The foregoing discussion of the concepts of ownership, of trade, of value and of money, has enabled us to define what is meant by the term Price System.

It has already been shown that money had its origin as an expression of debt or of deferred payment, and since by common social agreement it is universally acceptable, a given amount of money represents a general debt of society to the holder, with neither the particular debtor nor the commodity which is owed being specified.  That is to say, that money constitutes a debt claim of a certain value against any individual, and for any commodity having an equivalent value.

Negotiability of Debt.  Other forms of certificates of debt of a less general nature are likewise in common usage.  If one person sells another his property rights in some object, say an automobile, he may not receive goods in exchange, or even money.  He may, instead, receive an I.O.U., stating that there is owing to him a given sum of money which will be paid at the expiration of a given period of time.  Such an I.O.U.  constitutes another form of debt certificate.  In this case, the certificate is more specific than in the case of money, in that it states that a particular person is the debtor.  The holder of the debt certificate, however, may trade it to a third party in exchange either for goods or for money, in which case the debt is now owed to the third party.

Thus, certificates of debt, whether in the form of money, of promissory notes, or personal I.O.U.’s, are negotiable, and can be bought and sold or traded in, in exactly the same manner as property rights in physical equipment.  Other forms of debt certificates are bonds, mortgages, bank deposits, insurance policies, and bank notes.

Certificates of Ownership.  Besides certificates of debt, another of the more common types of certification employed in the more advanced stages of Price Systems, are certificates of ownership.  In a more primitive society, ownership of physical property is maintained largely by unwritten social agreement or by the physical prowess of the owner.  In the more advanced stages, however, ownership in larger items of property is attested by some form of legal document stating that a particular person or corporation has the rights of property with regard to some particular thing.  This may be an area of land, an automobile, a building, a book, an invention, a franchise, etc.

Certificates of ownership are of different kinds, depending upon the type of thing owned.  Ownership in real estate is certified by title deed, in an automobile by bill of sale, in a consignment of goods by bill of lading, in the right to publish a book by copyright, and in the right to manufacture an invention by patent.

With the increase in size, complexity, and rate of operation of the physical equipment of the Western World in consequence of the transition from a low energy to a high-energy state of industrial development, there has occurred a corresponding change in the form in which ownership has been exercised.  It has already been remarked that in an agrarian society ownership was largely individualistic; that is to say, that a particular individual possessed complete property rights in a particular thing.  In the eighteenth century and earlier, with the growth of commerce and of industry, groups of men found it convenient to form partnerships, as for example, the partnership of Bolten and Watt.  At the same time, trading companies were organized for the purpose of conducting large scale commerce.

These partnerships and trading companies, especially in the United States, have, chiefly in the period since the Civil War, been largely metamorphosed over into a form known as a corporation.  A corporation is defined legally as a fictitious individual; that is, it can conduct business and own property exactly as an individual while at the same time being owned by individuals without these owners being in any manner liable for the corporation.  An exception to this statement occurs in the case of certain double liability corporations such as national banks.  In these the owner is liable for the debts of the corporation to an amount equal to his nominal monetary ownership in the corporation.

Ownership, in the case of corporations, is expressed in two stages.  In the first place, the corporation owns title deeds, patents, copyrights, franchises, etc., in exactly the same manner as an individual; in the second place, the corporation itself is owned by individuals who are known as stockholders, the certificate of ownership in the latter case being the corporation stock.  The ownership of a corporation stock conveys to the holder the right to participate in the corporation profits when these are distributed in the form of dividends.

Wealth.  Another Price System term that needs to be considered here is that of wealth.  The term, wealth, is taken to signify the monetary value of physical assets of all sorts and kinds, including land, mineral resources, livestock, as well as man-made equipment.  The total wealth of the United States, according to the Statistical Abstract of the U.  S., was, in the year 1922, 321 billion dollars.  By 1929 this reached a peak of 385 billion dollars, and then declined by 1933 to approximately 300 billion.

This does not necessarily mean that there was more physical equipment in 1929 than in 1922 or 1933, because wealth is not a measure of physical equipment.  It is, instead, a statement of the contemporary monetary value of that physical equipment, and, as we have pointed out previously, there is no fixed relationship between any physical object and its value.  In other words, value does not, and cannot, constitute a measure of anything.

