money was summarized by the late 18th, early 19th century political economist Jean-Baptiste Say. This "Say's Law of Markets" can briefly be stated as "production equals income." Thus, in the aggregate, "supply generates its own demand, and demand its own supply."
Unfortunately, there is another understanding of money and credit, one that has become accepted as economic orthodoxy, despite the fact that it contradicts both common sense and sound philosophy, to say nothing of the natural moral law. Nor was Say unaware that there were economists and others (notably Malthus) who disagreed with his analysis. As Say explained,
I am aware that this proposition has a paradoxical appearance, which creates prejudices against it; I know that common prejudices are more likely to support the opinions of those who maintain that there is too much produce, because every body is engaged in creating it: that instead of constantly producing, we ought to increase unproductive consumption, and devour our old capitals instead of accumulating new ones. This doctrine has indeed appearances on its side: it may be supported by arguments; and may interpret facts in its favour. But, Sir, when Copernicus and Galileo first taught that the sun (although it was daily seen to rise in the east, ascend majestically to the meridian, and decline at evening in the west) never moved from its station, they also had to contend with universal prejudice, the opinion of antiquity, the evidence of the senses: ought they to have renounced the demonstrations resulting from sound philosophy? I should wrong you, were I to doubt of your answer. (Jean-Baptiste Say, Letters to Mr. Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce. London: Sherwood, Neely & Jones, 1821, 3.)The crux of the issue, and the basis for the misunderstanding between Say and Malthus, is that each used a different definition (and thus understanding) of "money." As we might expect, these different definitions of a concept as fundamental as money have been evocative of much confusion about the science of political economy, particularly where it overlaps into the moral philosophy, which necessarily provides the foundation of all the social sciences.
To Say, "money" is anything that can be used in settlement of a debt. As previously noted, this includes anything and everything that people use as a medium of exchange, regardless whether a third party has put some kind of stamp of approval on it. This is, essentially, the basic principle of the "British Banking School." As long as something can be used in settlement of a debt in a free exchange, it counts as "money," regardless who issued it, or even what it is.
To Malthus and those who take the position at odds with that of the Banking School, "money" is limited to that which is recognized by the State as the official medium of exchange. To be legitimate, it must have the sanction of the State. No transaction is legitimate unless it is carried out by means of whatever the State has authorized to be used as money. This is the basic principle of the British Currency School. It assumes a State so powerful that, like a god, it can presumably command changes in the natural law itself by claiming the right to define not just the exercise of rights, but the substance of rights, the very essence of reality. Perhaps John Maynard Keynes, the architect of modern economics, described it best in his Treatise on Money:
It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of Money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)According to Keynes, then, the State is effectively God — for nothing other than a Supreme Being has or could have the power to redefine the substantial nature of a thing and thereby transubstantiate one thing into another. Keynes claims for the State as something ordinary the extraordinary ability to change reality itself: "the right to re-edit the dictionary"! We can only pause in wonder, even awe, at the ready and unquestioning acceptance of such a claim and statement in the realm of political science on the part of the State, when, e.g., Christian bodies that maintain a belief in the "Real Presence" have been subject to abuse and ridicule for claiming that, as an extraordinary favor and purely a matter of faith (although considered no less real for all that), the bread and wine presented at the altar is transubstantiated into the Body and Blood of Christ by God acting through the minister.
According to Keynes, then, "money" does not consist of anything that can be used in settlement of a debt, but is a purchase order issued by the State, or by a State-sanctioned individual or organization. Just as Hobbes claimed in Leviathan, the State is presumed to be the ultimate owner of everything. Nothing else can be used as the medium of exchange; by no other means can contracts be entered into or fulfilled; freedom of association is abolished, and even the substantial nature of reality has been altered.
