Introduction: The Meaning of Money

INTRODUCTION: The Meaning of Money* ANY discussion, to be fruitful, should proceed from an agreeL ment upon the meaning of words and concepts. No greater confusion prevails than that surrounding the meaning of money—even among persons who are well qualified to examine the question. If this statement is doubted I would refer you to an article by that distinguished member of the New York Times economic staff, Mr. Edwin L. Dale, in the July 20, 1975, issue entitled, "Money Supply: A Growing Muddle," in which he states the question, "What is money nowadays?" Or one in the Wall Street Journal of August 29, 1975, which comments "The men and women involved in this arcane exercise [of watching the money supply]—brokers, investors, businessmen, economists and Federal Reserve officials —aren't exactly sure what money supply consists of." I would submit that if these experts do not know what money is, no one knows.

<«§ §•> This is understandable. About a decade ago certain economists, not content with leaving the matter complex, set about to simplify our understanding of money by the process of fragmenting the word—and thereby made the subject more complex. The error into which they fell, and into which in falling they have carried the economy down into its present morass of confusion, is that of dealing with qualities and attributes rather than substance. It is a common error of philosophers. To illustrate in the* Based on an address by the author to the Conference on "The Role of Money in Prosperity and Depression," arranged by the Committee for Monetary Research and Education, Inc., in cooperation with Clemson and Furman Universities, Atlanta, Georgia, October 2, 1975. Vll Vlll MONEY AND MAN ology, God in the Old Testament revealed himself to Moses as Being—"I am that I am"—Being of infinite attributes, of power and compassion and justice and wisdom.1 An ancient school of Hebrew theologians, however, impressed with God's wisdom began to apotheosize one quality as Divinity—that of Wisdom—until God ceased to be regarded as ultimate Being, and instead as ultimate abstraction. Eventually the philosophers so atomized the concept of Divine Wisdom that it became no longer understandable except by the very learned, and a vast cabalistic literature arose that for a time threatened to suffocate the Jewish faith in a fog of occult theosophy.

Fortunately a later and more inspired generation threw out of the Old Testament canon the Wisdom literature, but the heresy continued to plague early Christendom under the theology of Gnosticism and its variants. Present-day Christianity is under the influence of its own heresy—that of deifying the attribute of love to the neglect of God's justice, and half the federal government's revenues are given over to misguided subsidies generated by a so-called compassionate concern for the welfare of humanity, including the whole world—with over 150 billion dollars spent in the past quarter century in misused foreign aid benevolence. To turn from theology and metaphysics to more tangible aspects of the subject before us, let us note that our treatment of money today is the same as that of offering a hungry man a whiff of hamburger and suggesting that he has been fed. The fragrance is not the substance.

The heresy of money, the misunderstanding of its true meaning, is that of dealing with one of its attributes rather than with its substance. I refer to purchasing power. With money you can buy things—almost anywhere—almost any time. Not everywhere, of course. It may not get you a drink of water in the Sahara; heaven cannot be bought; and there are times when one would give his fortune for another day of life. But in a stable, civilized environment the purchasing power of money is the common denominator of trade and the measure of its appeal.

INTRODUCTION IX But other things have purchasing power. A song, a woman's smile, the promises of kings, all have purchasing power of a sort; even the absence of substance, like the absence of two feet of stature that made Tom Thumb rich, has purchasing power. More to our proper subject, in the nineteenth century the growing use of checking accounts led to the realization that these were a form of purchasing power that was not money, but so close to it that except in times of financial panic—as in 1933— a check was as useful as money as purchasing power and usually more convenient. The notion that checking accounts were the same as money was particularly congenial to a school of economists concerned with social control. It was also an attractive idea to politicians who look to government as the Ephesians looked to Artemis— the great, fructifying Earth Mother, cradler of mankind and dispenser of all earthly benefits.

The Constitution, it was recalled, gave Congress the power to coin money and regulate the value thereof. It was an easy step to forget the limitation of the words "to coin" and to expand on the words "to regulate." The government, it was advocated, had the responsibility to regulate the purchasing power found in bank deposits. In 1913 Congress passed the Federal Reserve Act. This gave to an independent corporation authority over the deposit accounts of member banks. It was an authority of immense latent potential. Gradually its exercise grew wider and wider and with it, its control over the economy, that is to say, the livelihood activities of society. In the early 1960's the kind of purchasing power of which we are speaking became generally known in the trade as Mi, that is, government-issued purchasing power—note that I do not use the term "money"—plus commercial bank demand deposits, that is, deposits subject to checking or instant withdrawal.

