There are no easy ways to become richer. There aren’t even any easy ways to become rich.
There are, however, EASIER ways to become both rich and richer! What do I mean by that?
First, let’s look at the way that most people think you build wealth. Get a job, cut consumption below your income, and save, save, save. Then, when you have enough money accumulated, you either use it to finance some terrific invention, or you find someone with a terrific invention who needs your money to make it profitable. This also applies to starting businesses, of course.
Once you learn about corporate finance (or any other kind, for that matter), you find out that most new capital isn’t financed that way. Yes, at one time it was, but economic growth went at a snail’s pace. The “development curve” was practically flat, not much of a curve. What happened?
Somebody reinvented commercial banking, that’s what happened. Most people think that a bank is a financial institution that takes deposits and makes loans. That’s right, but that’s only one kind of bank. If that were the only kind of bank, economic growth would be limited to what could be saved out of existing wealth. Looking at a development curve from the 17th century on, however, we see something astonishing. It goes from almost horizontal, to practically straight up! There’s no way on earth or anywhere else that people saved that much money, if only because that much money didn’t exist!
There’s no secret what happened. People reinvented the commercial or mercantile bank. That’s a financial institution that takes deposits, makes loans … and issues promissory notes. And what is a promissory note? It’s a promise to pay somebody in the future for what you get today. You don’t have to have the means to repay the promissory note today (or why would you be borrowing in the first place?). All you need is to be able to repay the promissory note when it falls due.
You see what happened? People stopped financing new capital out of past savings, that is, out of what they could cut from consumption, and started financing out of FUTURE savings! That is, they repaid the loan out of what the capital would produce in the future, rather than what had been withheld from consumption in the past. Suddenly, the sky was the limit for development. We were no longer shackled by the past, because the “money” that people were creating to finance new capital was not backed by existing wealth, but by future wealth. We could finance anything that could pay for itself with what would be produced in the future, rather than what had been produced in the past. All money is a promise, and is only as good as the word of the issuer of the money – and it doesn’t have to be government, either. Anybody that can make a promise and deliver on the promise can “create money.” All you need is someone who accepts the promise in trade.
How does this make it easier to become richer? Simple. If we finance out of future savings, we avoid reducing consumption. Why is that important? Because the demand for new capital is derived from consumer demand. If consumers stop consuming, then there’s no reason to finance new capital. Not only is it harder to become richer by cutting consumption, it’s very easy to become poor because people stop buying whatever marketable good or service you’re producing.
One more thing is needed to become richer: more people who own capital. The more people who own capital, the more money they have to spend. Every dollar someone spends means a dollar in income for somebody else who supplied the good or service being purchased. With everybody owning capital as well as labor, and financing new capital out of future savings instead of past savings, there won’t be any super-rich, but the number of poor people will decline rapidly, and everybody will get richer faster, and all without first having to cut consumption and starve yourself in order to do it. We need a “Capital Homestead Act” so that everybody can become an owner of capital by using future savings.