Conversations with my son series

Conversations with my son – Universal Income and creating Money Supply

As the day’s get better, so the conversations with my son come out of the blue. I do talk to my son about money. He knows he has a savings account and he knows it is important to save regularly, so that he can have more money when he is older. He also understands (for the time being) that he needs to work hard at school, as working hard at school will help him have a better choice for his future.

He is only 7, so having already assimilated these basic concepts is a good thing.

It is also not surprising that he asks about money concepts from time to time.

This time our conversation veered from Universal Income to Creating Money.

As we were crossing the Champs de Mars, on the way to school, he turned to me and said :

“Daddy, imagine if money grew on trees.”

I assume most kids ask this or say this at some point. I have a vague recollection that, as a child, I secretly wished I’d find a money tree. Who wouldn’t right ? We all learn at fairly early stages that if you want something, well you need money to buy it.

But if money did grow on trees what would happen ? Our conversation spun through, principally, two interesting concepts :

  1. How does money get created ? What is this concept called “Money Supply”?
  2. Is the concept of a Universal Income a good or bad thing ?

What follows is not a word by word transcript of our conversation, but rather a stylized version of the simple concepts I explained to my son. It was interesting to see how he reacted to these two basic concepts, one of which we still don’t have a universally accepted stance on, and I’ll share those reactions with you.

1. What is money supply and how is money created ?

Money supply is the total amount of money moving around in a country. This is usually the coins and notes that are in existence and the short-term deposits in the banks (which can be withdrawn rapidly to becoming notes / coins).

Money creation is the process whereby the money supply is increased. But before we go there, how did money originate ?

Initially we had a system of exchange of goods. You want the blue toy car that your friend Raphael has and he wants the book you were reading yesterday. “But Daddy if he wants my book, I’ll give it to him. I don’t want his toy car.” “That’s generous of you my boy, but let me finish my example.”

If you think his car is worth the same as your book, then you can exchange them and that is called the barter system. We did this before money existed. “You did that as a boy Papa ?” … (pause for dramatic effect, as that comment sinks in and you wonder how old your son thinks your really are, then continue the conversation).

Long ago, before I was born, people used this system as money had not yet been invented. But then it became difficult for people to agree what was the value of something and it was difficult to always find things to bargain. Think about that spinning top you just got. It is new and you enjoy playing with it. Maybe you like it so much, that you would want two toy cars if you ever wanted to exchange it. Then maybe your friend Raphael only wants to give you one car for your spinning top. In that case, you can’t exchange it easily as you’ll end up fighting.

“I don’t fight Dad, it is Raphael who always pushes me first.”

So to overcome the problem with different perceptions of value, we started making money. It started first with coins and then we added paper at some point. Actually, paper money originated first in China somewhere between the 7th and 11th century. It then spread back to Europe when the first explorers, like Marco Polo brought the concept back to Europe. This also helped, as then people could carry around coins and notes when they wanted something and not the thing they wanted to bargain.

With coins and notes, we were able to give something a value and transport the means of payment in a more efficient manner.

“But what if people ask too much money and I don’t want to pay that much for something ?”

We can still negotiate with money and prices, but money in coin and note makes it easy to transfer things.

Money was first made of gold and then other things, but people could always exchange these other coins for gold when they wanted to.

“Can we do that now and get gold coins?” (My son is a fan of pirate stories)

Today we don’t have that same system. Today the money we have is backed by the government and the value of the money, our euros, is managed by governments and people all over the world who, by exchanging our euros with pounds or dollars give it a value.

If people like our euros, they’ll buy more of them and it will be easier for us to buy things. If they don’t like it, they will sell them and things will be more expensive.

« Do people like our euros Dad ? »

« Yes, son, today more people like our euros than those who don’t. »

This value of money is very similar today to how we fix the value of any good or service. It is governed by the rules of supply and demand. The more people who want something that has a fixed supply, means that that thing has more value.

In our world today, the creation of money or the supply of money is managed by the central bank of the government and they fix the rules of supply. The demand is the rest of the world and together they determine the value of our money.

money creation supply demnd for money

And this brings us back to our Money Tree. If we had money trees growing all around, that would mean that there would be more and more money (supply). As the supply got bigger for a static demand, the value of the money would fall and things would become more and more expensive and we’d need more and more money to buy them.

“But Daddy, I meant a tree just for us. Imagine !?”

“But what about all the people who have less money than us ?”

“We could give them some so that everyone has money.”

2. Is the concept of a Universal Income a good or a bad thing ?

“If we gave everyone money, do you think they would continue working or stop ?”

“They would work of course, as we work for fun, not only money. It is like going to school.”

It is refreshing to see that coming from my son. Indeed work should not just all be about money, but often we confuse the concept of Universal Income with the vocal minority, who claim that if they had money they would retire and not work at all.

We all know about the image of the immigrant coming to our country to feed off our system.

That image and its variants are winning elections, but how true is it ?

Do immigrants really abuse the system. I argue that – like the local population – any abuse is relatively small. Every human has a desire to contribute, to feel valued and to learn and grow and giving someone a basic income will not mean that they will stay at home and watch TV for 10 hours/day.

The research is pretty strong to support this argument. Check this one out

Do Undocumented Immigrants Overuse Government Benefits ?

In my own country, I see first hand the strength that immigration has brought. The workforce that has been provided by immigrant labor over the last few generations has been phenomenal. It has come with its own problems but the pros have outweighed the cons, even though the vocal minority might sway you to the latter. Why should we believe that today’s immigrants will be any different than yesterday’s ?

So I asked my son to get another data point : “For the kids in your school that aren’t French, do they work less at school ?”

