The Role of Money

What it Should Be, Contrasted with What it Has Become

Frederick Soddy

• Publisher: Routledge
• Year: 2014
• Print ISBN: 9780415488914
• eBook ISBN: 9781317833536
• Topic: Business
• Subtopic: Business General
• Index: Business

The Role of Money examines the mystery of money in its social aspect and illustrates what money now is, what is does and what it should do. The standpoint from which the book is written is that of the public. The significance of the 'money-power' of the state to issue money has been recently recognized by historians. Its key position in shaping the course of world events is here explained.

Included are:
* Chapters on the philosophic background
* The theory of money - Virtual Wealth
* The Evolution of Modern Money
* International Economic Relations
* Debts and Debt Redemption

CHAPTER IV

MONEY AS IT NOW IS

MONETARY Illusions.—The advantage of money in use, that it enables all economic values to be expressed in terms of a common unit, is one of the greatest disadvantages in understanding its real nature. All economic transactions with which the ordinary citizen is concerned are always first translated into and accounted for in money units. Indeed, money units are often used without any qualification both for money and for such forms of property or debts as are easily convertible into money. The definition of money in this book is that it is the debt to the owner for a certain value of marketable property obtainable on demand in the country in which the money is legal tender for payment of debt. It is because ordinary citizens are never a consenting party to the initial exchange which creates money in the first instance that they have failed to see its vital national importance. All debts being contracted and expressed in money units they do not understand the significance of the debt-credit relation by which money itself comes into existence. The “credit of the nation” is not merely its power of running into debt for money to its individual citizens, but includes also its power of running into debt to its individual citizens for actual goods and services—whereby money itself originates. The fact that the debt owed to the citizens by the nation is in goods and services and not in money does not alter the sign of the transaction. It appears to do so only because the vendors receiving new money for wealth given up consider themselves paid, whereas they are not paid but owed.

All money given up by individual citizens to the nation in exchange for National Debt securities belongs as a matter of course to the nation that incurs the debt, whereas the goods and services given up by them in exchange for paper and credit money created by banks was accounted by our monetary system, up to the 1928 Act, as belonging to the issuer of the money. The extraordinary thing is that one would search in vain for any law sanctioning this accountancy as regards the major part, namely that issued as bank-credit.

A Distinction without a Difference.—It will of course be objected that the banks do not and never have claimed permanent ownership of the money they issue. But in practical economics there is no longer any important distinction in this connection between a capital sum of money and the revenue it yields. The owner of a National Debt security is really the owner of the annual revenue it yields. If this is £100 a year and the interest is four per cent it is exchangeable for around £2,500, if five per cent for £2,000, and so on. To be in permanent enjoyment of the annual revenue is in practice the same as being the owner of the capital sum. So it is with the £2,000 millions or so created by bank-credit which yields to the banks an annual revenue at a bank rate of five per cent of £100 millions a year. Of this they have been in enjoyment ever since they issued the money and they still show no disposition voluntarily to surrender it to the nation. It is a quibble therefore to argue that they do not own the money they have created. If it were replaced by State money the State also could choose whether it received the capital sum, or lent it out and derived the interest from it—whether it incurred with it £2,000 millions of new expenditure, or whether it knocked this sum off the National Debt and saved the taxpayer £100 millions a year. These are only two of the many similar ways the nation would be the richer for accounting the goods and services given up by its citizens for money as the property of the nation rather than of the banks.

To terminate such a situation as now exists all that is required is for the public to look at money, not as it has so sedulously been instructed from the standpoint of the issuer who receives goods and services for it gratis, but from the standpoint of the user who has first to give them up for money before he can get them again. The accounting must begin one stage earlier than money to cover the transaction by which the money originated. If this is done the claim of the banks that they are using their own credit and not that of the community cannot be substantiated. It is true the early bankers thought they were, and no doubt they originally were when they lent part of their depositors’ gold. At that epoch the credit of the goldsmiths stood higher than that of the government, which thought fit, when in need, to appropriate the merchants’ stores of gold in the Tower without the formality of the owners’ consent, and thus drove the latter to seek a safer “bank”.

The Vested Interest in Creating Money.—But when they began lending not gold but promises-to-pay gold or, later, under the cheque system, cheques, which are claims on the bank for money, the banks began to appropriate a credit that was not their own but belonged to the community which had to give up the equivalent goods and services to those to whom the banks extended the “credit” in the first instance. Now the argument has come round full circle. The invention of credit money enabled the banking profession to appropriate as its own that part of the credit of the community which has been termed the Virtual Wealth, and this, involving as it does the power of creating money out of nothing, could not help proving a most extraordinarily profitable business which has now become a gigantic vested interest.

