Wealth, Virtual Wealth and Debt

Frederick Soddy (1926)

“Money is now a form of national debt, owned by the individual and owed by the community, exchangeable on demand for wealth by transference to another individual. Its value or purchasing power is not directly determined by any positive or existing quantity of wealth, but by the negative quantity, or deficit of wealth, the ownership and enjoyment of which is voluntarily abstained from without the payment of interest, by the owners of the money, to suit their individual business and domestic affairs and convenience.”

Soddy’s first nine conclusions worth quoting at length, I reckon:

“Summary of Practical Conclusions

IT may be of assistance to the reader to collect and summarise the chief practical conclusions arrived at, as distinct from the theoretical analysis upon which they are based.
(1) The production of Wealth, as distinct from Debt, obeys the physical laws of conservation and the exact reasoning of the physical sciences can be applied. Wealth cannot be produced without expenditure, and a continuous supply of wealth cannot be supplied as the result of any expenditure once for all, for it is a form of energy, or the product of its expenditure under intelligent direction. Its production demands a continuous supply of fresh energy and continuous human diligence, nowadays, rather than physical labour. The scale on which it can be produced is practically limited only by the state of techrrical knowledge of the rime. There is no longer any valid physical justification for the continuance of poverty. The phenomenon of unemployment and destitution at one and the same time today is solely due to ignorance of the nature of wealth and the principles of economics, and to the confusions between wealth and debt which have hitherto bemused that subject, even among those who have essayed its scientific investigation and elucidation.

(2) There are two distinct categories of wealth which owe their value to the opposite qualities of perishability and permanence. Both are alike in the manner of their production. But in the formation of the first category of perishable wealth the energy required is stored up for use later by life when the wealth is consumed. It includes food, fuel, explosives, fertilisers and all materials the usefulness of which depends upon the change they surfer in use. They can only be used once, and they usually function as the energisers and actual supporters of lire. In the second category of permanent wealth the energy required to produce it is not stored in the product–or, if is, it acts detrimentally fo durabifity in use–but has already gone to waste in the process. It enables and facilitates life, but does not empower if. If saves further expenditure of lire-rime to an indefinite extent, but does not support lire. The category includes all classes of permanent possessions, of all degrees of actual durability, but distinguished ffom the first category by the fact that their destruction is incidental to and not the reason for their usefulness, and is a dead loss. This category includes the whole of capital in the sense used in this book, namely, organs of production used in production.

(3) Capital, by saving to an indefinite extent the expenditure of human rime in production, appears to afford a continuous revenue of wealth without further work, but the origin of the wealth produced is in the continued use of capital by human agents, not in the capital itself. There is no ethical principle to which to appeal, in order to equate the rime spent in the accumulation against the continuous expenditure necessary to make it productive, or to determine the just division of the wealth produced as between the capitalist and the worker.

(4) Money is now a form of national debt, owned by the individual and owed by the community, exchangeable on demand for wealth by transference to another individual. Its value or purchasing power is not directly determined by any positive or existing quantity of wealth, but by the negative quantity, or deficit of wealth, the ownership and enjoyment of which is voluntarily abstained from without the payment of interest, by the owners of the money, to suit their individual business and domestic affairs and convenience. The aggregate of this deficit is called the Virtual Wealth of the community, and it measures the value of all the money owned by the community, which is forced by the necessity of exchanging its produce to act as though it possessed this amount of wealth more than it actually does possess. The Virtual Wealth of a community is not a physical but an imaginary negative wealth quantity. It does hot obey the laws of conservation, but is of psychological origin. It increases with the number of the population and the national income and varies over long periods of time with the habits of the people and the way they conduct their business and domestic monetary affairs. It is only when the Virtual Wealth is constant that the general level of prices is directly, and the iurchasing power of money inversely, iroiortional to the quantity of money in circulation.

(5) Banks create and destroy money arbitrarily and with no understanding of the laws that correlate its quantity with the national income. They have been allowed to regard themselves as the ov¢ners of the virtual wealth which the community dies hot possess, and to lend it and charge interest upon the loan as though it really existed and they possessed it. The wealth so acquired by the impecunious borrower is hot given up by the lenders, who receive interest on the loan but give up nothing, but is given up by the whole community, who surfer in consequence the loss through a general reduction in the purchasing power of money.

(6) The banks have usurped the Prerogative of the Crown with regard to the issue of money, and corrupted the purpose of money from that of an exchange medium to that of an interest-bearing debt, but the real evil is that we now have. a concertina instead of a currency. These powers have fallen to them in consequence of the invention and development of the cheque system, unforeseen before it became an established fact. It has been connived at by politicians of all parties, who have betrayed the people and without their knowledge or consent have abdicated the most important function of government and ceased to be the de facto rulers of the nation. The issue and withdrawal of money should be restored to the nation for the general good and should entirely cease from providing a source of livelihood to private corporations. Money should not bear interest becanse of its existence, but only when genuinely lent by an owner who gives it up to the borrower.

(7) The value of money should hot depend on the quantity of a single commodity, such as gild, and the standard if value should have reference to the general average of goods consumed and used in living. That is to say, the index number of general price-level, or its reciprocal, the purchasing power of money, should be maintained constant by regulating the total quantity of money in circulation. The index number should be continuonsly ascertained by a national statistical anthority who would report its findings to the national authority charged with the issue of money, so that the issue may be regulated to maintain the standard of value constant, much as the National Physical Laboratory in this country is charged with the standardisation of weights and measures.

(8) When the quantity of money is constant, its value or purchasing power is proportional to the Virtual Wealth, and when its value or purchasing power is constant, the quantity of money is a measure of the Virtual Wealth. The issue of money should therefore be regulated by its purchasing power, so as to maintain the purchasing power constant, more being issued if the purchasing power tends to rise, or the index number to fall, and some withdrawn from circulation if the purchasing power tends to fall and the general price-level to fise, very much as the speed of a steam engine under varying Ioad is antomatically controlled by steam being admitted by the governor when the speed tends to fall, and shut off when it tends to fise. The money issued should defray national expenditure in lieu of taxation, or redeem interest-bearing National Debt. The withdrawal and destruction of money should be by taxation or by raising a National Ioan.

(9) It is recognised that the invariable standard of value proposed is a debtor-creditor standard to facilitate long-term business engagements and remove the speculative element introduced into them by change in the value of money. Bat in an era of increasing human efficiency in wealth production a debtor-creditor standard of price is not necessarily a “just” price. But no social progress can be secure until the purchasing power of money is made invariable.”