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September 23, 2020
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How money was thought. Part 5. Money can be paper money |

In the previous part of our series (if you have not read it, we encourage you to click on this link), we described how thinking about money was changed by the Church’s reformation – Martin Luther and those who continued his way of thinking and ideas. The real challenge for theorists, however, was the appearance of paper money in circulation. Certainly, it was a bigger shock for people than it is for today’s elderly people to pay for goods using smartphones.

Paper money

The appearance of paper money in circulation and the independence of the size of its circulation from the resources of ore took the considerations of what we pay to a much higher level. It is true that the very idea opened up for issuers the possibility of a huge expansion of money circulation, but the question was to what extent the rulers could go so far as not to lead to an economic catastrophe. After all, even flooding Europe with gold as a result of the discovery of the Americas has led to the formation of a lot of inflation.

Let’s go back to the first part of this series for a moment (you can read the whole thing here). Recall that thinking of money as worth a certain amount was associated with a certain convention almost from the beginning. Plato himself believed that gold should disappear from the market, but that was where it was to be introduced “Sign for exchange”. What was that supposed to mean in practice? We can consider something like a fiat currency. So the ancient thinker believed that people can pay with something that is not metal at all!

Only that after him, many believed (and rightly so!) That an excess of money supply could result in very high inflation. William Petty (he lived from 1623 to 1687) warned against the effects of the constant increase in the number of units of money in circulation. And this even when we were talking about a bullion currency, not necessarily a paper currency. He introduced the concept of the optimal amount of money into economics. The excess was compared to the fatness of the body, and the deficiency to the emaciation. His perception of the nature of money was interesting. He believed that we could use paper money, but only if the market was short of ores.

Quantitative theory of money

In turn, John Locke (1623-1704) is considered to be the creator of the famous quantitative theory of money. He said that the price level depended in direct proportion to the quantity of money, but with the indication that the latter meant “speed of circulation”. He also argued that money has no intrinsic value – it is only an empty tool for trade. In addition, he believed that work is the only source of value. It sounds rational, of course, but centuries after Locke, applying this thesis in practice and extending it to absurdity in real socialism showed what madness it can lead to. Of course, Locke himself could not have foreseen that something like this would happen …

About a similar period in France, Pierre Boisguillebert preached his theories, seeing the role of money in being “Slave of trade”, not “tyrant ” this field. He also wrote that:

“The art of finance is just an in-depth knowledge of business, agriculture and commerce.”

He added that the level of consumption, not money resources, tells us about the wealth of the state. It is not the price level itself that is important, but the price-to-wage ratio. What would appeal to contemporary socialists, he added that consumption should be evenly distributed among all social strata, not only the richest. Why? It was not about creating 17th-century communism, but again about the speed of money circulation. Poor people spend their earned funds faster than the rich. The state should also use all resources for production. Otherwise, he is condemned to poverty in the long run. An example is Spain, which initially got rich by importing gold from America but then ran into financial difficulties. On the other hand, we have Switzerland, where even poor quality land was cultivated in the Alps. In other words, it can be said that the Spaniards achieved their initial, apparent success, while the Swiss, among others by hard work, they became one of the richest countries. This, of course, to simplify things …

Introduction to the crazy reprint

Today we live in a time when there is already open talk about crazy currency reprinting. The Fed has recently been printing dollars to power and giving them away to US citizens. This is just a step away from a steady, guaranteed income. In a sense, we also find the roots of this thinking about money in the 18th century.

On the one hand, paper money has opened up new possibilities for increasing the circulation of currency. So if the state of the first Piasts in the 10th century had serious economic problems due to the lack of gold, after eight centuries this problem – in the era of paper money – would not exist at all. Only another appeared.

Unfortunately, some economists (including one swagger who pretended to be an expert) decided that printing money would stimulate the economy and allow the employment of people who are currently idle, because employers and the government lack the resources to employ them. Actually, it’s just a step away from the fashionable Modern Monetary Theory today, but we’ll mention it later. In any case, one of the supporters of such thinking about money was the aforementioned economic swagger. It is about the Scot John Law, author of “Money and Trade Considered”.

John Law
Jon Law

Law deserves a separate paragraph. It was an extremely colorful figure. In his youth, he squandered his family’s fortune, constantly got involved in love scandals and dueled. Ultimately, he decided to become serious and … designed a central bank. His ideas, however, did not meet with interest in his native Scotland, but ultimately the idea appealed to indebted France. So Law created the country’s first central bank. You can read more about his tragic fate here.

We are interested in the very ideas of Law. This, in turn, believed that the continuous printing of currency is not only real, but also right. He argued that with the increase in circulation of money, interest rates on loans would fall, everyone’s profits would rise, and prices … would not jump at all! How it ended, you will learn about the history of the bubble that took place in France when Law took matters into his own hands. Suffice it to say that historians are of the opinion that the economic experiments of the nonchalant Scot led in the long run to France’s great debt and, consequently, to the outbreak of the French Revolution.

It is also worth mentioning James Steuart (he lived in the period from 1712 to 1780). He is considered a precursor of Keynesianism. He wanted an account money to be created, which was to be a measure of the constant value of the market. It was to be stable and secured with goods (land, houses, etc.). However, it was not supposed to be bullion money, because it was to be used only for international exchange. In other words, he wanted to pay something like stablecoins inside countries, and to use gold in trade between countries. He also saw a positive in taxes, internal loans and government spending. Hence the comparison to Keynes.


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