Writers on money, from the conventional or issuers’ standpoint, now argue, for example, that the banks are within their rights in times of economic depression, when no one wants to borrow their money at any price, and they have more “cash” than corresponds with the ten per cent safe ratio to their total deposits, if they buy property belonging to the public with the money that they issue, a transaction scarcely distinguishable from the operations of the counterfeiter. This is called “Open market operations” and, true to banking phraseology, this method of acquiring the nation’s valuable marketable securities by the issue of new money is still technically called a “loan”, rather than a theft.

Open Market Operations.—When an ordinary citizen buys securities his stock of money is decreased, but with the banker it works exactly the other way. He increases the quantity of the money he issues by buying just as by lending. He destroys it again by selling just as by calling in a loan. To make this at all intelligible to ordinary citizens they must look at it in this way. The banking system is now a corporation which has a vested interest in the issue of some nine times as much money as it holds “cash”, and if credit-worthy borrowers have not yet recovered sufficiently from being caught in the trap of deflation, and are unable or unwilling to borrow this issue from them, then the banks are within their rights in buying for themselves on the open market revenue-producing investments, paying for them by their own cheques. These the vendors pay into their respective banks creating deposits there, until the safe ratio of cash to deposits is reached.

Cash (!).—But what now is “cash” ? In banking parlance “cash” is legal tender money plus credits at the Bank of England. Let us see how this worked out in 1932, just after we went off the gold-standard and the “monetary policy” was directed to raise prices and make the value of everybody’s money worth less in goods, so repudiating part of the nation’s debt in goods and services to the owners of the money. It began by the Treasury arranging with the Bank of England and authorizing them to issue £15 millions more of their Promise to Pay notes, under the 1928 Act. The net profit of this issue, whatever it may have been, the Treasury presumably was paid, and to this extent the taxpayer benefited. Then the Bank of England increased its “loans” (banking phraseology) by acquiring for itself £32 millions of marketable securities from the nation, and came into the enjoyment of the revenue of interest which they yield, paying for them by cheques. Whether or not the old lady who overdrew her account and sent the banker a cheque for the amount is an invention, there is not the slightest doubt about this being the normal, natural, and regular method of the Old Lady of Threadneedle Street.

The sellers of these securities in due course paid these cheques into their banks, and the latter returned them to the Bank of England thus increasing their credits at the Bank of England, which rank as “cash”, by £32 millions. This great accession of “cash” enabled them to increase their “loans” by approximately £267 millions, much of the increase probably being due—in the still parlous condition of credit-worthy borrowers as yet insufficiently recovered from being deflated—to “open market operations”. So that, between February, 1932, and February, 1933, they were able to show an increase in their “deposits” of nearly £300 millions. After that it became rather ruinous to go to Switzerland for one’s holiday, or to any other country on the gold-standard, owing to the “exchange” being against us. At the time of writing (1934) the pound in countries still on the gold-standard is worth about 12s. But the banks between them “acquired” some £300 millions of the nation’s revenue-producing securities—or the equivalent revenue from their borrowers in so far as they may have succeeded in really lending the new money they issued—in the first year after going off the gold-standard.

Banks now Create Money to Spend Themselves.—This surely disposes of the last vestige even of the excuse that the banks in “assisting” industry by fictitious loans are a public service, for having, by deflation and suddenly withdrawing their “assistance”, put the nation’s industries hors de combat, in order to reinflate the monetary concertina, there being now nobody else to “assist”, they have to fall back on assisting themselves. The banking system is in fact now nothing but a gigantic vested interest in the actual issue of new money by methods which still evade the law and ruin first creditors and then debtors. By the ordinary canons of commercial morality there is not a shred of difference between creating money to lend to others for interest and creating it to spend oneself, and now none is recognized either in banking morality. All of this was of course accompanied by the usual dishonest propaganda intended to distract attention from what was taking place. Newspapers called attention to the abundant credit facilities lying idle and no borrowers, and pointed the finger of scorn at those who imagined that shortage of money could have anything whatever to do with the slump !

The Banker as Taxgatherer.—The 1928 Currency and Bank Notes Act, as indicated in the last chapter, has, beyond all doubt since the country has gone off the gold-standard, introduced a new principle into the British Constitution. Before, the issue of bank-notes was strictly regulated by law, but as regards the profits of the issue the nation made no claim to them. So long as they were convertible into gold, the banker made himself liable for the issue though he gave no security whatever for his solvency. Notwithstanding the fact that, stopped by the law from issuing notes, he began to lend chequebooks to such an extent that it soon became physically impossible for him to fulfil his bond, and that any attempt to make him do so on the part of a small section of the public would have plunged the nation into a financial panic, mercantile custom, if not the law, still maintained the fiction that the banker was trading with and using his own credit.

