Money; A Work in Progress

By Charles Pinwill

In the beginning was one’s word. And one’s word was one’s bond. And no transactions were ever repeated if good faith was not present in the first one. Because trust is the basis of all trading it could only initially happen within small family and tribal associations. Those who gave yet didn’t receive, or received though didn’t reciprocate, vetoed mutually beneficial outcomes.

This was the twinkle in the eye before the conception of money.

Barter was the beginning of it. It is generally supposed to have been particularly difficult to make desired trades. How does one find a pair of shoes in exchange for some arrowheads? A cobbler would not necessarily want the arrowheads but may accept them if he knew someone else who would want them who had suitable leather for sale. If not, then perhaps he had marmalade jam which a leather owner was known to like, or which may be exchanged for baubles which a leather owner’s wife was susceptible to use.

If money was invented to make things simpler, then presumably the long chains of exchange in a barter economy must have been more complex than modern stock exchanges? Did we keep it simple, Stupid?

A universally required commodity, such as grain in ancient Egypt, simplified the intellectual exercise. Man does not live by bread alone, but without some bread he does not live at all, so everyone accepted at least some bread. A “currency” approaching universal acceptability was to be found in staple foods.

The Romans used the basic commodity salt which is evident in the English word “salary”, and pecus (the Latin for “a head of cattle”) from which was derived the English “pecuniary”.

The key thing was that everybody wanted the commodity. Some things such as bird-of-paradise feathers in New Guinea were only of use in impressing one’s neighbors, but if everyone wanted to impress their neighbors, and the neighbors were universally impressed by one’s possession of these feathers, a universally acceptable currency was arrived at.

Defying later fixations, money took the forms of cowrie shells in West Africa until about 1900, porpoise and whales’ teeth in Fiji, snails in the Queen Charlotte Islands, the red scalps of woodpeckers amongst Karok natives, dog’s teeth on the island of San Cristobel, and sandalwood on Hawaii. The Polynesian Island of Yap used large aragonite stones ranging from about one foot to ten feet (3 meters) in diameter, right up until 1939 when World War II brought different customs.

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Professor Walker had defined money “as anything, no matter of what it is made, or why people want it, which nobody will refuse to accept in exchange for their disposable goods or services.” Its only money value resides in the fact that other people want it. Nobody would want it at all, if it were not for the fact that all want it.

Different cultures had different money fetishes. Earlier cultures usually favored commodity monies as these had dual values, a practical use value, and a symbolic “claims upon others” value. Many hold that the best types of money have durability, portability, divisibility, and scarcity, but there is another desirable quality which is important too. In a famine, grain monies disappeared because people ate them. If a money was absolutely useless in the sense that it made no unique or significant contribution to sustaining life, it would not be used up in any circumstances.

The absolute uselessness of gold was a major factor in its rise as a money. Golds’ irrelevance to sustaining life was closer to an absolute fact than it was with any other product, and it remains so. It is essential and irreplaceable in no useful function whatsoever. Nobody has yet nominated an element which, if all of it was removed to the other side of the moon, would do less injury to humanity than would gold. No wonder its adherents proclaim its value with such adamancy; its value is a matter of faith.  

Gold was strongly supported by bankers as the basis of the issue of money for another reason. Everyone knew it was difficult to find and mine. It would therefore hold its value, was the rationale. The bankers loved it however, for another reason; they could create and loan into society about one hundred times more money than they had gold. It is a well-known story.

When a gold sovereign was deposited a receipt for one sovereign payable in gold was given to the depositor. As few actually wanted the gold itself, they just wanted to know that it was there, another ten receipts (bank notes) were written and loaned out. Not one in ten people wanted the gold, and when they did, they soon brought it back and redeposited it anyhow.

Next the bankers encouraged people to leave their banknotes with them too. A special account would be given them, and they could direct the bank to make payments by writing cheques. The banks now made loans by putting credit (the right to draw funds) into these accounts. For every gold sovereign there were now ten banknotes, and for every ten banknotes there were one hundred “sovereigns” in either cheque or savings accounts.

The “scarcity” of gold was such that it could be multiplied one hundred-fold, and the community was still none the wiser. And as it turned out, this was a good thing. Why? Because the industrial revolution could now be financed, and the empire expanded to places like Canada and Australia and the industrial and economic ability of mankind exploded. This money multiplication happened everywhere of course, not just in England.

This economic boon could not have happened if the money really was gold. What most extol as a virtue of gold; its scarcity, was the problem. As Warren Buffet and others have pointed out, in the whole of human history all the gold ever mined has a limited volume. If it were all put into a classic cube of equal height, width, and length that measurement would be 20 meters. It would easily fit onto an average suburban house block.

