Nothing’s changed in the economics departments of universities, apparently, since the Bank of England published a paper in 2014 explaining that most textbooks’ accounts of where money comes from were wrong.
By the 17th Century, necessity had transformed goldsmiths — traditionally responsible for fashioning items from gold — into the most secure places to deposit it. Before long, the paper receipt for a gold deposit was valued at par with the deposit itself — and somewhat lighter to carry.
Those looking to borrow gold could similarly deposit a paper promise to repay, in return for bullion. But soon a consensus emerged: the goldsmith had no need to pass the borrower physical bullion, when they could instead pass only a paper receipt for the value of the loaned deposit.
Goldsmiths quickly learned they could issue more deposit receipts than they held in bullion — as long as they held sufficient gold to fulfil the maximum physical withdrawal demand they expected at any one time. Goldsmiths’ deposit receipts were money, created with the stroke of a fountain pen on issuance of a loan; on repayment of the loan, the goldsmith tore up both the loan and deposit paper.
The Bank of England’s 2014 paper confirmed that, whilst the regulatory environment has changed — and gold replaced by fiat reserves — the principles have not. Money is created by the act of a commercial bank issuing a loan, and destroyed by repayment. For every deposit there is an equal and opposite loan; the total value of all the money in the economy sums to zero.
No covenant is more celebrated in the free world than the 13th Century charter to constrain the rights and entitlements of King John. That concomitant rights accrued to the barons — not us — is the most obvious flaw in the narrative, but not the most instructive. What’s missed in the celebration is the light never shone on the other side of the ledger. Rights, like money, are an asset for one and an obligation for another: demanding them binds one party and enfranchises a second. As aggregate monetary balances sum to zero, so too is every right matched by a corresponding duty.
The freedom the population is prepared to surrender — freedom, that is, in its most generic sense: to be able to continue as you are — defines the aggregate collateral from which rights and entitlements are underwritten. Activism in the UK and the wider western world is overwhelmingly dominated by the pursuit of new rights, rather than the defence of existing freedoms.
The failure to attend to this imbalance explains more elegantly than ‘political polarisation’ the rumbling frustrations behind today’s politics in primary colours. Like the Cantillion effect in economics — where the first recipients of newly minted money benefit before prices rise — there’s a lag between the benefits of newly minted rights and their cost to the system. Urban progressive activism is too purist to recognise its own success in expanding rights, and too single-minded to monitor the capital adequacy of the social collateral available to underwrite them.
A stable system rests not on the quantity of promises but on their credibility: the further pursuit of rights requires greater due diligence on the reciprocal constraints that others will actually bear. Our failure to do so augurs the socio-political equivalent of the Great Financial Crisis.
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