Keynes's explanation, however, while superficially plausible once you accept the idea of divine right or an all-powerful State (and, in fact, reflects what many people today firmly and sincerely believe), is completely wrong. It is a declaration of pure legal and moral positivism, the sort of thinking that the noted German jurist Heinrich Rommen declared leads ultimately to nihilism, and to which he traced the rise of Nazism. Contrary to the statement that absolutism has been "claimed by all modern States and . . . so claimed for some four thousand years at least," Keynes's belief and faith in absolute State power is (as we have seen already in this blog series) actually of relatively recent appearance on the political stage — and is not, in any event, "claimed by all modern States." Contrary to Keynes's declaration, the United States of America explicitly vests sovereignty not in the State, but in the people.
This is nothing more than the Medieval argument as to whether God's Intellect (Nature/Reason) has the primacy, or whether God's — or the State's — revealed Will is supreme. We can easily see, then, that Keynes's concept of "money" is directly contrary to the Thomist understanding of the natural moral law. It assumes as a given that "law is will" (lex voluntas) instead of "law is reason" (lex ratio). (Rommen, op. cit., 36) In Keynes's and the Currency School's positivist orientation, money, like law, is whatever the State says it is. This is claimed to be so, regardless of the underlying principle, whether it be actual value represented, or the dictates of justice as discerned by reason, respectively. As Rommen explains,
Natural law is the consequence of the doctrines of the priority of the intellect over the will (law is reason) in both God and man, of the knowability of the essences of things and their essential order, their metaphysical being and the ordered hierarchy of values. Positivism, on the other hand, is the consequence of the doctrine of the primacy of the will with respect to the intellect in both theology and human psychology. Besides, voluntas here means more than mere will: it denotes passion, irrational appetite, and so on. Positivism signifies the renouncing of all efforts to know the essences of things (nominalism), the repudiation of the metaphysics of hierarchized being and value. Accordingly it is also found in the same conceptual pattern in the things of the nineteenth and twentieth centuries, even though it is concealed under different names. (Ibid.)The idea that money is anything that can be used in settlement of a debt is consistent with the understanding of the natural law based on reason (lex ratio), while the belief that money is and can only be what the State declares to be money is an application of pure moral positivism, indeed, even tyranny — as Keynes admits.
Modern political absolutism, such as Keynes erroneously declared has been around for "some four thousand years," is rooted in the theories of "divine right" that followed hard on the heels of the Reformation, as John Neville Figgis noted, and the growth of the idea that the natural moral law is based not on the Intellect, but on the Will, that is, personal opinion and (ultimately) the belief that "might makes right." As we saw, it reached its highest (or, depending on your point of view, its lowest) development in Stuart England with the totalitarian political philosophies of Sir Robert Filmer and Thomas Hobbes. Far from being unchallenged and pervasive for thousands of years as Keynes claimed, State absolutism was countered by political philosophies at least as far back as Aristotle in The Nichomachean Ethics, The Politics and The Athenian Constitution, and Aquinas in De Regimine Principum.
Not that any refutation of the modern mania for legal and moral positivism and State absolutism has made any difference in the modern world, absolutely convinced that the State is the sole means of effecting changes in the common good, even in reality itself. Aristotle's idea persists that the individual is helpless in the face of existing social structures or conditions. Only a divinely instituted State or one that exists on its own authority (so modern political scientists and economists assume) has the power to act on the common good, and that only indirectly.
The implications of the claim that the State alone has the power to define what can be used as money and by whom are thus, to put it mildly, breathtaking. This has led to the situation so ably described by Pope Pius XI in his landmark encyclical, Quadragesimo Anno, "On the Restructuring of the Social Order," issued in 1931. As Pius XI observed,
In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.Although Keynes's view of money and the role of the State is admittedly the prevailing view in the modern world, it did not (despite Keynes's claim that it had developed out of the accepted theory of State absolutism for "four thousand years") go unchallenged. Aquinas opposed the theory after it made its first appearance in the 12th century. In the 16th century, when the belief that the natural moral law is based on the Will rather than the Intellect gained new momentum from the Reformation, the argument in support of the Intellect was strengthened, notably through the work of Cardinal Bellarmine.
This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will. (§§ 105-106)
We will start to look at the work of Cardinal Bellarmine in the next posting in this series.