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So, the evolution of money systems had reached, seemingly, its final form by 1900. All industrial nations had arrived at a “sound money” system, with each currency firmly based upon gold. Gold could be and was withdrawn at times, but as the value of money could only be had by spending/investing it, a frugal people receiving gold and wishing to save their money then put the gold back into their bank accounts. The system worked.

Still, senior bankers had experienced runs upon banks in the 1890s and at other times too. The English had a central bank in the Bank of England which could issue credit to private banks when in trouble, and American bankers now sought to emulate this. In 1913 the Federal Reserve Bank of America was established as the capstone of this sound money system. Then came an unrehearsed event.

When World War I commenced some people thought to play it safe. Within forty-eight hours two perecent of English depositors had withdrawn their gold. The Bank of England had no more to give. What to do? 

The Government declared a two-day bank holiday and hastily printed masses of flimsy bank notes. When the banks reopened the public was told that England was off the gold standard, and withdrawals were paid in these notes. Those who didn’t like the notes were told that they could bring them back if they chose, and they would be credited to their accounts. The system carefully constructed over centuries fell down in two days. 

After the war the English made an attempt to reintroduce the gold standard which was supported by Winston Churchill. By 1931 it was abandoned forever as a disaster, and he apologised.

Postwar however, the decisive arena in which the world’s money system was to be decided, was America. America’s industrial prowess and Americans’ patriotic belief in their economy brought the “roaring twenties”. A fervour of confidence had even the shoeshine boys borrowing to buy shares in American industry, and the stock market rose and rose. Not to join in was simply unpatriotic. In October 1929 the Stock Market crashed and brought the Great Depression.

America’s banking fraternity then decided on a policy of returning to “sound money”. Credit was restricted, but in any case, the public appetite for debt had evaporated. Poverty and hardship deepened. As debts were repaid and not reborrowed what people would do for a scarce dollar increased, and what dollars there were could now buy bargains everywhere.

What followed was the longest and greatest (and the last) effort to reinstate “sound money”. Sound money was easily arranged; one just made it scarce. The value of the bankers’ mortgages was not to be eroded by inflation. Poverty, malnutrition, and suicides would not move those who choose to improve the world with sound money. The authorities’ persistence was most tenacious and held with the strongest resolve. Even in 1941 the unemployment rate in the United States was over 20% but easing credit was resisted.

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The Great Depression could well have been made to last until 2029 but for one awkward and difficult man. He would not countenance credit restrictions and for all the wrong reasons. Those who favored peace would not issue credit to finance it, but Hitler wanted war, so he had the credit issued, and Germany boomed. A perfectly good depression was thereby interrupted. The population may have been retained in a much more submissive and compliant state for many years, but for that dreadful man. Even John Kenneth Galbraith, America’s leading Keynesian, stated that it was not Keynes who ended the depression, but Adolf Hitler. The Japanese helped it along of course, by bombing Pearl Harbour. Economically, happy times were here again!

After the war the “cat was out of the bag” and a depression was “out of the question”. John Maynard Keynes’s General Theory published in 1935, which presented ideas he had plagiarized and perverted from C H Douglas five years previously, was now the new economic “textbook”. Credit was to be issued whether the public wanted it or not, with Government “pump-priming.” A whole plethora of new household products were up for manufacture; refrigerators, washing machines, vacuum cleaners, second cars etc. so industry had much to do.

In 1920 Douglas had published his ideas that a deficiency of purchasing power was continually occurring in modern economies, and in 1923 a private meeting with New York’s most prominent bankers confirmed their concurrence. They opposed his solution of credit being issued debt free and distributed to all as a National Dividend. All credit must be issued as a debt to themselves. They were not conspiring of course; they were just acting and cooperating in their own self-interest.

This recurring deficiency of purchasing power was the “missing link” in economic understanding. Every year society had to go further into debt to afford to buy its own production. Even in the Great Depression the money supply was increased every year; that it was not increased enough was the problem. Economists became obsessed with deciding whether there was a deficiency of purchasing power in the economy, and reasoning why it was so, if it was so. So many schoolboys getting to the very bottom of the theory of relativity, as it were. Whether it was so or no, could only be decided by measuring it.

This was eventually done as better statistics became available. The aggregate incomes of all Americans in 2014 was measured as $10.1 trillion. The consumer goods produced and sold that year amounted to $12.5 trillion.🔴1   The bankers created another $2.3 trillion and added it to the national debt that year, which amounted to $7,500 per American, or $30,000 per family of four. So, 20% of products did not stay on the shelves, and America did not go into severe recession.

Since it is inconceivable to most that a deficiency of purchasing power could arise in a manner of which they cannot conceive, the concept remains largely ungrasped. It must be addressed otherwise. We cannot see most radiation, gravity, or the speed of light though we believe it is there when it is measured.

