Wealth vs. money and other selected F. Soddy quotes

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.

Writing about money: an indecent practice?

In his book Wealth, Virtual Wealth and Debt (1926), Frederick Soddy writes p.291:

Of the existence of a real conspiracy – a conspiracy of silence – on all monetary problems, in the Press and on political platforms, among editors, publishers and economists, who more than any others ought to be alive and awake to their infinite importance – there can be no question whatever. It exists, and anyone who has tried to call the attention to the evils of the present system will affirm it. Mr H.G. Wells is reported to have said: “To write of currency is generally recognised as an objectionable, indeed almost indecent, practice. Editors will implore the writer almost tearfully not to write about money, not because it is an uninteresting subject, but because it has always been a profoundly disturbing one.”

Good thing we are not in 1926 and can publish without editors and publishers.

Community issuance of money

I’ve been reading The Role of Money by Frederick Soddy, after Michael Linton inspired me by forwarding me this great Soddy quote:

Money is the nothing we take for something before we can get anything.

I hugely recommend this book and will try to condense some of his thoughts on this blog. Here’s a first thought this book inspired me:

Money must be issued as receipt for a voluntary gift of goods/services to the community, not as privately-printed counterfeit community gift receipts in exchange for forced, future larger real gifts to the private issuer. Following the latter model puts you on a course where the community’s debt has to always increase – sometimes to bail out the private money issuers – and inevitably concentrate in fewer hands, while forcing the endless privatization of formerly abundantly available resources.

The key challenge in such a model of community-based issuance of money is determining:

  1. what constitute a “gift of goods/services to the community”, and
  2. how to measure it.

2. is not big challenge. Even though gifts are made to the community, the largest part of the economy would still be free exchange based, providing a market-based valuation of gifts made.

1. is the key challenge. Certainly a gift of one’s time to clean up a nearby public park serves better the community next to this park, than the community miles away. This is where democracy – the online real-time one – and multiple currencies can really help: identifying unmet needs that the community cares most about, and validating them as worthy of community receipts when voluntarily providing gifts in the form of goods/services. Furthermore, separation of commons can be achieved by having an issuer i.e. a distinct currency in each community.

This can work at any level, neighborhood, city, county, state, federal, world, essentially allowing to pay over time the interest-bearing public debt with non-interest bearing gift receipts. Governance can be truly decentralized.

There should be currencies for those who don’t want to use the community-issued currency as medium of exchange, for instance asset-based, like e-gold.

Fractional reserve banking can be made illegal.

Many taxes could be ditched as well in generous communities. Some communities may require to have taxes paid, but would require them to be paid in their own currency, so as to ensure that not too much is issued and it gets recycled to fund new projects. Paying taxes would be done by either giving your time/goods in exchange of issued currency, or paying the taxes with local currency collected via exchanges with other local currency holders.

Banks can focus on narrow banking i.e. accounting, identity, security.

P2P lending in any currency, community or asset-based, can thrive. No problem in lending money as long as lending more than you have is illegal.

As a practical example, imagine a school in need of a bus+driver to go on a field trip. The community would vote this project as worthy of a receipt. A bus company would accept to provide the service in exchange for these receipts. They could use the receipts at accepting merchants. Merchants would be interested to collect the receipts since that’s what they could pay their local taxes with.


The inevitable change in our monetary system?

Everywhere now there is the dawning consciousness among thoughtful minds that this age contains elements not understood or contained within the working rules of the older systems of government, economics, sociology, or even religion, and that it is due to new principles that have to be introduced into the base and can in no wise be met by a change in the superstructure of society. Even more remarkable, almost incredibly to those who have been hitherto lost voices crying in the wilderness, is the swiftly growing volume of agreement that it is the obsolete and dangerous monetary system that, primarily, is at fault. […] All are agreed that here at least change is inevitable, the only doubt indeed now being whether any part of the system, which through a lack of imagination as to what might have been is still apt to be described as having “worked well in the past”, can survive into the future.

This was not written in 2008 in the wake of the great financial crisis, it was written in 1934 by Frederick Soddy in his book The Role of Money. Here are many of us, almost 70+ years later saying the same thing. I really hope we don’t have to wait another 70 years.