As we saw in the previous posting on this subject, turning control of money and credit to the State does not seem to have been a good idea — ever. In the crudest sense, it separates the people who produce from the benefits of production, mainly consumption. This undermines the first principle of economics as stated by Adam Smith in The Wealth of Nations: “Consumption is the sole end and purpose of all production.”
In other words, allowing the State (which by its nature produces nothing in the way of marketable goods and services) to “create” consumption power by issuing fiat money backed with its own debt completely nullifies Say’s Law of Markets. When the State issues money backed only with its own debt, it makes it possible to consume without producing, whereas the fundamental premise of Say’s Law is that — absent charity, theft or redistribution — the only way to consume is to produce.
According to Say’s Law, you must either produce for your own consumption, or produce something to trade to someone else who has produced something that you want to consume. When the government issues orders for consumption without producing anything (i.e., creates money backed by its own debt), it inhibits production by penalizing producers, weakens the economy, debauches the currency, and allows politicians to be largely unaccountable to the electorate when they don’t have to answer to them directly for the money they spend. Essentially, what you’ve done by allowing the government to create money is hand politicians a blank check.
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| Don't contradict Keynes, he does it himself. |
And that is the problem with the assumptions of Keynesian economics and monetary theory that drove the New Deal and the Great Society, and are behind the Great Reset, etc. They do not describe reality, as the following analysis should make evident, but a fantasy world, and one that violates the inviolable laws of mathematics. Economics may be a social science, but that does not exempt it from the laws of mathematics. And how is that?
We begin with a standard tool for analyzing the relationship between money and economic activity. This is “the Quantity Theory of Money equation,” given in most economics textbooks,
M x V = P x Q
where M is the quantity of money, V is the “velocity” of money (the average number of times each unit of currency is spent in a year), P is the price level, and Q is the number of transactions.
According to the past savings Currency Principle, you can affect V, P and Q by changing or controlling M. As any high school freshman algebra student should be able to tell you, however, you can change M all you like, but you have no idea what will happen to V, P or Q as a result.
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| Jean-Baptiste Say |
This is because — again, as our hypothetical freshman algebra student can tell us — you cannot solve for three variables (V, P and Q) when you only have one equation. The result will only be nonsense, as the answer can be anything you want it to be. This is good news for politicians who want to spend as much money as they can, but very bad news for the rest of us.
The case is different with the future savings Banking Principle. Using the same Quantity Theory of Money equation, we assume instead of the quantity of money determining economic activity (the Currency Principle), economic activity determines the quantity of money — the Banking Principle. That is, instead of production deriving from money as Keynes and others have insisted, money derives from production, as Adam Smith and Jean-Baptiste Say claimed.
Suddenly, instead of being confronted with paradoxes and contradictions on every hand, economics and finance begin to make sense. In mathematical terms, the Quantity Theory of Money equation changes from a baffling puzzle with one known item and three variables in a single equation, to one variable and three known items, which any freshman algebra student should be able to solve with ease.
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| Adam Smith |
Under Currency Principle assumptions, then, economic planning is an exercise in futility. It leads only to chaos as politicians try to force results by manipulating the one thing they should leave strictly alone: the money supply.
Ironically, under Banking Principle assumptions, the question of how much money should be in the economy is meaningless. Because money can only be created under Banking Principle assumptions when there is existing or future production to back it, the quantity of money is self-regulating. When people need money to initiate a transaction, they create it. When the money has done its job, it is automatically cancelled by completing the transaction.
Furthermore, the only way politicians can get money under the Banking Principle is to go hat-in-hand to their constituents and beg them, pretty please with sugar on top, for a tax increase. The problem, of course, is that if a politician wants a tax increase that he or she can’t convince his or her constituents is absolutely necessary, the constituents will throw the rascal out and vote in somebody who will have their interests — and their pocketbooks — more at heart.
Frankly, while no one likes to pay taxes, ensuring that the government can only get the money it gets through taxation — and that the people paying the taxes are the ones voting — is the best (and, according to some, the only) way to establish, protect and maintain the sovereignty of the human person. And that is why we will start to look at the issue of sovereignty in the next posting on this subject.
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