Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Elmerville Grows



click here for previous Elmer stories.

Elmer had become a very powerful man.

Elmerville was steadily growing. Through specialization, people were opening stores that sold furniture and clothes and basic items and providing special services from food and entertainment to medical treatment. People built homes by hiring specialized workers to design and construct them. The standard of living was increasing. Elmer was at the center of it all.

Elmer expanded the economy by issuing credit through Elmer notes. People still thought of these notes in terms of gold, and each note was denominated in a certain amount of gold, but they no longer transacted in gold. The gold was accumulating in Elmer's vault.

At this point Elmer had issued far more Elmer notes than could be exchanged for gold. But Elmer knew the townspeople; he knew who was likely to exchange their notes for gold and who was not. So he kept the number of notes issued to reflect this propensity. Over time he noticed that this propensity was declining, most people talking in terms of the number of Elmer notes and not how much gold each was worth. This allowed him to some extent to issue more notes relative to the amount of gold that actually existed.

Even though things in general in Elmerville were going nicely, every so often an individual problem would occur. One day a man named Tony, who had borrowed a good sum to build a house on his farm, came knocking at Elmer's door. Tony had a bad crop that season; it turns out because he had skimped on treating the soil trying to save a little for the interest payments to Elmer. Tony had no way to pay what he owed Elmer.

Now Elmer was not without compassion, but he was above all a business man. Recognizing no way to restructure the loan due to Tony's irreparable situation, he decided to cut his losses. He took Tony's farm, as it was collateral for the loan, and settled Tony's debt. Elmer put the farm up for sale.

A few days later a lady named Casey came to Elmer's door to talk about the farm. She told Elmer that she and her husband would like to buy the farm, but only had a small amount for a down payment and would need to borrow the rest. So Elmer worked out the mortgage terms with her and the deal was done: in exchange for the mortgage and the down payment, Elmer gave her title to the farm.

After Casey left, Elmer reflected on what had just happened. By providing more credit he had been able to sell a real asset at a higher price than if that credit had not been provided: surely another buyer paying cash would have had a better bargaining position than Casey. This was the first time that Elmer fully realized the correlation between asset prices and the availability of credit and that defaults on debt could be managed by issuing more and more of it. That was only possible if the propensity for people to want gold in exchange for their Elmer notes continued to drop.

The next day Elmer instituted a program to renew all outstanding Elmer notes under the auspice of making the new notes all standardized. The new notes had no reference to gold.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos