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Three Important Words

on Wednesday, 28 December 2016. Posted in From Debt to Prosperity (book)

From debt to prosperity - Chapter II

In every discussion about the money system we find three words frequently recurring. These three words are put to a great deal of abuse. And if we are to understand clearly why the operation of the money system produces a chronic and increasing shortage of purchasing-power, we must first have a definite understanding of these three words. They are all vitally related to each other. But their meaning has become con­fused.

The Meaning of WEALTH

The first of these words is Wealth. Wealth has been defined by Webster as “Large possessions, a comparative abundance of things de­sired, especially of worldly estate.” From this definition it is apparent that wealth consists largely of goods. “All things possess the attribute of wealth if they can be used directly or indirectly for the satisfaction of human desire.” The term wealth is thus a word used to express the total of goods which can satisfy human desire, as well as the means of producing such goods.

In considering our Wealth as a nation we must include as a very important part the great cultural heritage that has been handed down to us by our forefathers. The rich natural resources, the farms and fac­tories which make America wealthy, would be of little use and could never have evolved were it not for the organized scientific knowledge bequeathed to us by our ancestors. This part of our wealth is an asset belonging to the entire nation.

“The modern economic production system is not a system of indi­vidual production and exchange of production between individuals. It is more and more the synthetic assembly, in a central pool, of wealth consisting of goods and services which are preponderatingly due to the use of power, to modern scientific processes and all sorts of organi­za­tions —.”1

The real wealth of any person, or of any nation, may be measured by his or its ability to deliver wanted goods and services.

It is not always easy to measure wealth, for the value of any one article of Wealth depends directly upon the desire that people have for that article. But since we must all deal in wealth to satisfy our desires, it is essential to have some means of measuring its value in relation to our desires for the goods which compose wealth.

The necessity for dealing with wealth leads directly to the second of the words we must define in order to understand the money system. This word is Credit.

CREDIT — Real and Financial

“Credit is the vital air of modern commerce.”2

The word Credit comes from the Latin “credere” meaning to be­lieve.

“Credit . . . is something founded on belief.”3 All of us use the word “credit”, and when we say a man’s credit is good we mean simply that we have confidence in his ability to make good on his promise to pay. In other words credit rests upon the ability to pay or to “deliver the goods” as promised.

But it is not generally realized that there are two different and distinct kinds of credit, known respectively as REAL Credit and FINANCIAL Credit. “REAL Credit may be defined as the rate at which goods and services can be delivered as, when, and where required. Fin­ancial Credit may similarly be defined as the rate at which money can be delivered ... The inclusion in both definitions of the word rate, is of course, important.”4

Thus Real Credit depends upon the ability to deliver goods or services. Financial Credit depends upon the ability to deliver money, as required. This distinction is very important, and we must have it clearly in mind as we consider the monetary system. Let us note it well, for we shall refer to it later.

What is MONEY

The third word we must understand clearly is Money. Money is the title to life in modern society. But there is probably no other word in our language about which there is so much confusion and muddled thinking. It is no exaggeration to say that most of the wreckage in our stalled economic machinery is due to misunderstanding of the true na­ture and function of Money. Therefore it is vital to understand Money itself, even though this may require some revision of our former no­tions.

Money has been defined as a “medium of exchange, a means of expressing an effective demand for goods.” In these days of economic hysteria this simple definition will remove much of the confusion that shrouds money in mystery.5

We read and hear a great deal about “Sound Money.” What is this “Sound Money” the experts talk about? Certainly it is sensible to say that a sound money system is a system that works — a system that makes effective the existing demand for goods.

Money and Gold

The origin of the use of money is lost in the beginning of history. Originally men satisfied their desires by barter, exchanging goods for goods. “As time went on however it was found a convenient practice to effect exchanges directly by means of some sort of currency tokens, which tokens were themselves objects of value such as cattle, hides, or gold.”6 Later these gave way to metal discs, and eventually coins, serv­ing the purpose of tokens as accepted measurements of value, were is­sued by governments as currency or government money. Because gold was both scarce and easy to measure, it was used for coins and gradually became accepted as the basis of the value of money. Gold, which is sim­ply one commodity, thus grew to be considered the foundation of the early monetary system.

“When merchants, in the later Middle Ages felt the need of some safe place in which to store their money ... the only people inspiring them with sufficient confidence were the goldsmiths, and the practice arose of depositing money with them. At first when a merchant had payments to make he would withdraw his money to enable him to do so. Later on he merely gave an order to the goldsmith to pay over the necessary sum . . “7

But as the trading of wealth increased, paper money or notes gradually supplanted the handling of gold. Metallic money gave way to paper notes about 1700 A. D. and the goldsmiths went into the bank­ing business. From this we have evolved a still more convenient system: our banks, by extending credits, enable their depositors, by signing cheques, to issue bank-money which circulates so acceptably that it is now used for most of our transactions. Today this bank-money amounts to more than eleven times the currency-money issued by the Government.

One important point here deserves our consideration. Before cheques came into use gold was the chief measure of value upon which money was issued. Now that we use cheques, and gold is out of circu­lation (most of the countries of the world having “gone off the Gold Standard” and our dollar having been devalued or “clipped”), the money system has become more and more a bookkeeping method to record values exchanged, and less and less dependent upon gold.

Some people still maintain that the price of gold is the only stand­ard of value, but both history and present experience challenge this belief. On this point even the Supreme Court has been called into con­troversy! But for two good reasons we need not waste time on this con­flict. In the first place, we are concerned chiefly with the practical workings of the money system, and gold is now out of circulation. And secondly, we have defined money simply as the medium of exchange, and we are observing the actual operation of this medium in business.

 


 

1) C. H. Douglas, Oslo, Norway, Feb. 1935.

2) Daniel Webster. 

3) C. M. Hattersley, This Age of Plenty, p. 170.

4) C. H. Douglas, The Monopoly of Credit, p. 21. 

5) Professor Walker’s definition is as concise as any, “Money is any medium which has reached such a degree of acceptability that no matter what it is made of or why people want it, no one will refuse it in exchange for his product.” Money is thus a claim on goods and services.

6) C. M. Hattersley, This Age of Plenty, p. 35.

7) C. M. Hattersley, This Age of Plenty, pp. 37-38.