In the previous posting on this subject, we noted that the Industrial Revolution made it possible for a few people to produce far more than they could ever consume, while the discovery by politicians that they could finance government operations using newly created money backed only with their own debt made it possible to consume massive amounts of goods and services without producing anything at all.
This posting is titled “A New Philosophy of Money,” although that sounds rather silly — at first. As a number of thinkers through the ages have pointed out, everyone has a philosophy, and your philosophy determines how you think about something. It doesn’t have to be true, logical, or even systematic. It can just be a set of assumptions that you accept without ever having bothered to examine them. In general, a philosophy is a way people seek to understand fundamental truths about themselves, the world in which they live, and their relationships to the world and to each other.
Henry Dunning Macleod
For example, if you accept as a fundamental assumption of existence that money and credit (the same thing, according to Henry Dunning Macleod) are a commodity by means of which people carry out exchanges, your understanding of economic life will be completely different from that of someone who believes that money are credit are only a social tool by means of which people carry out exchanges. In the former, money and credit have an independent existence, while in the latter, money and credit have no existence independent of the human minds that create them.
Putting on our hip waders and getting into this a little (or a lot) deeper, the idea that ideas have an existence separate from the human minds that create them is a Platonic idea. It creates an independent reality apart from the reality created by the Creator and shifts what it means for something to be true from an absolute that can be discerned at least in some degree by reason, to a matter of opinion . . . in which case “truth” depends on whatever the individual or group with the most power or self-referential “faith” insists that it is.
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| Ideas are human creations |
The idea that ideas do not have an existence independent of the human minds that create them is an Aristotelian idea. Reality and truth are not changeable, but absolutes that must be discerned as far as possible through reason, not faith, and be consistent with empirical observation and logic. There can be no contradiction between truth and reality, for truth means conformity with reality, not changing things until you feel satisfied or comfortable with it.
The point here — and the thing that led in large measure to the Panic of 1825 — is that the belief that money and credit are a commodity divides truth from reality. Money and credit are not themselves a commodity, but an idea, a symbol by means of which people exchange things that have economic value. To think that you can have the symbol of the thing exist before the thing itself (that is, think that production derives from money, rather than that money derives from production) gets the whole process backwards.
Put more simply, money doesn’t create value, value creates money. Ebenezer Scrooge understood this as well as he understood anything. As a strictly honest man, he would not have put his name to anything whatsoever if he wasn’t absolutely certain that it existed. Just look at how much he resisted acknowledging the existence of the Spirits that visited him, beginning with Jacob Marley. As Scrooge said,
“You don’t believe in me,” observed the Ghost.
“I don’t,” said Scrooge.
“What evidence would you have of my reality, beyond that of your senses?”
“I don’t know,” said Scrooge.
“Why do you doubt your senses?”
“Because,” said Scrooge, “a little thing affects them. A slight disorder of the stomach makes them cheats. You may be an undigested bit of beef, a blot of mustard, a crumb of cheese, a fragment of an underdone potato. There’s more of gravy than of grave about you, whatever you are!”
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| Jean-Baptiste Say |
Unfortunately, the Industrial Revolution convinced people that it is possible to produce without consuming, thereby violating Adam Smith’s first principle of economics and Say’s Law of Markets based on it. As Smith declared, “Consumption is the sole end and purpose of all production,” which Say logically concluded means that for an economy to be in balance and run rationally, each consumer must produce, and each producer must consume. As a result — assuming producers consume and consumers produce — production equals income, and thus supply (production) generates its own demand (consumption), and demand, its own supply.
Given Smith’s principle, Say’s Law, and the realization that money derives from production, the level of economic activity determines the quantity of money in an economy. This is “the Banking Principle,” because commercial, mercantile and central banks were invented to turn things of value (either currently in the possession of the money creator, or a contract of some sort representing the present value of something the money reasonably expects to have in hand at a future date) into “money.”
Shortly after the Industrial Revolution made it possible for a few people who owned capital to out-produce people who owned only labor on a gigantic scale, the French Revolution and the Napoleonic Wars to which the French Revolution led convinced politicians that it was possible to finance a significant amount of government spending by issuing money backed with its own debt. In other words, by backing new money with its own debt (financial instruments called “bills of credit”), a government gains tremendous power to consume without producing anything or by imposing direct taxation (the “hidden tax” of inflation is another matter).
This put the fixed idea in people’s heads that if government would just create exactly the right amount of money, the economy would run smoothly. Eventually this became known as “the Currency Principle,” the fundamental assumption of which is that the amount of money in the economy determines the level of economic activity. Monetary and fiscal policy changed from maintaining a stable and adequate currency and how to tax most justly to ensure adequate funding for government, respectively, to how much money could government create without devaluing the currency and how to tax people as little as possible to get reelected.
In short, money ceased being a means by which people exchanged things of economic value and became a political tool and a matter of public policy to force people to act in what those with money deemed desirable ways. It was at this time, in fact, that Mayer Anselm Rothschild is alleged to have said, “Give me control of money and credit, and I care not who makes the laws.”
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