Cadmus

Multiplying Money

Abstract

This article is not a comprehensive factual history of money as an economic instrument. It aims rather to present an essential psychological history of the power of money as a social organization or social technology. It explores the catalytic role of money in the development of society and its ever-increasing capacity for accomplishment in both economic and non-economic fields. This perspective focuses attention on the unutilized potential for harnessing the social power of money for promoting full employment, global development and human welfare. The title ‘multiplying money’ is intended to convey the idea that this untapped potential is exponential in nature. In order to recognize it, some fundamental misconceptions about the nature of money, how it is created and on what it is based need to be examined. This is the second article in a series.

1. Too Much or Too Little

The idea of multiplying money sounds almost sacrilegious. It evokes responses similar to what one might expect if an English clergyman were to preach the virtues of polygamy or an Indian demographer were to urge people to bear more children or an international economist were to propose that gambling and speculation be promoted as a major growth sector. Today the world is glutted with money. Witness the $4.6 trillion circling the globe daily in search of higher speculative returns or the $225 trillion in global financial assets, up from a mere $12 trillion in 1980.1 Yet, far from having too much, the world has far too little money, too little at least that is being used for its intended purpose to promote human welfare. But the merest hint about creating more money raises shouts of alarm, suspicions of conspiracy and a rush of investors to safe havens such as gold, land and other ‘real’ forms of wealth.

It is not surprising that the rich and famous protest against efforts to multiple money, for they presently enjoy a near monopoly in this domain and any extension of that privilege risks depriving them of the major source of social power and prestige that distinguishes them from everyone else. Imagine a conclave of dukes and earls advocating the multiplication of titled families or an assembly of physicians advocating that the number of licensed doctors in USA be tripled to bring down the costs of medical care. But ironically, it is not just the wealthy alone who resist the multiplication of money. Almost everyone else regards it with equal suspicion as an assault on common sense or sacred values. ‘Beware of inflation! Remember Weimar Germany!’ proclaims the man in the street born 30 years after the event, as if he has been studying monetary theory all his life. ‘Gold is the only real wealth’ cries his wife as she clings to her gold wedding ring. ‘It’s another Wall Street conspiracy to exploit depositors and raise taxes,’ insists another.

Scratch the surface and most people will tell you that a tight leash on money is a real virtue, a sign of stability and security, something you can rely on precisely because it resists change, a reassurance that greed, folly and imagination are not running away from us. This thinking is consistent with the original mindset with which the science of economy was founded at a time when wealth was confined to 10,000 families in England, the middle class was miniscule, and the vast majority scratched out a subsistence existence. Economics was founded as the science of scarcity. Although we now live in a world with the capacity to produce all types of goods and services in sufficient quantity to meet the needs of every human being, the mentality of scarcity still overshadows our thinking on the subject of both money and economy and stands as a brick wall between the human race and abundant prosperity.

The fact remains that there is not too much money in the world, but too little. At least that is what the American colonists concluded three centuries ago. Money was a revolutionary invention and a source of revolutions as well. One of the little known causes of the American Revolution was the lack of money. The Revolution was fought for the cause of freedom and one of the most prominent kinds of freedom the colonists sought was freedom to create money. England insisted that only British sterling be used as a medium of exchange in its colonies, but the colonies could not generate sufficient sterling from their one-sided trade with England, so they resorted to using Spanish dollars to supplement sterling. When this practice was banned by London, they resorted to furs, tobacco leaves, and even wampum beads as a supplementary medium of exchange. In desperation, the Massachusetts Bay Colony in 1690 became the first of the American colonies and one of the first governments in modern times to print their own paper currency notes denominated in pounds, shillings and pence. The practice was soon followed by all the other colonies. The British Parliament eventually outlawed the practice as both illegal and immoral in a series of acts, the last and most drastic completely banning the use of legal tender paper in 1764. War ensued as the result of a perpetual shortage of money to transact trade.2

Today a similar revolution is brewing in the streets of Athens, Cyprus, Egypt, Madrid, Rome and Lisbon, and among rising numbers of unemployed youth in towns and villages throughout the world. The cause célèbre is the first major crisis affecting the world’s most important experiment to move beyond national currencies towards a truly global system – the Euro. The source of the problem is not any inherent deficiency in the concept of a regional currency, but in the inadequate development of European institutions of governance to support its successful application. Having relinquished their right to create money at the national level, member states of the Eurozone have encountered the very same problem that plagued the American colonies before independence – an incapacity to generate all the money that is necessary to support full utilization of their economic potential to meet the needs of their people. These nations possess the essential ingredients to continue their remarkable rise from the ashes of WWII to become the most prosperous region in the world. What they now lack is the necessary catalyst – money. What is true of some nations of the Eurozone today is true of the world as a whole.

