Freeman

ARTICLE

The Story of Gunch and His Magical Scheme

NOVEMBER 01, 1975 by ALICE GIFFORD

 

Mrs. Gifford of Lynchburg, Virginia, is a teacher.

Once upon a time, there was a person named Gunch who was hired by ten friends to do certain things for them. He did not work and produce things for them to sell or even to eat or wear or live in. He acted as a guard to protect their properties and occasionally he helped settle arguments between them and he performed other small tasks for them. But absolutely all of Gunch’s support came from the contributions given to him by his ten friends.

One day Gunch had an idea for what seemed an excellent new service he could provide for his friends. He decided to help them to save for their old age. So Gunch went to his friends and made this proposal.

"I will set up a fund for all of you who support me. If you will give me a small amount of money extra each month, I will invest it for you. I will keep a careful record of this fund and when you reach the age of 65, I will start giving it back to you, one hundred dollars a month at a time."

The friends agreed that this was a superb plan. So they each began to contribute $5 a month extra to Gunch. He accepted their $50 total and put it into a special box marked "Old-Age Funds." Then Gunch invented a grand way to invest their money. He printed up IOU statements which carried a guaranteed interest of 3 per cent. This IOU said he had borrowed the money and would pay it back with the interest in the future when it would be needed. Then, leaving a small amount in the box just in case it might be needed suddenly, Gunch replaced the rest of the money every month with the IOUs and proceeded to live on almost all of the money his friends were giving him.

Day of Reckoning

All too soon the time came to start paying back the money. Gunch had a problem. First, he had to be sure he could get new friends, young and working, to join his old friends so that their new payments into the fund would redeem the IOUs and pay out the promised money. He had to be sure of many, many new friends, or else he had to increase what the old friends paid in so he could support the $100 a month payments out. $50 coming in would never do it. To make matters worse, pay-out time came rather quickly for some of the original friends. They were in the plan only a very short time before they reached 65 and had paid in far less than they would eventually receive back. These people were going to spend many years living on the money which the new friends paid in. Furthermore, unless there were an assured group of younger people coming in who were willing to assume the burden, the friends who supported the first payments out would not have any money left for themselves—especially if Gunch’s whole scheme were ever discovered.

Now Gunch had to start collecting money and borrowing money and shifting money from one person to another faster and faster. He began to raise the $5 a month charge a little at a time until it doubled and tripled and then finally became almost 6 times as much. The friends who were now living on the pay-outs were finding that $100 a month was not so much as it had seemed to be when they agreed to the idea in the first place and they begged Gunch to give them a little more. Gunch and the other friends did feel sorry for these old friends so they agreed to give them just a little more, and then a little more than that, and then…. and so forth. But this kindness only made Gunch’s situation worse.

Unfortunately, we have to stop this story right here at the crisis. Every good story gets its hero into a terrible situation and then when it reaches the climax of problems for the hero, the plot figures out a way to rescue the hero and end the story. But no one yet knows how Gunch can be rescued. His magical scheme put him into such a mess and no one can find any magical scheme to get him out. So we have to leave Gunch with no end to his story yet.

This little story of Gunch and his scheme is, in essence, exactly the story of Social Security. A government has no money of its own. It lives on the money which its "friends" — its citizens — give it. The money which is supposed to be in a fund gathering interest has been, and is being, taken out all the time and replaced with government bonds. This is the "investment and interest" that is in the fund. Government bonds are simply IOUs which the government hopes to be able to repay someday. Because it is government and because it involves millions of people, not just ten, the whole scheme has been successfully camouflaged from most of its victims.

Fiat Money

Governments have another tool they can use to hide their scheme, however. The government, unlike Gunch, can control the money supply. So governments can pay out by "printing" money. Of course this extra money they have created out of nothing is inflation and causes prices to go up and makes all the money the friends have buy less than it did before. But the friends do not understand this point either. So again, the results are not so obvious to everyone. But the scheme will inevitably either fail or cost many millions of dollars each year to the new young working people coming into the scheme.

The tragedy of this whole thing is that the American people have been so thoroughly duped by this magic. They have always had great faith in private savings and trust funds and insurance when conducted by private business and they never saw the difference between these private funds and the government’s magical scheme. But an insurance "fee" which has risen from 3 per cent in the 1930′s to almost 12 per cent in the 1970′s should say something. That doesn’t just mean more money, it also means a bigger share of all the money. Can it be that, soon, instead of everybody supporting somebody, we will have a situation of nobody supporting everybody?

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November 1975

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