and was particularly vexed by the staggering spending plans announced by Ocuda. His advisors, many of whom had been students of the great Ally Greenfi n, began to worry that their cache of Fish Reserve Notes would lose value if they stopped buying. And if that happened, Usonians would no longer buy as many Sinopian products.
They argued that without Usonia’s thunderous demand, their own export factories would shut down, causing unemployment, discontent, and perhaps even protest (which had never been allowed in Sinopia). Caught on the horns of a dilemma, the Sinopian king kept the status quo going and hoped for an answer.
One day, while he was deep in thought and his council of economic advisors was away on a research expedition, a simple peasant slipped past the palace guards and engaged the worried king in conversation.
“My most glorious leader, please forgive the intrusion, but I hear that you have been troubled by thoughts of fi sh. Perhaps I may be able to help.”
“These are great matters involving trade, savings, investment, and planning. What can you know of such things?” thundered the king.
“Very little, I am sure,” conceded the peasant. “But I know that in my village, we all make nothing but wooden bowls, which we send across the sea. In exchange, we get paper, which we save for the future. Someday we hope to buy things with the paper, but now there is little. As we send away our bowls, we wonder why we have no bowls ourselves. We still eat our fi sh off the fl oor. Most unsanitary. Would it not be simpler if we just made bowls for ourselves? In that way, our work would improve our lives.”
“That’s absurd,” said the king. “Our people would starve without our exports. How else could we run our economy?”
“Well, my king, as I said, we are good at making bowls. And since—under your wise leadership—we are catching so many more fi sh, all we need is to fi nd someone here at home who would trade their fi sh for our bowls. Then all of our productivity would stay here, and our people would have more bowls and more food to put in them.”
The king was puzzled. “But wait, the Usonians are so much wealthier than we. How can we compete with their citizens to buy the products we make? They can afford to pay more. They have the Fish Reserve Notes.”
“Begging Your Majesty’s pardon, but I don’t see why we need their notes. They have value only because of our fi sh and our bowls. We have made the products, so of course we can afford them. We just have to stop giving them away for nothing.”
Somehow the simplicity of the peasant’s words made a profound impression on the king and he decided to change the policy. No more purchases of Fish Reserve Notes. From now on Sinopians would trade their goods only for real fish!
Since he was uncomfortable with the fast change that
the peasant seemed to advocate, the king decided on a gradual course. After all, the king had plenty of bowls, none of which were made of wood.
As the daily deliveries of Sinopian fi sh slowed, things began to change.
When the Sinopians, the biggest buyers of Fish Reserve Notes, reduced their purchases, the supply of notes began to overwhelm demand. When there is more supply then demand, prices have to fall. As Fish Reserve Notes steadily drifted downward in value, no one wanted to be the one left holding the bag. The Bongobians and the Dervishes then joined the Sinopians in limiting their purchases. With plenty of sellers and no buyers, Fish Reserve Notes entered a death spiral.
Stuck with stacks of rapidly depreciating notes that he couldn’t sell, the Sinopian king realized that events had moved beyond his ability to control them. Knowing that his island’s Fish Reserve Notes would soon be nearly worthless, he prepared his subjects to bite the bullet. At a mass rally he assured them that short-term pain would soon give way to long-term gain.
As expected, the value of Sinopians’ savings of Fish Reserve Notes turned out to be a mirage. The Sinopian economy was pushed into disarray as some businesses closed. But as the peasant had predicted, other businesses soon stepped in and used the spare capacity to make things the Sinopians actually needed.
As they had before, the Sinopians still caught fi sh, made products, and generated savings. Since these were the essential ingredients that caused an economy to grow, there was no reason for Sinopia to fall into crisis. In fact, with more products available at home and more of their savings in their own banks, living standards started to improve. Savings that in the past were locked up in Fish Reserve Notes were instead lent out to local factories to retool for domestic consumption. As more products were produced for local consumers, Sinopian stores suddenly found themselves stocked with goods. Increased inventories meant that prices could come down.
As the peasant had predicted, despite the losses in their doomed stockpiles of Fish Reserve Notes, Sinopia thrived.
Back in Usonia things were headed in the opposite direction. With only the meager domestic catch available, the bank’s fi sh technicians had to work harder and more creatively than ever before. Official fish began shrinking at an alarming rate and fishfl ation flared anew. But unlike prior outbreaks, this new variety spiraled out of control.
Soon offi cial fi sh got so small that they had to be bundled in packages of 50, then 100. Islanders were eating 200 fi sh a day just to stay alive. Any savings in Fish Reserve Notes became essentially worthless. The condition became known as hyper fishflation.
With fewer products coming in from Sinopia, Usonian retailers were left with diminished inventories. The result of skimpier fish chasing fewer products was soaring prices!
Through a rowdy public campaign, the senators attacked retailers for “price gouging.” They claimed that fi shfl ation could be stopped if the greedy businesspeople would agree to price controls on products and services. But as these measures focused only on the symptoms of fishflation, rather than the cause, they just made matters worse.
Limiting what could be charged for a product without doing anything to control the decreasing value of money simply meant that manufacturers and retailers couldn’t make a profit. As a result, they stopped selling and a black market of illegally high-priced merchandise arose.
Sensing the trouble with Fish Reserve Notes, some citizens tried to protect the value of their remaining savings by depositing fi sh in an offshore bank, where their savings would be protected from senatorial slicing and dicing.
But when the senators noticed this trend, they made it illegal to move savings off the island.
The fear of shrinking fi sh became so prevalent that no deposits were left in the bank for long. Every fi sh caught was immediately sliced up and consumed. As had been the case before their economy grew, there were once again no savings, no credit, and no investment.
Unable to come up with any ideas, the senators did what they always did…they discussed plans for the next stimulus. Clearly, the prior attempts to shock the economy back to life were simply too small. The next round would just have to be bigger! However, no one was quite sure what would be used as a stimulant. At this low moment, the mood was lifted by the sight of a Sinopian cargo ship on the horizon.
The senators were thrilled. They assured their fellow islanders that the Sinopians must have seen the errors of their misguided abandonment of Fish Reserve Notes. They would once again be making deposits at the Fish Reserve Bank.
But when the Sinopian ship made port, something entirely different ensued......
Sinopian agents fanned out across the island with wheelbarrows of real fi sh, and cartloads of Fish Reserve Notes, buying everything, even the stuff that was nailed down. Since no one on Usonia had any real fi sh anymore, the Sinopians could outbid everybody on everything.
They bought the Water Works, dismantled it, and put it in acargo canoe. They did the same with the lighthouses. They bought all the donkey carts, surfboards, hand nets, used bongos and even the mega fi sh catchers. For good measure they snapped up the empty condos so that Sinopian workers could have their own vacation huts.
When their shopping spree was done the Sinopians left, bringing everything of value with them. They left behind the Fish Reserve Notes that they had accumulated over the years. At least, the Usonians would have plenty of kindling for their cooking fi res. Finding something to eat was a different matter.
The senators surveyed the devastation and wondered where it had gone wrong. They had spent, so why hadn’t the economy grown? Finally it became clear. It was all much simpler than what they had thought.....
Addressing an anxious population still looking for answers, Senator Ocuda uttered the most honest words any politician could muster:
“Does anybody here remember how to make a net? I think it’s time we all went fishing.”