Economist Paul Krugman has been making a similar argument with regard to the US economy for years, citing zero interest rates and low inflation as clear symptoms that something is amiss. Randall Wray, a major proponent of Modern Monetary Theory (MMT), has provided a sound framework to explain why there is ample scope and justification for creating sufficient money to achieve full employment.3 Although it directly challenges proponents of balanced budgets and tight monetary policy, MMT is gaining significant attention and support. In a web presentation to the World Academy’s Global Employment Challenge as well as in books and numerous articles, Wray explained why sovereign nations with full control over their own currencies can and should create sufficient money to ensure their economies function at full employment. But let us reserve the theory for a subsequent article and start by examining the facts.

2. The Great Catalyst

Money is a catalyst for economic activity, in the same way words are a catalyst for communication. Without language, interaction, cooperation and relationship between people would be reduced to physical gestures and signs at particular points in space and time. The gathering and transmission of information, organization and transfer of knowledge, dissemination of technologies, codification of laws, formalization of governance, diffusion of cultures, formulation of philosophies and recording of religious experiences and inspiration would be impossible without symbolic language. In the absence of the power of ideas made possible by language, these remarkable human capacities would be literally ‘unthinkable’.

Catalysts are a mysterious phenomenon. They facilitate and accelerate transactions without being altered in the process. A catalyst enables chemicals to interact with one another to produce entirely new substances, leaving the catalyst just as it was before. Without them, many reactions occur very slowly or not at all. It seems almost inconceivable that a thing so potent could remain unchanged and undiminished by the function it serves. Indeed, when it comes to social catalysts such as language and money, each usage adds incrementally to its power and effectiveness. The more we use a language, the more it grows in subtlety and sophistication. The more we use money, the more it multiplies and the greater the power it acquires for accomplishment in society.

Money plays a catalytic role in society, facilitating exchange, promoting enterprise, stimulating production, spurring innovation and invention. Before money, most of humanity lived at or below subsistence levels producing only enough to meet the immediate requirements of their families for self-sufficiency and for local barter exchange. Money and trade changed all that. They provided an incentive for each person to produce the maximum of which they were capable, so that it could be converted into money and used to obtain a wide range of other goods, services and intangible social benefits produced by others. Thus, Adam Smith termed money as ‘the great wheel of circulation, the great instrument of commerce’.4

3. Untapped Global Potential

Any economy needs sufficient liquid money to facilitate full utilization of its productive capacities. A casual examination of the facts makes it abundantly clear that the world economy is far from operating at full production. According to official statistics, about 200 million people are unable to find opportunities for gainful employment. Nearly 75 million of them are below the age of 25 with dismal prospects for the future.5 The actual figures are much higher. Many people are forced to settle for work that utilizes only a small fraction of their productive capacities. While underemployment is difficult to measure accurately, the magnitude of the problem is clearly reflected by the fact that only 40% of the global workforce is employed full time.6 When underemployment is taken into account, it is reasonable to assume that more than one-third of the world’s human capital remains unutilized.

What is true of people is equally true of other productive resources. Society is an organization of human beings with the capacity to utilize knowledge, skills, technology, human and other resources to meet a wide range of human needs for production, exchange and consumption; peace, security and governance; transport and communication; health and education; scientific pursuits, artistic creativity, entertainment and recreation. Today global society has immense resources – a rapidly expanding body of scientific knowledge and technological capabilities, educational and training institutions; an ever-expanding network for communication and transportation connecting individuals, organizations and communities around the world; an enormous base of manufacturing facilities functioning far below capacity; and so much more. None of these productive resources are being fully utilized for human welfare.

Even our environmental problems are directly linked to a shortage of money. The world already possesses the technological capacity to effectively address climate change, water shortages and other ecological challenges. Massive investments in solar and other forms of renewable energy could soon make reliance on fossil fuels obsolete, if only we had the capacity to mobilize sufficient money needed for that investment. Actually those financial resources already exist but are being utilized to aggravate ecological problems rather than resolve them. A new IMF report estimates that global energy subsidies amount to a staggering $1.9 trillion worldwide – the equivalent of 2.5% of global GDP, or 8% of total government revenues. Moreover a considerable portion of these subsidies goes to the top income group.7

Global society is operating at far below the level required to fully meet human needs. Unprecedented prosperity co-exists side by side with three billion people still mired in persistent poverty – a number equivalent to the entire world population in 1950. The gap between needs and performance has always existed. But the difference is that the world now possesses the capacity to meet all those needs. Poverty was once an accepted, unchanging reality of life to which people resigned. Today that is no longer the case. The Human Aspiration is awake, expectations of a better life have percolated to all parts of the world and all levels of society. People are no longer either resigned or patient. Even in the poorest democratic societies, they want and urgently demand more. The signs of brewing revolution are reflected in the rising levels of discontent and unrest among unemployed youth and low income voters, among the rural landless and the urban poor, among the educated unemployed and the unskilled.

