One of the problems with the global monetary system is the so-called experts are never able to decide how much money to create so that there is low inflation, high employment, low prices, and high wages . . . and you get the idea. The experts argue endlessly about everything except what they’re really concerned about: how to get the money they want and prevent everyone else from getting it.
The biggest problem, however, is that the so-called experts don’t really understand money, especially when they try to analyze the situation using the Quantity Theory of Money equation. As we saw in last week’s posting, M x V = P x Q, where M is the quantity of money in the economy, V is the velocity of money (the average number of times a unit of currency is spent in a year), P is the price level, and Q (some economists use T instead of Q) is the number of economic transactions. Solving for M to get the amount of money in an economy results in M = (P x Q)/V.
Unfortunately, the experts don’t try to solve for M. Instead, what they do is try to solve for P, Q, and V. So, why are the experts unable to calculate the necessary amount of money to create? The reason is simple. As anyone familiar with basic algebra knows, you cannot have three unknown variables in a single equation.
Such an equation cannot be solved in any meaningful sense. There must be a separate equation for each unknown variable to give the relationship of each unknown variable to the known variables. Whatever theory or magical formula is used to decide how much money to create, having three unknown variables in a single equation means anything can happen, and it often does.
On the other hand, under the Banking Principle, the Quantity Theory of Money equation makes perfect sense. As Banking Principle economists claim, the level of economic activity in the economy determines the quantity of money, i.e., you do not need money to make money! To oversimplify, people create money every time they initiate an economic transaction and cancel money when the transaction is completed. This sums up the entire science of finance and the mystery of money from prehistory to modern times.
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| John Maynard Keynes |
Put another way, the Currency Principle assumes all production derives from money, and all money represents unconsumed production, i.e., savings. Savings is strictly defined as the excess of production over consumption. As John Maynard Keynes (1883-1946) asserted in his General Theory of Employment, Interest and Money (1936), “everyone is agreed that saving means the excess of income over expenditure on consumption.” (John Maynard Keynes, The General Theory of Employment, Interest, and Money (1936), II.6.ii.)
Keynes’s assertion, however, begs the question. If someone can produce only by financing with existing money, existing money in someone’s possession comes only from savings, and savings only comes from production . . . where did the production come from out of which the first production was financed? The same difficulty occurs when borrowing others’ savings. To have savings to lend, the other must have produced something to have refrained from consuming it. This is turn requires the other to save out of something which has not been produced to finance the production he refrained from consuming.
The answer is nowhere. Nothing can precede itself. The Currency Principle is based on a circular argument, the circulus in probando logical fallacy.
Thus, the Currency Principle is supported by a mathematical impossibility on one hand, and a logical fallacy on the other. This does not mean the Currency Principle is false. Based on the weakness of the evidence and alleged proofs, however, it cannot be said to be necessarily true.
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