The idea that the State is somehow sovereign in and of itself or has been granted some kind of sovereignty directly by God leads inevitably to the belief that all rights come not directly from God to natural persons as part of nature itself, but from the State or the collective to individuals as a revocable grant. The individual is perceived as utterly helpless in any social situation, unless he or she is directly assisted by the State, which assistance always takes the form of direct control over the life, liberty, property, and acquisition and development of virtue of each citizen. Every individual becomes a "mere creature of the State," existing as a person only at the sufferance and permission of the State, which thereby becomes all-powerful.
Nowhere is this more immediately evident than in the institutions of money and credit, the life's blood, so to speak, of the body politic. As the 19th century economist Charles Morrison explained,
Confidence and credit are only moral elements in society; they may be said to be, to a great extent, mere matters of opinion; yet their importance in the production and distribution of wealth is so great, that the whole machinery of material production is kept at work, disordered, or paralyzed, according as these principles act in a healthy manner, irregularly, or not at all. They are to our industrial community what the nervous system is to the body, a slight and sensitive substance in itself, but the indispensable cause of all the life and motion of the system. A great nation may possess in abundance all the means of producing wealth, — population, intelligence, capital, natural and artificial instruments of production; and yet, if credit and confidence should be from any cause destroyed, all these resources seem to have lost their virtue, and general distress prevails. Let confidence and credit be restored, and the whole system is immediately set in motion again, and in a very short time general prosperity returns. (Charles Morrison, An Essay on the Relations Between Labour and Capital. London: Longman, Brown, Green, and Longmans, 1854, 200.)Money and credit, as the economist Irving Fisher explained in The Purchasing Power of Money (1911), are based on private property. Credit, simply put, is delivering something of value to another conditional upon the future return of something of equal value. Extending credit creates a debt. Money is whatever is used to return value to a creditor; it consists of anything that is or can be used in settlement of a debt.
Money is thus always something that conveys a property right. This obviously implies that whoever or whatever issues or creates the money has a property right to convey; that he, she, or it "owns" whatever backs the money, or has a legal claim on the thing of value sufficient to derive and issue claims against the thing of value. Issuing money backed by something that the issuer does not own or to which he or she does not have a legal claim is theft; the issuer is making promises for someone else to keep, or is committing theft in some other fashion.
By understanding money and credit as the medium of exchange — that is, anything that can be used in settlement of a debt — anyone can participate in the economic process and engage in exchange simply by establishing his or her "credit" in the community. That is, someone demonstrates to the satisfaction of all parties to any transaction in which the one seeking to establish credit participates that he or she will make good on his or her promise to deliver value on demand or at some agreed-upon future date or on the occurrence of some event. The ability to enter into a contract is an inherent aspect of individual human sovereignty, coming under freedom of association (liberty), and is based on private property. Every person is (or should be) free to enter into a contract (free association) to deliver value immediately or in the future (private property).
Part of this explanation might confuse some people. They may wonder how or why the power to deliver value immediately or in the future comes under "private property." This confusion is easily cleared up once we understand that "property" does not refer to the thing that is owned, but to the inalienable (absolute) right to be an owner that every human being has, and to the socially determined bundle of rights that define how an owner may use what he or she owns. "Property," as the late lawyer-economist Louis O. Kelso pointed out, in everyday speech connotes "control." Thus, the power to deliver something of value immediately or in the future signifies the owner's exercise of control in the form of the right of disposal over what he or she owns — private property.
Thus, anyone who wishes to participate in the economy must have the means to do so. This in turn means that everyone who wishes to participate in the economy must have ownership of something, whether labor or capital (preferably both), and that ownership must be exclusive, that is, the owner must have the right to exclude others from the use and enjoyment of that which he or she owns. (There are circumstances that justify limiting or even confiscating a portion of what someone owns for the common good, but only to the extent that 1) it is absolutely necessary and no other recourse is possible — and the owner is justly compensated in some fashion — and 2) the owner's right to be an owner is in no way limited or abolished.) Only in this way can the process of money creation be carried out legitimately, for unless we have something of value to back our promises, we cannot make good promises, and the economy will not function, just as Charles Morrison pointed out. As Jean-Baptiste Say explains,
Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own. To the proprietor of the mines whence this money is obtained, it is a production with which he purchases such commodities as he may have occasion for: to all those into whose hands this money afterwards passes, it is only the price of the productions which they have themselves created by means of their lands, capital, or industry. In selling these, they exchange first their productions for money; and they afterwards exchange this money for objects of consumption. It is then in strict reality with their productions that they make their purchases; it is impossible for them to buy any articles whatever to a greater amount than that which they have produced either by themselves, or by means of their capitals and lands. (Jean-Baptiste Say, Letters to Mr. Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce. London: Sherwood, Neely & Jones, 1821, 2.)The "job" of money is thus to facilitate participation in the economic process. If people need this thing called "money," they either produce a good or service to exchange for the goods and services produced by others, join with others to create the money by means of a contract backed by the promise to repay the money in the future, or borrow existing money on the strength of their promise to produce a good or service in the future to repay the loan. Obviously, common sense tells us that if we borrow money, we should only do so if what we spend the money on produces something that we can use to repay the loan. We are otherwise diminishing our future ability to meet our consumption needs out of our own resources — in effect, robbing not only Peter, but ourselves to pay Paul.
If we reflect on Say's explanation of the role of this thing we call "money," we come to a number of conclusions, the most important of which is that anyone can create money simply by having "good credit" and by exercising his or her right of free association to enter into contracts with others. The actual thing or things that two parties to a transaction agree to exchange between themselves is irrelevant to anybody who is not a party to the transaction. It can — and has been — such things as stamped lumps of gold, silver, and bronze, cattle, tobacco, playing cards, wooden tokens, promissory notes, even elephants or human skulls. All that is necessary is that someone either have a good or service that he or she has produced, or be reasonably certain that a good or service can be produced in the future so that it is available for delivery when the "money" is redeemed, thereby making good on the promise. As Say further explained to Malthus,
From these premises I had drawn a conclusion which appeared to me evident, but which seems to have startled you. I had said, "As each of us can only purchase the productions of others with his own productions — as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase." Thence follows the other conclusion, which you refuse to admit: "that if certain goods remain unsold, it is because other goods are not produced; and that it is production alone which opens markets to produce." (Ibid., 3.)This is "Say's Law of Markets." To summarize as briefly as possible, production equals income, and supply generates its own demand, and demand its own supply — in aggregate, of course.
Unfortunately, while this understanding of money is both logical and derived directly from the common sense precepts of the natural moral law based on the Intellect, it is neither widely understood nor accepted today. Instead, the world has been saddled with an understanding of money based on an approach derived from positivism, an almost pure moral relativism, that is, the Will, rather than the Intellect. We will look at this "unnatural" understanding of money and credit in the next posting in this series.