The catalytic role of money in mobilizing social resources to tap unutilized potential was dramatically illustrated in the town of Woergl, Austria, during the 1930s. At the height of the Great Depression, the economy of Woergl was at a standstill, public spending was drastically cut, and unemployment reached 25%. The mayor of Woergl devised an ingenious plan to revive the local economy. He deposited the entire town’s money in the local bank and used that deposit as the basis for creating local labor certificates, which he utilized to finance public works. The certificates quickly gained public acceptance because they could be utilized as legal tender to pay local taxes. Many important public works projects were undertaken using the certificates to pay local workers. The workers in turn presented the certificates to retailers in exchange for essential goods, and the stores used them to purchase materials from local wholesalers and manufacturers, who used them for further exchange as well as to pay local taxes. A one percent negative interest rate on the certificates ensured that people spent them quickly rather than saving them, leading to a very rapid turnover of funds, which further multiplied their catalytic economic impact. Very soon, the town economy was booming and reached full employment. Woergl’s success continued until the Central Bank of Austria decided that its sole authority to issue money had been compromised and declared the experiment unlawful. In a short time, unemployment in Woergl rose back to previous levels.

Today’s global economy is flush with money, but too little of it is being utilized for the intended purpose as a catalyst for the real economy. Like a chemical catalyst stored in a separate beaker standing next to the reactants it is intended to catalyze, a vast portion of money today is being stored separately in financial markets insulated from the real economy, seeking to multiply itself through speculative investment rather than by catalyzing real economic activity and employment generation. The barriers between the real economy and financial markets are porous, their interactions myriad and complex, so it is always possible to dispute this view by pointing to the positive role of financial markets in pooling capital for productive private investments, managing risks, extending credit and financing public goods. But the membrane separating the two grows ever thicker and less porous, their estrangement ever greater and closer to irreconcilable divorce.

The world already possesses the capacity to generate all the financial resources it needs to fully meet human needs. The problem is that we do not know it or rather we do not know how to design our social systems to effectively utilize it. The prevailing view of money is so completely obscured by myth, superstition and intellectual confusion that untangling the web leads only to further confusion, debate and controversy between established dogmas and conventional wisdom. The solution lies in dispensing with dogma. The key lies in finding the answers to the following questions: What is money? How is it created? On what is it based?

4. Caveat

A caveat is necessary before we can attempt to answer these questions. Money is one of the most sophisticated and powerful of all human inventions. It takes many forms, it evolves continuously over time, and it interacts in increasingly complex ways with virtually every other aspect of human social existence. The theories formulated to describe and explain it, the systems used to administer and control it, and the multiplicity of its forms and actions appear bewildering in their complexity; so much so that most people, including most economists, have decided that understanding money must be left to monetary specialists, much as we leave speculations and research on the Higgs boson to theoretical physicists. This perception is a major source of our difficulty in managing money effectively. For regardless of how money is defined in economic textbooks, it is not merely or even primarily an economic instrument. Money is a social invention, a psychological symbol, rather than a material thing. It is a human social system based on social rules and human choice, not an inanimate, lifeless mechanism. Its one and sole legitimate purpose is to promote the welfare of human beings. The moment we lose sight of these facts and begin to regard money as some mysterious abstract entity to be worshipped or feared, we lose the power to comprehend and control it. We lose our freedom as creative human beings and become subordinate or enslaved to the instrument we have created.

There is an additional complication in striving to understand money. Money and those who possess it have always been targets of envy, jealousy, suspicion, hostility and persecution. This is especially true in periods of financial turmoil, such as the present day. In the wake of the subprime mortgage crises, the ensuing global financial crisis and the persistent economic downturn, the deficiencies, inequities and abuses of money and financial systems have been so highly publicized and well-documented that public discourse is most often characterized by scathing criticism, vilification or outright condemnation. Bankers, Wall Street traders, government officials, corporate executives and wealthy investors have become the scapegoats for all that is inadequate, unfair, inequitable and corrupt about the national and global economic system. This makes it extremely difficult to engage in an objective, impartial examination of money and its role in society.

