What do you really know about the Boston Tea Party? Other than that it happened in Boston, in 1773, and that it was a key event in the American Revolution? Grab a cup of your favorite something and curl up in your favorite chair.
It all began with banks, where trouble often starts. What is a bank? It’s a business which lets you store your money in a safe place. Nice and convenient, right? But that’s not all. They then offer you the additional convenience of using that money as a means of payment (paper or plastic) without you needing to come and draw it every time you need it. And for that, they charge you nothing, or very little.
Why do they offer such a nice service for free, or at best for a loss? (It costs them way more to offer that service than they ever collect in fees.) You just know the milk of human kindness flows not by the quart in every vein of theirs. No, the reason they’re so nice to you is: they take your money and then lend it to someone else. They then charge their borrowers interest on those loans, while paying you nothing (or next to nothing). So they pocket all that interest.
Banks, then, love to lend. The more they lend, the more they make. To lend more, though, they need more people to leave money with them.
Or do they?
Imagine you’re a bank. You’ve discovered how lucrative it is raking in interest on money that’s not yours, and which costs you hardly anything to get. You want to lend more, but you can’t persuade any more people to leave their money with you. Or, sadly, they simply don’t have more money to leave with you. Pesky poor people, they have mouths to feed, insurance to pay, and that sort of thing.
Rats. So you have a management meeting at one of the finer dining establishments in town — you know, the kind with linen napkins and silverware that actually is silver. Thankful that you don’t have to unwrap your lunch, you and your co-managers ruminate as you masticate, until Eddie’s eyes light up. “I know! Let’s simply make our own money, like, create it out of thin air. Please pass the caviar, Fred.”
Really? Can bankers create money out of thin air? Indeed they can, and they love to do that. Wouldn’t you? How do they do that? Is it legal? Yes and yes.
It begins with something mundane, like me depositing $1,000 in my account at HappiBank. Then they call Cecile and say, “Hey, Honey, want to borrow some money?” Cecile is eying a nice new computer and borrows $1,000. She pays SmartComputer $1,000 for a computer, and they deposit the money in their bank account at HappiBank, which now has $2,000 on deposit. They just created a second $1,000 with the first thousand I deposited there. They now lend the second $1,000 to someone else, who pays their vendor, who deposits their money in their HappiBank account, too. Now HappiBank has loans of $2,000 paying them interest, and deposits of $3,000. So, now they’ve created a total of $2,000 in new money, all from my original deposit of $1,000.
That’s nice, but kind of limiting, because the bank can only create as much money at a time as I deposited there. Eddie’s proposal is radical: let’s not mess around with this $1,000 at a time thing. Let’s just lend BigWind ten million dollars, just because. Then they can deposit that right back, and we can lend $10 million to someone else. Imagine that interest! Now we’re cooking with gas! Wow, that sounds nice. Is it legal? Yes, again… as long as BigWind doesn’t need his money
That is, as you can imagine, the catch: What does HappiBank do if BigWind wants his money back, and I do, too. The bank doesn’t have our money, because they lent it out, kind of hoping we all could get along without it.
You can see that for this system to work, you need a lot of trust. As long as I trust HappiBank, I’m content to leave my money there. The moment I suspect they won’t be able to pay me back my money, what do I do? I go straight there and take it out, and so does BigWind. HappiBank has to hope they have other people’s money sitting around in the bank that they haven’t lent out yet. This scheme will work as long as withdrawals remain at a “routine” rate. The moment too many people come to withdraw their money, the bank will collapse.
When banks collapse on a grand scale, it shuts ordinary businesses down, because most of them depend on credit to some degree or another for their businesses.
And that’s exactly what happened in England in 1772, when some banks in Scotland, who tried to make extra money on speculative trades, collapsed, stiffing depositors. That caused a panic as depositors rushed to the banks to get their money. Banks predictably collapsed, and with that, credit to ordinary businesses dried up.
The biggest British business of the time, the East India Company (EIC), suddenly found itself without a source of funding. They traded with the southern colonies in America, paying for tobacco and other crops with “store credit,” which allowed the Southern plantation owners to buy equipment, seed and other things they needed for their plantations. This suited them, especially since they were granted an entire year to pay for their purchases, with no interest.
Well, to grant that South those generous credit terms, the EIC depended on credit they obtained from London banks. When those banks went under, the EIC was hard pressed for cash, and some feared the equivalent of Walmart, Microsoft and General Motors, all rolled together, would go under. That would be a disaster of unimaginable proportions.
The East India Company was, in other words, too big to fail.
In order for them to recover, they did what all companies do when they become too big to fail: they got the British government to grant them special exemptions and favors — in other words, a bailout. Part of the bailout was a provision that exempted them from paying taxes on tea. This gave them an unfair advantage over their competitors, because their tea was now cheaper than the tea supplied by others. The customers, as you already know, took exception to the special favors granted to privileged men of money, and to the fact that their plights and positions had no voice in the government of the day.
Then they did what so many people have done through the years: they resorted to civil disobedience, which, in turn changed the government of the country in profound ways, ways not seen or thought of before. It’s no coincidence that the Russian, French and American revolutions all stemmed from the privileged being given preference over the man in the street.
There is one arena where the ordinary person wins every day, though, and that’s auto and homeowners’ insurance. Competition is healthy and, if you shop with an independent broker, the rates can’t be beaten. Grant is independent, and that means his team can go to bat for you and save you real money. Give him a call, don’t be shy now.