Money is not true wealth (Part I)

By Glenn Stehle

[Part 1] [Part 2] [Part 3] [Part 4]

The events of the 1590s had suddenly brought home to more thoughtful Castilians the harsh truth about their native land – its poverty in the midst of riches, its power that had shown itself impotent…  For this was not only a time of crisis, but a time also of the awareness of crisis – of a bitter realization that things had gone wrong.  It was under the influence of the arbitristas that early seventeenth-century Castile surrendered itself to an orgy of national introspection, desperately attempting to discover at what point reality had been exchanged for illusion….

The arbitristas proposed that Government expenditure should be slashed…

Most of the arbitristas recommended the reduction of schools and convents and the clearing of the Court as the solution to the problem.  Yet this was really to mistake the symptoms for the cause.  MartínGonzález de Cellorigo was almost alone in appreciating that the fundamental problem lay not so much in heavy spending by Crown and upper classes – since this spending itself created a valuable demand for goods and services – as in the disproportion between expenditure and investment.  ‘Money is not true wealth,’ he wrote, and his concern was to increase the national wealth by increasing the nation’s productive capacity rather than its stock of precious metals.  This could only be achieved by investing more money in agricultural and industrial development.  At present, surplus wealth was being unproductively invested – ‘dissipated on thin air – on papers, contracts, censos, and letters of exchange, on cash, and silver, and gold – instead of being expended on things that yield profits and attract riches from outside to augment the riches within.  And thus there is no money, gold, or silver in Spain because there is so much; and it is not rich, because of all its riches….’

The Castile of González de Cellorigo was…a society in which both money and labour were misapplied; an unbalanced, top-heavy society, in which, according to González, there were thirty parasites for every one man who did an honestday’s work; a society with a false sense of values, which mistook the shadow for substance, and substance for the shadow.

J.H. Elliott, Imperial Spain:  1469-1716

Austerianism is predicated on the belief that money, and not production, is true wealth.  But if we look at the four great hegemonic empires to arise since the advent of capitalism – Spain, Holland, England and the United States – what their histories tell us is something very different.

In 16th-century and early 17th-century imperial Spain money was conceived predominately in the form of specie — silver and gold bullion.  But by the time Holland had risen to preeminence in the 17th century and had “transition[ed] from a merchant oligarchy to a rentier oligarchy,” money began taking on a different meaning:  “houses, lands, and money at interest” And of that, Holland’s oligarchs had plenty:  “Amsterdam was the money-market of the Western World” (C.R. Boxer, The Dutch Seaborne Empire 1600-1800).

From whence did this money come from?  To put it quite bluntly, it came out of the hides of either conquered foreign peoples or of domestic workers.  C.R. Boxer, for instance, describes the condition of the latter in imperial Holland:

Although adequate unemployment statistics and other relevant materials are lacking, it is clear from numerous contemporary accounts of the Dutch Republic in its ‘Golden Century’ that economic expansion and national prosperity were accompanied by great poverty among many groups of workers, as happened later in England during the Industrial Revolution….  As early as 1566 a Leeuwarden chronicler noted that, in sharp contrast with the wealthy regents and merchants, stood the mass of the ‘humble, distressed, and hungry common people’….  The poor houses and workhouses also supplied women and children for industrial labour, and here again there is an obvious parallel with England during the Industrial Revolution.  It is true that some steps were taken to check these abuses, such as fixing the textile operatives’ working day at a maximum of fourteen hours (!) in 1646; but thirteen years later a leading Leiden industrialist noted that many workers were living in overcrowded slums, and that some were forced to burn their beds and furniture to keep themselves warm in winter!

Out of 41,561 households in Amsterdam in 1747, some 19,000 were living in squalid back premises, cellars, and basements.