Every social institution can be used both positively or negatively, for good or for bad. The language we use to communicate and forge rich human relations can also be used to disguise, deceive, slander and condemn, to hatch conspiracies and undertake crimes. The governments we found to secure our freedom can also be used to oppress and deprive us of that very freedom. The global Internet which has empowered individual human beings as never before can also be used to promote scams, viruses, crime and terrorism.

So too, money is a neutral instrument which can be used to create unprecedented freedom of choice, prosperity, welfare and well-being for all human beings or it can be misused to serve other less noble, less equitable and desirable purposes. We do not condemn and reject the institution of language because it is also used by criminals and terrorists. We do not reject the principles of democracy because it so imperfectly embodies in practice the ideals on which it is founded. We do not shut down the internet because it is used for anti-social purposes. Instead, we strive to develop ways to extend its positive applications and minimize or eliminate its negative expressions as far as possible.

Thus, in examining the origins and evolution of money as a social institution, we need to recall that money, like democracy, is a work in progress – imperfect in its structure, often misdirected and misapplied in the exercise of its power – but nevertheless a remarkable invention that has resulted in unprecedented wealth generation and welfare. It is necessary that we keep in mind the remarkable contribution money has made to human development, the power it has placed at the disposal of human beings, and the vast untapped potential for extending and multiplying that power until its benefits fully reach all humanity. Then we will be in a position to impartially identify and correct the many blatant deficiencies and gross inequities that have been generated by the partial and biased misapplication of a power that is rightly intended to promote the equitable development of all.

5. Origin and First Principles of Money

Let us approach the issue of money from first principles, starting with a few basic premises. First, society is an organization of human beings which possesses power to utilize knowledge, skills, technology, human and other resources to promote the survival, security, growth and development of its members. Among these powers is society’s ever-growing capacity for production, exchange and consumption. The development of a society is a function of the degree to which it has acquired the capacity to harness this social power to evolve beyond a subsistence level existence in Nature. The greater its capacity to raise the productivity of resources – land, human labor, mechanical energy and natural resources – the more economically advanced the society becomes. The discovery of fire, creation of languages, invention of the wheel, development of agriculture, establishment of markets and trade routes for exchange of goods, founding of towns and cities are some of the significant early steps in the evolution of social power. During the past two centuries global society has harnessed this power to dramatically raise the living standards of a rapidly expanding human population, generating an eight-fold multiplication in real global per capita income.

Money is one of the primary instruments responsible for this remarkable achievement. The invention of money has played a central part in the general evolution of social organization and social power. Money is a social organization relating people, institutions, communities and activities together in a seamless web. Money is not merely an economic tool or institution. It is integrated with virtually every field of social activity – law and politics, education and research, entertainment and recreation, religion and spirituality. Money is a social technology that facilitates, expedites and improves the efficiency of all types of social transactions, the way language facilitates oral and written communications and the Internet facilitates global communications and digital transactions.

Money is a social symbol. It is social in the sense that it has no value to a single person living alone on a deserted island. It is a symbol in the sense that it is not merely an object like a stone or a gem. Money may or may not be represented by objects with intrinsic value, but it always represents something beyond the material form it takes. Money is a symbol for value and its power derives solely from the fact that people recognize and accept that symbolic value, the way we accept the symbolic value of the word ‘love’ or ‘truth’. The value of money depends entirely on human perceptions, i.e. on the fact that it is trusted and accepted by other people. Real currency notes believed to be counterfeit are essentially worthless as a medium of exchange, just as counterfeit notes believed to be real are indistinguishable in their utility from government issued currency notes.

The symbolic nature of money is obscured by its origin as a physical commodity. Although early money often took the form of something with intrinsic value – a cow, a bag of grain, a gold nugget – its utility as money did not depend on that. Indeed, the archeological evidence of clay tablets indicates that the earliest forms of money may have simply been records of credits and debits, which were in use long before the first appearance of minted metal coins around 600 BC.8 Whatever its origin, money gradually evolved to acquire new forms which were more subtle, less material. The grain receipt was an early form of money issued in exchange for the deposit of grain in government and private warehouses in ancient Egypt. These receipts were accepted, circulated and widely employed as a medium of exchange and store of value. Public confidence in the issuer of the receipts made it possible for warehouses to also issue receipts that were not backed by grain as loans to borrowers. Thus, the first fiat money was born in the distant past.