Wealth in the foregoing sense may more properly be considered to be national wealth, as contrasted with individual wealth.  Individual wealth consists in actual certificates of ownership of physical wealth in the sense defined above, or else in certificates of debt stating that the individual has a claim upon a certain value equivalent.  Thus, it is immaterial to the individual whether his wealth be in the form of certificates of ownership in, say, land, General Motors stocks, A.T.  & T.  bonds, or U.S.  currency, so long as that wealth is readily convertible in equivalent value from one of these forms to the other.  Hence, from the point of view of the actual mechanism of the Price System, there is no important distinction in an individual’s wealth between ownership of debt-claims and the ownership of physical equipment.

Since the debt-claims are, in general, the more readily negotiable, it is simple to see how our present money-mindedness has arisen.  It has become customary, not only for the layman, but for the businessman, the financier, and the professional economist, to think almost exclusively in terms of money or debt while taking only vaguely into account the fact that somewhere in the background, physical equipment exists and operates; that upon this operation the entire social structure depends; and that but for this, the entire debt and financial structure would fall like a house of cards.

Creation of Debt.  Individual wealth, as we have seen, consists largely in debt claims—money, bank deposits, bonds, etc.—and when not in these forms, is expressed in equivalent units of value, which now have come to mean the amount of debt-claims that could be acquired or exchanged for rights in physical property.  Since debt-claims constitute a claim for property rights in physical equipment, and have the same validity as actual ownership, it becomes manifestly of some importance to inquire into the mode of origin of these claims.

Debt always signifies a promise to pay at some future date.  Thus, any incomplete barter—that is, a case where goods are delivered with the understanding that the goods in exchange will be received at some future date—constitutes a creation of debt.  Similarly, if a corporation issues bonds, these bonds are purchased for money, and since money already constitutes a debt claim, and the bonds represent a new creation of debt, it follows that debt, unlike physical substance, can be created out of nothing.  In other words, the process of floating a bond issue does not of itself involve any change in the amount of physical equipment, either before or after.  A similar line of reasoning applies to mortgages on real estate, promissory notes and I.O.U.’s.

Banking and Credit.  By far the largest single type of debt in the United States is bank debt, and banks are, accordingly, the largest creators of debt.  Since this is true, and since banking forms the central nervous system of our entire debt structure, which, in turn, controls the operation of the physical equipment, it becomes a matter of some importance that the mechanism of banking be examined critically.  There are many misapprehensions of the mechanism of banking, ranging from the popular misconception of a bank as merely a repository for the safe keeping of money, to the conception of a bank as an institution that takes in money from depositors, lends it to other people, and acquires its profits by receiving a higher rate of interest on the money it lends than it pays on that which it borrows.  All of this, as H.  D.  McLeod, in Theory of Banking and Credit makes abundantly clear, is totally erroneous.

The essential mechanism of banking is as follows: a banker is a human being or corporation with a ledger and a vault for the safe-keeping of money and other debt certificates.  A depositor brings money to the banker.  The banker accepts the money, and records in his ledger a bank credit or deposit in favor of the customer equal in amount to the money brought by the customer.  This credit or deposit entered in the banker’s books is a statement of the debt of the banker to the customer.  It is a statement, in effect, that the banker is obligated to pay the customer on demand or at the end of a certain period of time, depending upon whether the deposit is a demand or a time deposit, an amount of money up to the full amount of the deposit.  Contrary to the commonly accepted notion, a bank deposit does not signify money, but signifies, instead, a debt due by the banker to the customer.

Now suppose that another customer calls on the banker and brings, instead of money, a promissory note from a reliable firm, payable 6 months from date.  Suppose the amount of the promissory note was $1,000, and the prevailing rate of interest on paper of this sort was 5 percent per annum.  In this case the banker would buy the promissory note from the customer after deducting or discounting the interest due 6 months hence at 5 percent per annum, amounting in this case to $25.  He would not, however, pay money for this debt.  He would, instead, enter upon his books a credit or deposit for the amount of $975, in favor of the customer, with no money whatsoever being involved.

This bank deposit of the second customer would be in no respect different from that of the first customer who brought money to the bank.  Each deposit merely represents the legal right of the respective customers to demand money from the bank up to the amounts of their respective deposits.

The money in the bank does not belong to the depositors, but is the property of the bank, to do with as the banker sees fit, within his legal limitations.  Thus, in bank records, the cash on hand always represents a part of the banker’s assets because it is his property.  The deposits, on the other hand, are among the banker’s liabilities, representing his debt to others.