🔴1 National Accounts at   

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If we paid our employees $10.10 to produce $12.50 worth, we would be in profit $2.40. Of course, our employees could not afford to buy the $2.40 worth, as their incomes wouldn’t suffice. We could, however, allow them to go into debt to us for the $2.40, and add an amount like this to the national debt each year. Their indebtedness would grow inexorably and interminably so that in time all would tug the forelock before us. In this way they, and their governments, and their intellectuals would come in time to know the meaning of life.

Credit rules, OK.

As technology displaced human labour, improved methods and practices increased productivity, and processes were increasingly automated, the nations became more and more profitable. This being so, a larger and larger percentage of consumer products could not be purchased except by increasing indebtedness. Societies continuance depended upon it. But how to do it?

The key was in financing housing. The banks, by lending larger sums to more people to bid against each other, could expand loans for residential dwellings, seemingly forever. If they loaned $500,000 to six different families to buy a house at auction, how much would it bring? Later if they loaned $800,000 to six families to buy it, would it now fetch $800,000? In time two-thirds (2/3) of all the money in existence had originally come into existence by the banks creating credit to fund housing. 

There was so much money in the economy from housing loans by 2000, that industry now borrowed less as it could raise capital from trading profits or selling equity. Increasing house prices by increasing housing loans was now, overwhelmingly, the one way of keeping the economy out of recession. And as nations’ profitability increased each year, so housing finance was likewise increased to keep the system “liquid”. This needed to be done at an increasing rate, so credit was issued less stringently. 

People without income or even prospects of income could now borrow. Their mortgages would be bundled with others and on- sold. Debt roared into the economy. In Australia the amount of money in existence increased by 19% in 2007.

Defaulting mortgages, quietly breeding in the dark, now burst forth in profusion; the Global Financial Crisis of 2008 had arrived.

Notwithstanding this inconvenience, the money supply must still be expanded or an horrific depression would occur and social unrest might take us anywhere. But nobody would borrow to buy housing just now, as the unthinkable had now been thought. How can we possibly increase debt to keep the economy going?

Having benefited from C H Douglas’s insights, another stage was reached in this work in progress. Interest rates were reduced, sometimes to negative rates, and billions in money supply increases were rushed into the marketplace. A productive purpose was not thought necessary, but the business was in need of a name. The baby was hastily christened Quantitative Easing and the silver spoon pressed to his mouth to the extent of $80 billion per month. The debt economy was resuscitated yet again.

Once again, the admission that the nation’s economy was profitable was avoided, and the shareholders who own this profit (we the people) had their dividend stolen and loaned to some worthies who would render an interest payment to the bankers in due season, albeit sadly at a reduced interest rate.

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Thus, another step towards an inevitable outcome was taken. Universal adult suffrage is now in situ as the norm in politics; to each go an equal number of votes which don’t attract interest, and the ballot papers are not repayable either. The system presumes that the voting public owns the country.

One day we may presume that we the people each own a share in the economic enterprises we call nations also. 

The changes from even a century ago are profound. No longer is keeping money scarce attempted; none are brave enough to impose recession. Interest rates have also been discontinued except for nominal ones, as the public disinclination to accept more debt dictates this. The one remaining relic from the past is that loans are required to be repaid. Can this requirement also be abandoned?

The conditions of the economy are conspiring to make it so. The electric car manufacturer, Tesla, has been working at producing driverless vehicles. They report that this has involved doing so much in advancing automation and robotisation, that probably most current human employment will become redundant once these technologies are applied. The unemployed and unemployable will lose the luxury of being creditworthy, and the poor dears will be unable to be incumbered with debt. Will these vast numbers of unemployed (and therefore unempayed) consent to starving to death? 

If debt is to be insisted upon, then upon whom will this luxury be bestowed? Presumably the only remaining taxpayers, that is, those continuing in employment, with Government sometimes acting as an intermediary which will accept the debt and then pass it to those with continuing income. By this time wages, which will have to be high enough to allow these taxes to be paid and allow a life supporting residue for the worker, will be higher. This will add to the incentive to displace them with more technology. 

How far can it be to “preposterousnessity”? Can half the employable pay all society’s costs? If only 10% are required to work, shall their recompense be ten times the average living cost? At some point the insistence that income must only be funded as debt will become unhinged. Life itself decrees this, not dogma.

Dollars, like any mathematical numbers can be created with either negative or positive signs before them (-$1.00 or +$1.00). The choice is between a National Debt or a National Dividend. Many will insist that a National Dividend is “something-for-nothing” and being true to their convictions, will determine to expire of malnutrition rather than suffer its indignity. That will leave the rest of us.

Perhaps Darwin was right, and it will, after all, be decided upon survival of the fittest.

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