From the 15th Century onwards, London goldsmiths applied the same principle when they issued gold receipts in the form of interest bearing loans, often far in excess of the actual quantity of gold left with them on deposit. Because they were known to be wealthy merchants with huge stocks of gold, the public trusted their receipts without verifying whether each one was backed by real gold. As long as that trust was maintained, their receipts were widely accepted as money and infrequently redeemed for the underlying commodity. Note the subtle shift from trust in the gold to trust in the institutions that stored the gold and were reputed for their sound management and integrity. The goldsmith bankers of London reached the zenith of their influence during the mid-17th century.9

The notion that money is or should be based entirely on a physical commodity is a misconception that persisted well into the 20th century and still returns periodically. Some monetary historians argue that precious metal was added to early coins primarily to make coins more difficult and expensive to counterfeit, rather than due to the belief that precious metal was necessary to give money value. Even at the height of the Gold Standard when the British pound sterling was regarded as the strongest, most stable currency in the world, the Bank of England possessed sufficient gold to redeem only about 5% of the notes in circulation. After being compelled to abandon the gold standard during the First World War, in 1925, Churchill pushed through legislation to restore it against the advice of Keynes, who called it an ‘imbecile’ bill. The ensuing economic contraction compelled the UK to abandon the gold standard once again in 1931.

6. Evolution from Field to Marketplace

The primary role of money is as a catalyst for relationships between people. Human relations are the real basis for wealth creation. The physical labor of the hunter, herdsman and farmer was indeed the original source of wealth and welfare in humanity’s early ascent from the animal kingdom. At that time wealth was commonly measured in terms of heads of livestock or acres of arable land. But long ago they ceased to be the principal source of wealth creation. Various agricultural revolutions throughout history have enhanced the capacity of farmers to produce more than they needed for personal consumption. As soon as they developed the capacity to generate surpluses, they sought ways to exchange their surplus for other things they needed to enhance their security, productive capacity, comfort and enjoyment.10 Trade was born.

Adam Smith depicts the life of feudal barons in Europe during the centuries before development of roads, market towns, foreign trade and a money economy provided an outlet for their surplus produce. It was not uncommon for a lord to support a thousand or more families of mostly idle retainers on the produce of serf labor, simply because he could find no better way to utilize the surplus. When trade opportunities opened up, many of these barons reduced their retinues from hundreds or thousands to a few dozen servants, so they could trade the surplus for manufactured and luxury goods.

Trade shifted the center of wealth creation from the field to the marketplace, where the value of produce depended solely on its exchange value to other people, not on the cost of producing it, and on the ability of prospective buyers to offer something of comparable value in exchange. The wider the market, the greater the likelihood that buyers and sellers would find a match. The more distant the market, the greater the likelihood that what was produced locally would be considered scarce and desirable. The development of ever growing networks of markets spurred a succession of commercial revolutions, such as the great Bourgeois Revolution wrought by Arab merchants travelling the caravan and sea routes from Mesopotamia to Egypt and across the over half the Mediterranean to Spain from the 8th to 12th centuries, while Europe still remained a feudal agrarian society.11, 12


Garry Jacobs: Chairman of the Board of Trustees, World Academy of Art and Science; Vice President, The Mother’s Service Society
1. Susan Lund et al., Financial globalization: Retreat or reset? McKinsey and Company March 2013 http://www.mckinsey.com/insights/global_capital_markets/financial_globalization
2. Glyn Davies, A History of Money: From Ancient Times to the Present Day (Cardiff: University of Wales Press, 2002), 456-64.
3. Randall L. Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (Northampton: Edward Elgar, 1998), vii.
4. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Oxford World Classics, 2008), 178.
5. Youth employment, International Labor Organization http://www.ilo.org/global/topics/youth-employment/lang–en/index.htm
6. Jon Clifton and Jenny Marlar, “Worldwide, 40% Are Employed Full Time for an Employer” Gallup http://www.gallup.com/poll/145595/worldwide-employed-full-time-employer.aspx
7. “IMF Calls for Global Reform of Energy Subsidies: Sees Major Gains for Economic Growth and the Environment,” International Monetary Fund http://www.imf.org/external/np/sec/pr/2013/pr1393.htm
8. Wray, Understanding Modern Money, 42-44.
9. Davies, A History of Money, 248-51.
10. Robert Lopez, The Commercial Revolution of the Middle Ages, 950-1350 (Cambridge: Cambridge University Press, 1976), 56-59.
11. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations.
12. Lopez, The Commercial Revolution of the Middle Ages, 24.


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