One of the many ways that our money
lies to us is in its confusing money
with actual, usable, goods and services.
When we speak of capitalism are we
referring to money or to the tools
of production? When a person needs
capital to start his business are we
talking money or tools?
Now a rational person would promptly
tell us when asked, that money can
be converted into tools. This expert
on the way things work could inform
us that money is called capital because
a business can use money to acquire
the tools it needs. And experts tell
us that because the banks today are
reluctant to lend, to extend credit,
that our businesses do not have the
capital to expand their production
and make us all richer.
But let's ask another rational person,
this person is from Mars and is an
anthropologist studying human cultures
from an observational platorm on
the moon. From the moon, our Martian
(let's call him, "Martin")
can see everything that happens using
a marvelous telescope. Martin can
see factories and farms and offices.
Martin can see people working and
Then Martin is struck by something.
Martin sees factories closing. Martin
sees that far fewer people are working.
There is less production. The people
no longer are taking things from
the distribution centers. It seems
that things are grinding to a halt.
Martin is mystified. He cannot understand
why the brightly lighted industrial
areas of the planet are stopping
work. There appears to be no shortage
of tools and no shortage of raw materials.
Martin sees people suffering from
lack of goods. But Martin cannot
Now let's compare the two rational
people and their points of view.
Our first person, (we'll call him "Norm")
is well aware of money. Money is
very important to Norm. He knows
that to get others to do what we
want we must offer them money. Martin,
on the other hand, can't see the
money. It's too small to be noticed
from Mars. So Martin just sees people
working and producing and spreading
their products throughout the world
for people to consume. It all seems
quite reasonable, sensible, even
rational to Martin. He knows that
these human beings cannot survive
on their own. He knows that they
are all mutually interdependent.
He knows that they each and every
one depend on others for the things
they need to live.
To Martin, "capital" refers
only to those raw materials, tools
and the labor that uses them to produce
goods and services. That's because
Martin doesn't know about the money.
So Martin never confuses money or
credit with capital goods and services.
Norm does know about money and credit.
For Norm it is quite natural to think
of money as representing all the
things that money can buy. It is
quite natural to think of credit
as being just another kind of money.
So for Norm, there isn't really any
meaningful difference between capital
as money or credit and capital as
tools and labor.
But just because you have money
and/or credit doesn't mean that your
assets can be converted to tools
and labor. The supply of our money
is independent of the supply of other
goods and services. Just because
we can increase the numbers in a
bank account does not mean that we
have, thereby, increased the raw
materials, tools and labor to use
them. Just because we find a new
source of gold or silver and place
tons of the stuff in our bank vaults
does not mean that we have increased
the tools and skilled labor to use
those tools. In fact, the mining
of gold and silver takes tools and
labor away from other activities
which can produce useful things.
Isn't it silly to have a money whose
supply is independent of the supply
of things to buy? Yes it is silly.
We have inflation and deflation and
all sorts of scams that cheat people
which depend on that independence.
But, you see, if our money is a physical
object or represents a physical object,
its supply just has to be independent
of what is for sale. That is true
of every kind of money that has ever
existed in the history of humanity.
We have never, ever had a money that
wasn't either a physical object or
was accounts which were treated as
if they held the equivalent of physical
objects. And the supply of one physical
object is independent of the supply
of other physical objects, especially
when those objects are as small and
simple as money.
But let's get back to that capital
thing. If people suffer because they
don't have enough goods and services
to meet their needs will the creation
of credit provide those needed goods
and services? No it will not. Remember
that the supply of money (or credit)
is independent of the supply of goods
and services. Just because you increase
the supply of money it does not follow
that the supply of anything else
must necessarily increase. That independence
also extends to the tools of production.
An increase in credit or money does
not, in and of itself, increase capital
goods or labor. It even applies to
the supply of labor. The creation
of credit or money does not train
workers, does not recruit workers,
and does not give workers jobs. The
creation of money is independent
of those other activities.
But we hear on the news that the
government is giving money to banks
to stimulate job creation. The government
will be borrowing most of that money.
But regardless of how the government
gets the money, the money is not
capital goods, it is not labor, it
is not capital goods and services.
In fact, even buying tools is not
increasing the capital goods of the
economy if all that one is doing
is changing the ownership of existing
tools. Paying wages for production
with that money is not increasing
jobs unless those workers would otherwise
be idle. This is because the supply
of money is independent of virtually
everything. The mere act of creating
money or borrowing money does not
accomplish anything by itself because
of that independence which is a property
of the money itself.
So what would have to happen for
that borrowed money be employed to
create jobs and capital goods? How
could that money be used to increase
production and thereby enable increased
The rich and powerful will tell
you (via their political channels)
that if you just give more money
to the rich and powerful they will
have more money to hire people to
build more capital goods and hire
still more people to work with those
tools to produce goods which they
will hire still more people to sell.
But money doesn't really work that
way, does it?
If we give even more money to people
who already have lots of money how
is that changing anything? What will
motivate the rich and powerful to
hire more people in order to produce
more goods? If the rich and powerful
think that they can get even more
money by producing more goods then
that is what they will try to do.
They already have plenty of money
to hire more people. They are rich,
after all. But producing more goods
will only increase profits if those
goods are sold. The only reason that
the rich increase production is because
they think that increase in production
will be sold for increased profits.
The rich don't increase production
because it's fun or because they
want to give those goods away for
nothing. They increase production
because other people have money which
the rich want to get. If other people
don't have money to buy those goods,
the rich have no motive to increase
So how could all that money the
government borrows be used to increase
production? The money could be given
to the poor who will spend it to
buy goods and services. Then the
rich would increase production to
sell things to the poor so the rich
can get that money which the poor
have to spend. That's how our money
But will that happen? Will the government
give large amounts of money to the
poor whether they deserve it or not?
You know it won't happen. Why? Because
the government is controlled by the
rich and powerful. The rich and powerful
don't need to produce goods and services
to get that money from the poor if
they can just get the money directly
from the government. So why should
the banks loan money to increase
production if the poor have no money
to spend? Why should investors buy
the stocks of companies who sell
to the poor if they have no money
to spend? Why do all these factors
cause a downward spiral in our economy?
Because of the nature of our money.
I think Martin is laughing at us.
Brief History of Money: Part IV
Next: Too Big to Fail?
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