“No Dad, we all do the same work”

I do believe volume controlled immigration can have a positive impact on a country and Universal Income (yes the subjects are different, but the prior is more topical) can come with a benefit. There may be abuse, but it will also be relatively small. I believe giving people a certain basic revenue to ensure they can feed and house themselves, allows them the means to move further up Maslow’s famous hierarchy – which still stands true today for everyone.

The CFO

Want to go further ?

Universal Basic Income – A Not so Radical History

Maslow’s hierachy of Needs – click here

4 Comments

  • FranceUSA

    This is why I left France. You can get cheap Muslim male labor but at the cost of changing your society that will tell you, you can’t keep your own money since making money in France is viewed as bad. Being an entrepreneur is bad. Macron a socialist is viewed as a right republican now for getting rid of the Impots sur la fortune on liquid assets only (not real estate). Being for the right of women is bad. But being pro male Muslim and pro universal income is good. Unlike your son, and having lived many years by definition every person is lazy and the lasiest the more efficient (if not then explain why the cheminots are on strike. The definition of a lazy and selfish pro government employee that never had to work for himself and lives off subsidies from the rest of French citizens with higher fares and more borrowed money to pay for salaries instead of infrasucture). For every 10 migrants 9 are men and they put religion ahead of country and laïcité. This is why I am in the USA. It’s not as pretty as France the language is not as rich but they put limits to illegal immigration and they are proud of their neighbors that make more money and hope to be more successful as opposed to go on strike and ask for more taxes and less work more vacation and free school.
    Be a man and earn it all yourself.
    As Kennedy said a democrat, ask not what your country can do for you but what you can do for your country. Translation: be independent and help yourself. Such an anti French point of view.
    I am amazed that you even read Financial Samurai. The definition of a non white that is all about making it on his own in the US.
    FranceUSA

  • The CFO

    Thanks for your comments. Having experienced misery first hand, I don’t neccessarily share your view that being completely independent in the best course of action. I believe strong communities can and should have a place in the world. The obvious example is : should we help the child who was born a cripple or should we tell him or her to help herself and if he or she can’t then that’s not our problem. It may be extreme but I guess the question is where do you draw the line?

    Having lived in France 18 years, I don’t believe the French are anti-rich. The ISF or IFI now is in reality a joke and very few people pay it. There are numerous ways to get around it if you are smart enough in your portfolio construction. I do believe the French are anti-flashy. They don’t like people showing their wealth. Most of my freinds are entrepreneurs and they seem to be doing pretty well.

    The cheminot’s were promised life long contracts in exchange for a salary that equates to the average in France. Remember this initially put in place to counterbalance the relatively low salaries and entice people to the function. They enjoy 28 days of leave, which is about usual. They currently fear that they’ll lose the life long contract advantage. They also fear privitization is on the cards – which of course it is and which is of course the heart of this conflict. Look at UK rail since privatization.
    I am pro-people giving their opinions and believe good debate can change points of view.

    I like the Kennedy quote, always have, but wasn’t he asking people to work together at a point when they were so divided on so many issues?

  • FranceUSA

    Drawing the line is easy. Let the cripple help himself. It’s not my job. He has family. About the cheminot, those current employees keep the same rights so there are no changes to them. Only the future ones. Fear is a great political sledge hammer. Politicians use it because it works but reality is quite different.
    28 days sounds good but the fact is in a world in which one competes 28 days is well above the norm. For example the lack of work commitment in France is so bad that for the past 20 years I don’t fly Air France anymore and refuse to have a connection in CDG Paris because French government employee are on strike so often. I know many people that do the same and use London or Amsterdam for that reason.
    For the ISF, you think it does not affect many. Well it does affect my parents for one. They are very simple people. They try to save money and then buy a small house to rent it out. They don’t trust stock portfolios. They only understand “la Pierre” they don’t have a university education. Only 1 of them has a high school Bac. So getting complicated legal structures they don’t understand is out of the question. Simple as I said and also safe: no mortgage just cash. Over many years they got past the $1M mark and have to pay the ISF. That’s is by definition one of the best way one should accumulate wealth yet it is not encouraged while stocks and life insurance products which may not be appropriate for at retirement age are.
    If you truly want fair and egalitarian principle then tax everyone the same. You earn $1 you pay 20 cents. No deduction, no special class. No exclusions. Further you know about the Laffer curve. Above 50% tax rate (all tax included) people start to stop working.
    Did I mention that people that are well off move around to other countries. The end result is the ones not paying much tax and are a burden stay in the country. The ones that can afford a house outside France establish residency in Malta or Portugal. Just to name a few.

    Anyway. It is clear I have liberaterian views and you are a French socialist which would be considered a hard core left wing person in the US. I will give you one nuance about France vs the US that sums it up regarding the French selfish lazy attitude: liberal. In the us it is referring to the left and is often said as an insult by a republican. In France Proffesion Libérale is referencing the doctored or lawyers or CPA down to the plumber or carpenter that are considered rich and republicans and is often a jealous insult given by the socialists. Quite amazing and very telling about society. 2 opposite for the same word with its shared origin.

    Best of luck with your Web Site. I think it will be beneficial to many that you are sharing good advice on being financially responsable.

  • The CFO

    Thanks again for your comments. My views are actually more fluid than you may believe. What I am trying to do is stimulate debate on issues so thanks for providing your views. Actually I am neither French nor socialist but would consider myself humanitarian.
    Your view on taxes is an interesting one that I have looked at and might write about at one point.
    If ever your parents would need some help happy to offer any services I can. After all I am trying to offer my insights via this site and help people if I can.
    All the best and hope you continue reading.

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