Along with this extension of governmental authority over the economy through regulation of purchasing power represented by bank deposits went a changing attitude on the part of managers of the Federal Reserve System as to its functions. No X MONEY AND MAN longer was the Federal Reserve the agency of Congress whereby to regulate the value of the coinage—or even the official purchasing power—but it now undertook direct regulation of the economy. The first major use of its leverage came in 1923, when the Federal Reserve began to exercise an authority upon prices— a function that had long been considered that of the free market place. In 1923 the Board adopted the policy of using its powers in the interest of a stable price level. This, it was argued, was a worthy and necessary undertaking and well within the responsibilities of the Federal Reserve System. This power was exercised through manipulation of the volume of bank credit. From the regulation of bank credit was only a step to the regulation of prices, including the price of money, that is, interest rates.

«§ §»> In 1946 Congress enacted the Full Employment Act. This served to modify the Constitution by subordinating the historical federal responsibility for the common defense and the establishment of justice to that of providing a job for everyone. The Federal Reserve became a chief agency of this policy through regulating the country's purchasing power in the form of bank deposits. Unfortunately for the regulators—and for the country—the economists discovered that there were still other forms of purchasing power that eluded regulation. There was for instance M2, that is, Mi plus time deposits, and there was M3, and M-ad infinitum, because the range of items physical and intangible that have potential purchasing power is almost limitless. Thus, the current problem facing the regulators is that of how to deal with credit card money, of which there are an estimated 75 million potential purchasing power issuers. Another problem is that of Eurodollars, that hobgoblin of the money managers which no one has yet discovered how to manage.

In short, by dealing with this single attribute of money, that of purchasing power, economists have provided the advocates of socialistic and totalitarian government with an instrument for INTRODUCTION XI coercing society that is far more effective and embracing than police and secret prisons. To measure the distance by which the Federal Reserve has departed from its original charter I quote from the Federal Reserve Bulletin of February, 1971, discussing the policy of the Federal Open Market Committee—the instrument by which the System exercises its influence on the economy. "The FOMC's basic concern," the Bulletin reads, "is with the real economy—production, employment, prices, and the balance of payments." "But the Committee," the Bulletin continues, "must translate its broader economic goals into monetary and credit variables over which the Federal Reserve has direct influence. Thus, whatever emphasis is given to the financial variables that influence day-to-day open market operations, it is recognized that the immediate targets of day-to-day operations are not the goals of monetary policy but rather that those targets are set with a view to facilitating the achievement of the broader financial and economic objectives of the FOMC."

John Wesley, founder of Methodism, declared that he took the world for his parish. Here one observes how the Federal Reserve, created as a form of safety valve on mercantile credit, has taken the entire economy as its province. Under the watchful eye of this all-embracing bureaucracy the free market functions at its peril. Individual choice disappears. Perhaps one may still choose between fried and scrambled eggs for breakfast, but hardly between a two-button and a three-button jacket, since the clothing manufacturer, in producing the latter, may find his bank credit curtailed. The extension of political power afforded by treating purchasing power as money has led to a further grave departure from sound doctrine and practice. Since purchasing power is generally regarded as a material good, an increase in the total Xii MONEY AND MAN was regarded as wholesome and as a proper function of government. As De Lawd in the play, "The Green Pastures," said at the heavenly picnic, "Let us have some more of dat firmament."

De Lawd may provide by a wave of the hand more "firmament" for the heavenly picnickers, but it is a delusion that government, however potent, can do the same for purchasing power. Perfume is an attribute of the rose, and the only way more rose fragrance can be produced is by producing more roses. You cannot increase purchasing power by printing more pieces of paper, legended as so many dollars, or by increase of bank deposits by federal flat. Behind each of these units of purchasing power must be a substance—and it is to the nature of that substance to which politicians and economists should address themselves. For many years a popular belief which has served to promote the multiplication of fiat purchasing power is that the increasing production of the economy requires a corresponding increase in the so-called money supply. For many years the computations of Carl Snyder indicating that United States industrial production rose secularly at the rate of about 3 per cent per annum was taken as a norm at which the money supply should increase. I believe that the so-called Chicago school of economists holds that money supply should increase at some fixed per centage yearly.

As one student of the subject states the proposition: "As human productivity is increased the amount of money needed to measure the exchange of human services has to be increased in just proportion to the services individuals render to one another." But when the Federal Reserve provides the banking system with reserves by purchasing United States debt instruments with its deposit credits, it is putting fiat purchasing power into competition with the purchasing power created by the actual production of goods and services. The multiplication of such fiat or counterfeit purchasing power is the principal cause of the INTRODUCTION Xlll inflation of prices, despite depressed demand and production and high unemployment—the phenomenon of the 1974—75 recession that has so perplexed economists. Many economists delude themselves in treating purchasing power as money by calling it a function of money. This is error.

