11    Money Illusions

David Gracey

Very few people today draw a distinction between money and wealth. To most, the terms are synonymous.

But money is not wealth and the distinction is important. Money is a representation of wealth, and a claim on goods and services, but wealth is derived only from the production of goods and services in the real economy. The quantity of money has a real impact on that production and on other factors such as inflation, but it should not be confused with the production itself.

Why does it matter? Because focusing on money distorts our understanding of the economy. Look, for example, at the last budget-trimming exercise undergone by the Toronto City Council which resulted in large cuts in many areas, as well as a failure to meet clear needs in other areas such as transit. This was done in order to limit the property tax increase to 5%. Councillors were told quite rightly, that “there is no money” for their expenditures. The debt is $2 billion, with interest charges rising every year. Who could argue?

Suppose instead City Council had asked themselves the question, “Do we have in Toronto the resources – the labour, the expertise, the machinery, etc., to meet these needs?” If the answer was no – these resources are not available – then all could see the necessity for cuts. But if, as seems the more likely answer was at least a partial “yes,” citizens might question why the lack of money was such a stumbling block.

History provides the answer. In 1861, when Abraham Lincoln and his cabinet were confronted with a demand from the New York bankers for 17% interest on a war loan, they refused. But the war didn’t stop. They still needed the men, the guns, the transport, etc. to prosecute the war. These goods were available, or could be produced, in the real economy. The solution was obvious. Lincoln persuaded Congress to authorize the printing of money – greenbacks – which the US government then spent into circulation to purchase the needed materials. They did the job just as well as the money the bankers would have created, and there was no interest attached, and no debt.

The same thing happened when Canada entered World War II. The need was urgent, the resources were clearly available, so the Bank of Canada created millions to purchase the materials.

It is true, of course, that the City of Toronto cannot create legal tender, but the Bank of Canada is authorized to do so on their behalf if the loan is guaranteed by either the province or the federal government.

We live in a wealthy society with plentiful resources, but money is always scarce. (To be accurate, there is abundant money, but a huge chunk of it is tied up in the financial sector – in stocks, bonds, derivatives, options, etc., and does little but chase after itself). We have the resources to maintain good schools, good hospitals, good transit, so why should lack of money be a problem?

Because all money in our society, except the tiny portion (6%) still created by government, comes into existence only if someone is willing to borrow it and pay the interest and the principal on the loan. Such borrowers must be “credit worthy.” Financial speculators of all stripes generally meet the test, so a lot of this debt money disappears into the financial vortex. For the real economy individuals, or companies, or governments must do the borrowing. But as debt loads mount and interest payments rise, bankruptcies increase and lending standards are tightened. The recent lowering of interest rates has helped to keep borrowers afloat but at some point borrowing must stop. When that happens it will be apparent, as it was during the Great Depression, that abundant physical resources do not translate into money.

There is a better way, and Abraham Lincoln found it 140 years ago.

David Gracey

— from Economic Reform, April 2004