Credit as Capital

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 consuming.

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 understand why.

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 consumption?

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 production.

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 works.

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.