I just finished reading Wealth, Virtual Wealth and Debt (1926) by Nobel prize-winning chemist Frederick Soddy. I really enjoy reading these old books… On one hand it is depressing to see the high hopes that existed in the 1920s after what was known until 1939 as the Great War. Thinkers like Soddy seemed very optimistic that the same revolution that had happened in science was about to impact the world of economics, and with it monetary policy and positively impact the world’s poverty. As we all know, history took a very different path then.
On the other hand, reading this book fills you with optimism since one may argue that the context was not ripe for change back then. It may be now. The big contextual change since the 30s is that there is a larger awareness worldwide on the fact that earth will run out of the life-friendly deposits and environment it has offered gratis so far. We may not have reached the tipping point yet. A couple more major crisis, food and/or environmentally related, may be needed for that unfortunately. Crisis is ??????, “decisive moment”.
If I had to summarize the book in a few bullet points:
- wealth is not the same as money. Wealth is what enables and sustains life, it is the product of available energy. Whereas money only values what is scarce. Air, water, land is wealth, but economists won’t measure it until it becomes rare enough that it will have a price.
- wealth is limited by fundamental laws of physics. As long as we are bound to the earth, no wealth generating process is free of any waste. There is always waste, heat, loss (including for building solar panels).
- money is wealth that does not exist, it is merely information, something that represents the wealth we gave out, without anything in return. The quantity of wealth that community participants are willing to give away against acknowledgement of community debt is the community’s wealth, since it allows the community to cooperate. The unit we use to measure this “virtual wealth” is money and obviously it’s not because the quantity of money increase, that the virtual wealth does too.
- As far as solutions are concerned, Soddy essentially recommends issuance of money to be done at zero cost to the community, i.e. by the government, not by banks, and regulated via taxes according to a price index. He recommends that deposits at banks be fully backed with customers paying for account maintenance. He believes that it is possible to convert from a system where money is created by bank and government accumulate debts to a system where government have no debt, issue the money and banks only lend the money that their customers are asking them to lend.
And now a few quotes:
Originally wealth meant wealth – the state of well being, just as health means the state of being hale.
The century that has come and gone has seen a steady alteration in the significance of the word wealth from its original meaning, wealth, as the requisites that enable and empower life, to debt, the right of the creditor to demand wealth and the duty of the debtor to supply it. (p97)
Credit means surely that the creditor gives up to the borrower the use of the property lent. It is true that in granting bank credit the bank gives up nothing whatever, but the community does, and the borrower receives it.
Wealth has proved a quantity to difficult and too involved for analysis by the modern economist. The earlier economists did, according to their lights, attempt to deal with it; but the modern school have more and more taken it and its origin for granted and confined themselves to the study of debt, or, as we shall see, with chrematistics rather than economics. Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is the subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living.
Power over men is the essence of debt. Power over Nature is the essence of wealth. The not owing and not possessing wealth owed to one individual by another or by the community gives that individual power over the other or the community until the debt is paid. When paid, the not-owner becomes owner. The wealth he now possesses, but the power over men he loses.
Wealth is the product of useful or available energy. Economics deal not with, but entirely with the flow of useful and available energy and its transformations into useless forms, and physical wealth as a product of the control and direction of this flow.
Money is not wealth even to the individual, but the evidence that the owner of the money has not received the wealth to which he is entitled, and that he can demand it at his own convenience. So that in a community, of necessity, the aggregate money, irrespective of its amount, represents the aggregate value of the wealth which the community prefers to be owed on these terms rather than to own. This negative quantity of wealth I term the Virtual Wealth of the community because the community is obliged, by its monetary system and the necessity of having one, to act as through it possessed this much more wealth than it actually does possess.
This Virtual Wealth is thus a peculiar part of national credit, and is sharply to be distinguished from the rest, which, indeed is the only part of the national credit usually recognized, and which is in no way different from that of an individual. […] The National Debt must continue to be paid for until it is repaid. Whereas the Virtual Wealth of the community, although it is National Debt in one sense, is permanent, necessary, beneficial, normally non-repayable and non-interest-bearing debt.
The nation must act, and continue indefinitely to act, as if it possessed more wealth than it does possess, by the aggregate purchasing power of its money, but the important thing is that this Virtual Wealth does not exist. It is an imaginary negative quantity – a deficit or debt of wealth, subject neither to the laws of conservation nor thermodynamics.
It is not the amount of money people have that is of any real importance, but the amount of wealth they are in a position to obtain any time in the future on demand, and therefore go without in the present, that is of importance.
It is the virtual wealth which measures the value or purchasing power of money, and not money which measures the value of wealth.
The virtual wealth has little to do with the quantity of money. The habits of a community are essentially conservative, so that it can only change within comparatively small limits. Whereas the quantity of money, on the other hand, is absolutely and entirely arbitrary and can be theoretically be made as small as or as great as the nation pleases without any limit whatsoever.
Money is debt that need not be repaid at all, and indeed can only be repaid by the community itself obtaining possession of the money and destroying it. These are the only kind of debt that are wholly beneficial to the community. They need not bear any interest whatever.
Money = authorized token of the indebtedness of the whole community to the individual possessing the token.
Money is a debt repayable in wealth. Whereas most debts are repayable in money.
These are some good quotes, Guillaume – thank you for sharing. I mostly like “Power over men is the essence of debt. Power over Nature is the essence of wealth.”
The idea that money is merely “nothing” and just information about debt is a relatively modern concept of the 19th and 20th century. The idea to create “wealth” out of nothing was implemented in the 19th century (Crédit Mobilier). It's pretty powerful technology; one can fund otherwise expensive wars and at the same time create the illusion of bringing “wealth to the poor”. It's especially popular among politicians as a means to make unfulfillable promises and expand power: debt is power over people, and financing government programs through such debt is absolute power. Creating money from nothing is the modus operandi of fractional reserve banking and central banks.
“Power over men is the essence of debt”. In this sense, we are all slaves. But who's our master? Those who issue are: governments who grant institutions the monopoly to issue debt (like the US and the FED) or who own central banks with monopoly power (like the EU and the ECB).
“Power over Nature is the essence of wealth”. Good, sound money, therefore, is a natural resource. Salt, fish, rice, shells, metals – these are all natural resources that are per se tied to the nature's laws, the earths boundaries and natural constraints. You can't artificially inflate corn supply; you either produce corn – and create wealth – or you don't. In that sense, if over time – through a social process, not through a top-down “declaration” – a certain good becomes a “generally accepted medium of exchange” (money), is is wealth that spreads.