State mercantilism was the dominant paradigm of the 17th and most of the 18th centuries, and the great thinkers of the time went to great lengths to craft ideologies which justified the austere conditions of the workers.  Here’s how Carroll Quigley puts it in The Evolution of Civilizations:

Economic aims and economic values were distorted and frequently reversed so that consumption was condemned as an evil, abundance abhorred, work praised as an end in itself, exporting encouraged, and poverty regarded as a good because it was the only way to keep people working.  The esteemed Sir William Petty (1662) believed that a country could get richer and richer by exporting more and more and that it would be a good thing “if the products of the labor of a thousand men could be burned” since these men could then keep their skills by having to make the goods over again.  Charles Davenant in 1698 wrote, “By what is consumed at home one loseth only what another gets and the nation in general is not all the richer, but all foreign consumption is a clear and certain profit.”  More briefly in 1673 Becker wrote, “All selling is good, all buying bad,” while in 1677 John Houghton drew a logical conclusion from these ideas by suggesting that England could get richer by inviting foreigners to come in to “consume our corn, cattle, cloths, coals, and other things.

The demise of state mercantilism and the rise of liberal imperialism (also known as liberal internationalism) towards the end of the 18th century brought about many changes which revolutionized and greatly increased production.   Money in the form of specie was replaced by the use of banknotes backed to only a fractional part of their value by specie reserves, the medieval three-field fallow system was replaced with the newer enclosed leguminous rotation systems, the craft system of manufacture was replaced by the industrial system, and man- and animal-power were replaced by water power or coal-fueled steam engines.

But one thing did not change.   And that was the abiding faith in the appropriateness of austerity for the working class.  Just like those who came before them in the state mercantilist era, all the great thinkers of the liberal imperialist age – e.g. Adam Smith, David Ricardo, and Thomas Malthus – labored long and hard to lend moral and intellectual legitimacy to the austere condition of the workers.  As Robert Heilbroner explains of the early 19th century, it was

a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law.  Necker, the French financier and statesman, said at the turn of the century, “Were it possible to discover a kind of food less agreeable than bread but having double its substance, people would be reduced to eating only once in two days.”  Harsh as such a sentiment might have sounded, it did ring with a kind of logic.  It was the world that was cruel, not the people in it.  For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.

The laws were few but final.  We have seen how Adam Smith, Malthus, and Ricardo elaborated the laws of economic distribution.  These laws seemed to explain not only how the produce of society tended to be distributed but how it should be distributed.  The laws showed that profits were evened out and controlled by competition, that wages were always under pressure from population, and that rent accrued to the landlord as society expanded.  And that was that.  One might not necessarily like the result, but it was apparent that this result was the natural outcome of society’s dynamics:  there was no personal ill-will involved nor any personal manipulation.  Economic laws were like the laws of gravitation, and it seemed as nonsensical to challenge one as the other.  (Robert Heilbroner, The Worldly Philosophers).

But why the solitary focus of the liberal imperialists on increasing production if austerity meant increased production was not to bring about a general rise of domestic prosperity?  The increased production, as Hannah Arendt explains, was not to enhance domestic consumption, but to create a surplus of goods and money for export.  The imperialist expansion of the 19th century had

been touched off by a curious kind of economic crisis, the overproduction of capital and the emergence of “superfluous” money, the result of oversaving, which could no longer find productive investment within the national borders….

After the financiers had opened the channels of capital export to the superfluous wealth, which had been condemned to idleness within the narrow framework of national production, it quickly became apparent that the absentee shareholders did not care to take the tremendous risks which corresponded to their tremendously enlarged profits.  Against these risks, the commission-earning financiers, even with the benevolent assistance of the state, did not have enough power to insure them:  only the material power of a state could do that.  (Hannah Arendt, The Origins of Totalitarianism).