A peach has the attributes of form, color, fragrance, and taste, but none of these is its function—which elementally and metaphysically is that of a carrier of seed. Likewise, the attributes of money are several, but the essential function of money is that of a carrier of value. Other economists regard money simply as abstraction, like a statistical mean which they would relate to a commodity price index, or to a more fragile abstraction like the Special Drawing Rights of the International Monetary Fund which can best be described as an index of indexes. The Federal Reserve note, which passes almost everywhere as United States money, is not money but equally an abstraction. This fact is evidenced by the law creating it which, however it is evaded, still declares that the Federal Reserve note is "redeemable on demand in lawful money." The error of these concepts is that they ignore other attributes of money, notably universality. A song may have a monetary quality, particularly if sung by a famous singer, but it is evanescent and depends upon its audibility. A king's promise may buy an army, but only where the king's writ runs. Even the United States dollar, which has long been considered a universal currency, is no longer accepted everywhere, subordinate in certain areas to those more elusive abstractions known as Special Drawing Rights. Money, to be genuine, must possess more than purchasing power, it must have universality of acceptance.

Historically, only those things having the attribute of materiality have enjoyed acceptability as money. The materials may range from tobacco and wampum and cigarettes to the great stones of Yap—but only gold, silver and copper have enjoyed universality of acceptability.

XIV MONEY AND MAN But beyond substance, or materiality, and beyond purchasing power and universality, money must have another attribute, the fundamental attribute that converts a metal into money. Like the atom, which may be substance, but substance that exists only because of a mysterious force that holds its several elements together, substance becomes money by the endowment of an attribute which, for want of a better name, we may call integrity, that is, a moral force, that of consistency which is the essence of character. The first true moneys of Europe were pieces of metal—gold, silver, electrum—struck in pieces of uniform weight and purity. This striking or coinage first occurred in or on behalf of the temples. In the case of the Greeks it was that of the Temple of Athena, whose sacred owl is found in the early drachmas, and in Rome, that of the Temple of Juno on the Capitoline Hill. It was this temple whose sacred geese warned the garrison of the approaching Gauls, whence it was known as the Temple of Juno Moneta or Juno the Warner, and the word moneta attached to the coinage, from which we derive the word "money."

Early rulers, particularly the Roman, discovered that by reducing the size or quality of the coinage by insensible degrees they could increase the quantity and thereby the apparent purchasing power of their emissions. Thus began the curse of inflation which inflicts us today. When paper money was introduced into Europe from China in the thirteenth century, a new and readier means of increasing the apparent purchasing power of money became available, and with paper money emissions began the modern decline in the quality and integrity of the money that carried with it a decline in its purchasing power together with the credit convulsions, panics and depressions which periodically have afflicted the Western World. «§ $». Today we see all about us—throughout the world, as a result of Western cultural influence—the capitulation of the money managers to the cry noted by Adam Smith, that of more money, more purchasing power—a cry which they seek to satisfy by INTRODUCTION XV printing more paper, progressively destroying the integrity of the money. This has gone on to such an extent that as the distinguished journals have noted, no one knows what money is.

No one can say what money will buy today or tomorrow, and persons who have saved of it in hopes that it would give them a certain security of purchasing power in their old age now gaze amazed, frustrated, incredulous, distrusting not only in money, but in their distrust sweeping in all the institutions of civilization, of government, law, education and even church. We need to return to a new valuation and appreciation of the importance of integrity, of character, in the management of money, as indeed, we need to relearn its importance in the entire economic realm of production and distribution. The understanding must spread that quantity without quality is nothing, that factory output without integrity, that is without character and consistency in the product, is worthless in the market, and without purchasing power. Similarly, money without consistency and character loses its marketability, that is, its purchasing power, just as a factory turning out quantity of product but without consistency and quality of product loses its market and purchasing power of the product.

I would propose no greater service to the profession and to the country than that monetary economists begin a revision of their concepts of money, to draw a distinction between the attributes of money and its substance and to give recognition to the mysterious and awesome force of moral integrity in its management. Now, since a preachment without a practical application is apt to be borne on the wind, one suggestion may be offered, of an administrative nature, that a people aroused to the need for integrity in the money can adopt. It is that the Federal Reserve System be re-directed to its original function of a weathervane and safety valve on the commercial credit flow, by forbidding the Reserve banks to acquire any government obligations or to make loans on any collateral other than that arising from transactions in the production and distribution of goods.