The 1928 Act, which authorized the issue of bank-notes by the Bank of England to replace the National Treasury Notes, laid it down that the profits of the issue should be paid to the Treasury. As we have seen, the issue of any form of credit money is a forced levy or tax on the goods and services of the community which it is impossible for the community to resist or escape. Parliament alone has the right to authorize and impose taxation, and this Act enables the whole constitutional position to be challenged. For as regards the relatively insignificant issue of notes, Parliament has delegated its powers to the Bank of England, which in this respect is the authorized but unofficial taxgatherer of the Government. For surely, even in law, it is not possible to maintain that a tax is only a tax when the levy is paid in money tokens, and that a levy paid directly in valuables is not a tax. For this would be as silly as arguing that a person giving up money establishes a credit, but one giving up goods and services of equal value for money does not.

Even in 1928 the foregoing was true for all the ordinary citizens, though the 1925 Act had given money a limited degree of convertibility into gold for the benefit of the foreign trader. This, however, was removed in 1931. Thus we have by Act of Parliament the King’s head removed from the nation’s money and in its place a bank’s Promise to Pay substituted. Now this “Promise to Pay” dates from the days when the bank-note was at once the receipt for gold voluntarily given up to the bank by its owner, and its promise to repay it on demand. By making the Bank of England’s Promise-to-Pay notes legal tender in place of the National Treasury Notes, the promise is become a bogus promise. The bank-note is now only the authorized but unofficial receipt for a national tax collected on behalf of the Treasury by the Bank of England. The promise of the Bank of England can be shown to be bogus by anyone who cares to take some of these £1 notes to the Bank and demanding that they redeem their promise to pay “pounds” in exchange for them. It is time this lying legend was replaced by the true one “Received Value worth £I”, and it is time this sinister delegation of the powers of taxation to the Bank of England by Parliament was challenged and reversed, and the note signed by the Treasury authority responsible, as the original Treasury Notes were.

The Sprat to Catch a Mackerel.—But as already indicated this is not the real issue at all, which is the right of the banks by a book-keeping trick to create twenty or so times as much money as the amount for which legal tender receipts are issued. So long as physical tokens exist it is not possible to make them less than zero. But by book-keeping this obvious limitation can be got round, and in figures it is just as easy to count in negative numbers as in positive, and there is, then, no fixed number, such as zero, from which the counting starts. Money accountancy should start from the zero of no money. The real quantity of money is perfectly definite, for it is, in units of money, the worth of the real things the aggregate citizens are owed and entitled to receive on demand in exchange for the money. The fiction that only legal tender is “really” money, and that cheque accounts are not money but claims on demand to be paid money, does not in the least affect the quantity of goods the citizens have given up for it and are owed on demand. The cheque system preserves the zero of no money for legal tender or physical tokens, but extends the accountancy to an indefinite and continually varying extent below zero into the region of minus quantities, or debts of the banks for non-existent money. Making banks keep pound for pound of national money tokens against their liabilities to their current account holders would at once stop this fraudulent accountancy.

Banks Give no Security Whatever.—It is the strangest perversion of common justice that whereas the banks’ borrowers have to deposit with the banks valuable securities, in the way of the title deeds to houses, farms, factories, or investments, amply sufficient to cover the eventuality of their default, the banks, trusting no one, themselves give no security whatever of any kind to their depositors. In the one case, when it becomes impossible for the creditors to fulfil their bond they are sold up and bankrupted. In the other case the banks are granted a moratorium and sufficient national money is then printed to enable them to avoid ruin. The pound for pound of national money would be the nation’s security for their solvency and it could be issued to them as required, against suitable collateral security in the way of the banks’ assets to cover the loan. But as a matter of fact the mere substitution of a national money for the present fraudulent private money system would produce such an almost instantaneous increase in real national prosperity that it would not be long before industry and agriculture got out of debt to the banks and were able to create and accumulate their own capital without the aid, for the most part, of either genuine or fictitious loans.

The Time-Element of Money.—The philosophy of money here expounded, regarded in a strictly scientific light, may be said to put the difference between barter and monetary systems in the time-interval, that distinguishes the latter from the former, between the giving up of one kind of property and its repayment by another. Money may be considered intermediate repayment, but this does not quite cover the point, which is essentially one of time. If, in scientific fashion, we imagine the time-interval continuously reduced to zero, from a monetary system we arrive at a barter system, and the point is that this is not possible. If we make the mistake of supposing it to be so, it would be the...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• I. THE PHILOSOPHIC BACKGROUND—ERGOSOPHY
• II. THE THEORY OF MONEY—VIRTUAL WEALTH
• III. THE EVOLUTION OF MODERN MONEY
• IV. MONEY AS IT NOW IS
• V. INTERNATIONAL ECONOMIC RELATIONS
• VI. PHYSICAL REQUIREMENTS OF A MONEY SYSTEM
• VII. DEBTS AND DEBT REDEMPTION
• VIII. THE PRACTICAL SITUATION
• IX. HONESTY IS THE BEST MONETARY POLICY
• BIBLIOGRAPHY