Friday, January 16, 2009

Wealth, Virtual Wealth and Debt

Frederick Soddy, winner of the Nobel Prize in 1921, wrote "Wealth, Virtual Wealth and Debt" in 1926, which anticipated the market crash of 1929. Given the current state of the economy perhaps it is time to revisit Soddy.

Soddy points out the the real world is subject to the laws of physics while the economic world is subject only to the laws of mathematics. Thus there is a limit to what humanity can physically produce and consume, which Soddy defines as wealth. But Soddy sees no theoretical limit to the amount of debt that humanity can incur. Virtual wealth is what we call money, a representation of wealth that can be traded as a medium of exchange or held as a store of value.

Why, asked Soddy should a medium of exchange and store of value representing real wealth be treated as a debt incurring an interest charge?

Yet debt based monetary systems, such as the Dollar, Euro, Yen and almost all other national currencies, compound debt through interest charges without regard to real wealth, creating obligations that can never be repaid. Every dollar in our pocket, checking account, savings account and retirement account incurs an interest charge collected by the Federal Reserve, a privately owned bank. Yet, we didn't borrow those dollars, we earned them. Why are we paying interest on those dollars?

When it is no longer possible to carry the debt (pay the interest and repay the principal) the debtor is in default and his or her property is seized by the debt holder (financial institutions, banks and ultimately the owners of the Federal Reserve). Thus there is a tendency in our ecnomy to concentrate wealth in fewer hands over time.

Soddy understood the inherent impossibility of a debt based monetary system to be sustainable. Such a system borrows money into existence without regard to real wealth, incurs an interest charge to use currency as a medium of exchange and multiplies debt without regard to the physical world's ability to carry or service the debt (pay the interest and repay the original principal)accumulated by a fractional reserve banking system.

"Wealth, Virtual Wealth and Debt" is still in print and worth reading for anyone wondering what is really going on in today's economy.

1 comment:

www.nationaleconomy.net said...

"Every dollar in our pocket, checking account, savings account and retirement account incurs an interest charge collected by the Federal Reserve, a privately owned bank." Debt and money are two separate and distinct things. The interest is on the debt created when the money was created, and not interest on the money itself.

I'm always surprised to see someone who has read Wealth, Virtual Wealth, and Debt. I find that most everyone only understands a part of what Soddy started. My website has further information.

http://www.nationaleconomy.net