Currency as Debt: A New Theory of Money
Understanding Money—Debt-Money Systems
Part 1 of 9
 

John Adams blamed America’s troubles on public “ignorance of the nature of coin, credit, and circulation.” The subject is difficult. “Baron Rothschild, the notable French financier, was once heard to say that he knew of only two men who really understood money—an obscure clerk in the Bank of France and one of the directors of the Bank of England. ‘Unfortunately,’ he added, ‘they disagree.’”[1]

The source of difficulty is general agreement, by the public and economic experts alike, on an erroneous idea. Both sincerely believe that money is wealth. Currency, meaning anything used as money, is only a claim against society. In its most fundamental aspect it represents debt, not wealth. Wealth is ownership of labor, and of anything upon which labor has been expended, whether material or immaterial, which can directly satisfy human wants, needs or tastes.

Frederick Soddy, 1921 Nobel Laureate in chemistry turned student of economics, recognized the definition of wealth as “the touchstone of clear thinking in economic matters.”[2] Aristotle defined it as all things whose value can be measured by money. Roman jurists concurred, defining it as that which can be bought and sold. Title to wealth, not its definition, production, distribution, and consumption, was then as it is now a primary concern of legal codes.

Professional economists seized this definition with enthusiastic fascination. The ability to measure the exchange value of wealth in the numerical terms of money transformed the art of economics into a respectable, quantitative science. By confining their studies to mercantile transactions, to that which can be bought and sold, they conveniently forgot that some wealth is never counted in the stream of commerce. It may be overlooked, traded in black markets, saved, loaned, or, in its most important function, simply used or consumed.
 

Wealth is always a finite positive quantity, but its value often proves difficult to express in terms of currency. One man’s treasure is another’s trash. Some things are not for sale at any price. Economists struggle to assign exchange value to the unpaid labor of the homemaker. With straight faces they discuss strange subjects, such as imputed rent, the amount of rent that homeowners would pay if they did not own their home. Not the least of their troubles is the fact that all wealth deteriorates with time. Exchange values assigned today are likely to be inaccurate tomorrow.

Debt is a negative quantity. Its existence originates in a transfer of ownership of wealth in which the owner does not immediately receive full compensation in wealth. Hindu mathematicians first recognized and justified negative numbers with analogies to debt. These numbers symbolize imaginary quantities without physical existence.

All currencies are physical embodiments of debt. Because they are familiar, tangible items used extensively in commerce as money and routinely convertible into wealth, most people believe that money is wealth. Surely everyone will agree that anyone possessing lots of money is wealthy? Well, maybe not everyone. Some will agree only when the currency is gold and silver coin. They would argue that if it were paper money of little intrinsic value, it cannot be wealth. The friends of paper money criticize this reasoning as simplistic. They admit paper currency has little intrinsic value but claim that it is backed by wealth. Is their claim valid?

Visualize a family on a Sunday drive in the country. They stop at a roadside stand, buy apples from a farmer and pay with a paper dollar bill. The farmer confidently accepts this currency knowing that it is backed by the nation’s products, in this case, his apples. He is justifiably proud of his harvest. Imagine his mixed emotions as he keeps one eye on the paper dollar in his hand and with the other watches his customers enjoy eating their apples. Now what backs his paper dollar bill?[3]

The farmer erroneously presumes that the apples he sold backs the paper dollar he holds. Actually, the total wealth of the community, consisting of all unsold inventory and assets, backs the currency. One could reasonably assume that someone in the family earned that paper dollar. They exchanged wealth, their own labor or its products, for a general claim against the community. A paper dollar used as currency is the physical symbol of that debt. It amounts to a general claim against society for a specific amount but unspecified kind of wealth to be provided in the future by the community.

Wealth requires ownership. Things that are valuable but not owned cannot be classified as wealth. Minerals on the moon are valuable, but they are not wealth. Air is free but when compressed or liquefied it becomes wealth.

Owners often sell wealth, accepting currency in its place. Their actions display a preference to hold a general claim against society for the future delivery of a currently unspecified type of wealth rather than hold the actual wealth in their possession. One obvious benefit is more efficient commerce. With a strict barter system, a baker needing a haircut must find a barber wanting baked goods. Currency, as a universally accepted medium of exchange, simplifies the circulation of wealth.

Currency also serves in commerce as a store of value, its other major function. The claim it represents against society lies at some point in the indefinite future. As debt, a quantity both negative and imaginary, the currency outlasts perishable wealth. Thus the farmer produces much more than he needs for his own consumption and sells his product at harvest before it spoils.
 

All wealth, being a positive quantity, is subject to deterioration. Economists classify it in two types, perishable and durable, based on its rate of deterioration. Perishable items lose value quickly. The value may even become negative. Expensive Christmas trees bought in December must be disposed of in January, usually at some cost. Ingredients for a cake, valuable in and of themselves, may increase in value through the efforts of a talented cook or be ruined with a careless act.

Durable goods retain their value much longer. The low corrosion rates of gold and silver coins, as well as their beauty and intrinsic value, fostered their use as currency. But while the coins circulate as money they remain essentially tokens of debt, claims against the wealth of the community. The public normally holds them for that purpose, not for their wealth content.

In traditional currency systems, ownership of the coins remained vested in the crown or the nation. Mere possession did not establish full title. Laws prohibited melting or defacing the coinage. Penalties for infractions were usually severe. The government’s concern was practical. Use of standard accounting units and currency simplified its collection of taxes. Any direct use of gold and silver bullion could thwart the efforts of revenue agents.

Because arbitrary laws can never be universally enforced, specie gives its holder one distinct advantage over paper money. Both are equally valid claims against the wealth of the community, but only specie embodies an enforceable demand. If the community defaults, the holder of coins may melt them and recover the gold or silver. This reduces their usefulness as money but retrieves the incorporated wealth for the holder.
 

1 Don Paarlberg, Great Myths of Economics (1971, The New American Library, Inc., New York, N.Y.), p. 64 
2 Frederick Soddy, Wealth, Virtual Wealth and Debt (1921, Reprinted by Omni Publications, P.O. Box 216, Hawthorne, CA.), p. 72 
3 Story told by Merrill Jenkins Sr., author, lecturer and inventor of mechanical devices to determine the authenticity of currency.