Continuing our Scrooge Saga, in last week’s posting we asked the eternal question, “How did being wealthy become a virtue?” The quick answer is that people’s understanding of money changed. The longer and more involved answer is that people’s understanding of money, credit, banking, and finance changed . . . or, briefly, people’s understanding of money changed . . .
Prior to the middle of the nineteenth century when Ebenezer Scrooge had his activities and supernatural visitations chronicled by Charles Dickens, ordinary people thought about money only when they needed it, and what most people thought was that money is something the government either gives you or takes away. In other words, money is a commodity specially created by the State or some authority by means of which the State controls economic — and therefore political and social — life.
People who studied the matter or who understood how money, credit, banking, and finance really work knew better. They understood “money” is not a commodity, but a means of measuring value and engaging in exchange. They knew that production of marketable goods and services does not come from money. Instead, as they had known for thousands of years, they were fully aware money comes from production of marketable goods and services. As Jean-Baptiste Say informed the Reverend Thomas Malthus,
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| Jean-Baptiste Say |
All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.
To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.
From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce. (Jean-Baptiste Say, “Letter I,” Letters to Mister Malthus (1821).)
Given this understanding, it becomes clear that “money” is not a special creation by the State or even the banks. Anyone who can produce something or has something to trade with others can create all the money he or she needs. All that is needed is something of value that someone wants to trade with someone else for something of value.
This, however, can create a problem. What if the two people who want to trade things of value have no common or agreed-upon way of measuring the value of the things they want to exchange? Person A has meat, but Person B has wheat. How much meat equals what quantity of wheat, and vice versa?
That is where “currency” comes in — an agreed-upon measure of value, usually a third thing both parties consider worth having, such as lumps of silver, seashells, tobacco, or cattle. Currency (or “current money”, meaning “generally accepted money”) is thus a form of “pre-measured money.” This makes carrying out commerce a great deal easier, for otherwise people would have to decide how to value things each time they wanted to trade, even before they could decide what the things they had to trade were worth! Assuming there is no counterfeiting going on, and all things being equal, all currency is money, but not all money is currency.
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| Louis O. Kelso |
Money is, in fact, “all things transferred in commerce” . . . which assumes that a transfer having taken place, there has been a common unit of measure agreed-upon. That is why Louis O. Kelso could say,
Money is not a part of the visible sector of the economy. People do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54-55.)
Obviously, “money as a yardstick” or a unit of measure necessarily implies that there is something to measure, which in turn necessarily implies that the thing to be measured preexists the thing by which it is measured. After all, “value”, “length”, “weight”, and so on, are abstract concepts existing only in the human minds that create them until there is something to value, measure, or weigh.
“Dollar,” “yard,” and “pound” mean absolutely nothing until you have a good or service to exchange and thus to value, something concrete to measure, or a specific thing to weigh. You cannot go into a store and ask for a dollar’s worth, determine the length, or the weight until you know what you are buying, measuring, or weighing, respectively. Production (or existence) therefore necessarily precedes money, length, or weight.
Unfortunately, in the late eighteenth and early nineteenth century some odd ideas began creeping (or, more accurately, galloping) into the way the politicians and academicians think. These changed how people viewed reality and thus truth, truth being conformity with reality. These odd ways of thinking, which some began calling rei novae or “New Things,” turned everything on its head, and matters still haven’t been straightened out to this day. The effect of these “New Things” and how they affected understanding of money, credit, banking, and finance, is what we’ll look at in the next posting on this subject.
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