The banker knows from experience that under ordinary circumstances only a few of the depositors demand cash payment over a short time period, and that this is approximately balanced by other customers who deposit cash.  By far the greater part of the payments made by the customers of the bank are made by check.  If this check is written to another customer of the same bank it ordinarily is returned for deposit to the latter customer’s account.  This still involves no money but only the bookkeeping procedure of transferring a credit from the account of the first customer to that of the latter.

In case the receiver of the check is a customer of a second bank the procedure is only slightly more complicated, in that it involves a transfer of credit through the medium of a clearing house from the first bank to the second.

Thus, bankers have found that if customers have delivered to the bank $100,000 in cash the bank can then enter upon its books not only the deposits of these customers to the amount of $100,000, but it can also enter upon its books other credits, or deposits, to the amount of approximately $1,000,000, or ten times the amount of cash on hand to the credit of other customers in exchange for the debt certificates the bank has purchased from these latter.

Thus, we see that the real business of banking is that of the buying and selling of debts.  The banker buys a debt from his customer, and out of thin air, so to speak, creates for this customer a bank deposit which is another debt, or as McLeod has stated it in Theory of Banking and Credit:

At the present time credit is the most gigantic species of property in this country,1 and the trade in debts is beyond all comparison the most colossal branch of commerce.  The subject of credit is one of the most extensive and intricate branches of mercantile law.  The merchants who trade in debts—namely, the bankers—are now the rulers and regulators of commerce; they almost control the fortunes of states.  As there are shops for dealing in bread, in furniture, in clothes and other species of property, so there are shops—some of the most palatial structures of modern times—for the express purpose of dealing in debts; and these shops are called banks.

And, as there are corn markets and fish markets, and many other sorts of markets, so there is a market for buying and selling foreign debts, which is called the Royal Exchange.  Thus, banks are nothing but debt shops, and the Royal Exchange is the great debt market of Europe.

1 While this applies to England a similar situation holds in United States

Consequently, when the deposits of a given bank are many times greater than the cash on hand, that bank is doing a thriving business, but when the deposits are equal to the cash on hand, the bank is doing no business at all, and has become merely a repository for money with a state of complete liquidity—a state that many of our larger banks at the present time are approaching.

The Compound Interest Property of Debt.  Not only is debt, as we have seen, created out of thin air, but it has another property, according to the present rules of the game of the Price System, which is described by the term interest.  According to this latter property, debt is expected to generate more debt, or to increase at a certain increment of itself per annum.  This annual amount of increment expressed as a percent of the original amount, or principal, is called the interest rate.  A conservative interest rate on investments has been considered of late to be around 5 percent per annum.

Growth of Debt.  It is to be expected as a consequence of this property of spontaneous generation of debt out of nothing, that the total debt structure of a Price System would tend to increase indefinitely.  This we find to be, indeed, the case.

In a study, The Internal Debts of the United States (1933), edited by Evans Clark, it is shown that in 1933 the long-term, or funded debts of the United States, amounted to 134 billion dollars.  The short-term debts at the same time were 104 billion, giving a total internal debt of 238 billion dollars.  This total of 134 billion dollars of long-term debts, as Clark points out, represents an increase of 96 billion dollars from the pre-war figure, which was only 38 billion dollars: ‘Of this increase, 37 billion dollars came before the post-war depression (1921-22), 51 billion more came between 1921-22 and 1929, and 8 billion dollars developed during the current depression.  In other words, long-term debts about doubled between 1913-14 and 1921-22; increased about 68 percent more between 1921-22 and 1929; and expanded a further 6 percent in the past four years, so that for every $1.00 of debts we carried before the war, we carry $3.53 today.’

It becomes especially significant now to consider what was pointed out in a previous lesson: that the physical expansion of industry was, in a period from the Civil War to the World War, a straight compound interest rate of growth at about 7 percent per annum.  During that period, the debt structure was also extending at a similar rate of increment.  Since the World War, as we have already seen, the rate of physical expansion has been declining, and physical production has been progressively leveling off.  Thus, for the period prior to the World War there was a close correspondence between the rate of growth of the debt structure, and of the physical industrial structure.  Since the World War, while the physical structure has been leveling off in its growth, the debt structure, not being subject to the laws of physics and chemistry, has continued to expand until now the total long and short term debts are only slightly less than the entire wealth, or monetary value of all the physical equipment.  As time progresses this discrepancy between the rate of growth of the physical equipment and that of debt must become greater, instead of less.  The implications of this will be interesting to consider.


  • Wealth, Virtual Wealth, and Debt, Soddy (Chaps. 1-5).
  • The Internal Debts of the U.S., Clark.