And thus the age of liberal imperialism was born.  Britain, France, Germany, Belgium and the United States would come to rule over vast empires, either by direct rule or by establishing client states, and by the time of the Versailles Treaty it was possible for Thorstein Veblen to assert that “the present economic and political order rests on absentee ownership.”  Absentee ownership could take two forms, either as loans to the colonies and neo-colonies or as direct investment in these faraway places.  “The imperialist policies of the Great Powers, including America,” Veblen explains, “look to the maintenance and extension of absentee ownership as the major and abiding purpose of all their political traffic.”   In “all these civilized nations,” he adds, “the security of property rights has become virtually the sole concern of the constituted authorities,” who “at any cost” will strive to make the world safe for “that Democracy of Property Rights on which the existing political and civil order is founded.” (Thorstein Veblen, “Review of John Maynard Keynes, The Economic Consequences of the Peace”).

Making the world safe for the “Democracy of Property Rights,” as Arendt pointed out, requires extensive use of the state’s instruments of violence:  the police and the military.  In liberal imperialism, however, this is never openly admitted.   The result is that, as Reinhold Niebuhr explains, the “moral attitudes of dominant and privileged groups” are thus “characterized by universal self deception and hypocrisy” (Reinhold Niebuhr, Moral Man and Immoral Society).  And since “inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the special privileges which they hold.”  Classical and neoclassical economics are perfect examples of this.  As Niebuhr goes on to explain:

Practically every moral theory, whether utilitarian or intuitional, insists on the goodness of benevolence, justice, kindness and unselfishness.  Even when economic self-seeking is approved, as in the political morality of Adam Smith, the criterion of judgment is the good of the whole…


Rationalism in morals may persuade men…[to] condone their egoism as a necessary and inevitable element in the total social harmony.  The egoistic impulses are so powerful and insistent that they will be quick to take advantage of any such justifications.  The utilitarian movement of the nineteenth century had the laudable purpose of persuading men to achieve by diverting egoistic impulse to the most inclusive possible social objectives.  It was significant that it merely provided the rising middle class with a nice moral justification for following its own interests.


Thus, for instance, laissez faire economic theory is maintained in an industrial era through the ignorant belief that the general welfare is best served by placing the least possible political restraints upon economic activity….

When economic power desires to be left alone it uses the philosophy of laissez faire to discourage political restraint upon economic freedom.  When it wants to make use of the police power of the state to subdue rebellion and discontent in the ranks of its helots, it justifies the use of political coercion and the resulting suppression of liberties by insisting that peace is more precious than freedom and that its only desire is social peace.

The “universal self-deception and hypocrisy” manifest themselves in foreign relations as well as domestic relations.  As Kevin Phillips explains in Wealth and Democracy, the

openness of the world economy from 1870-1913 – reexamined with interest as the debate over the next great globalization heated in 2000 – was less a phenomenon of global fraternity than a projection of British power and its demand that investment and export opportunities remain open….

The notion that Britain did this through laissez-faire rather than government activism is a Victorian fairy tale.  From 1845 to 1870, laissez-faire dominated British domestic policy in the sense of denying any role for government in aiding the masses in ameliorating poverty.  Globally, however, Britain spent huge sums on the principal supervisory force that watched its world commerce – the Royal Navy.  Steel development had more than a little to do with the navy; India was run by mercantilist precepts; the Bank of England was charged with maintaining the pound sterling; and the British government subsidized transatlantic steamers and telegraph cables and bought half the shares in the Suez Canal Company.  With that kind of laissez-faire, Britain built an empire and projected the globalization regime of open sea-lanes, open ports, and (relatively) free movement of investment.

After WWII the baton of liberal imperialism was passed from Great Britain to the United States, and the US became the senior partner, with the other “civilized nations” playing the role of junior partners, in keeping the globe safe for “that Democracy of Property Rights.” 

The quest of privileged groups for absolute domination and control over not just domestic affairs, but also the planet, runs like a thread through the capitalistic era, which began about 500 years ago.  In the successive installments of this series, I would like to explore how the belief that money is true wealth came to dominate elite thinking in Holland, Great Britain and now the United States, and how this belief undermines the very success of the imperial projects undertaken by the privileged groups in these countries.


15 responses to “Money is not true wealth (Part I)

  1. What a great piece. A very good job by you sir. Are you going to cover domestic currency policy in the US pre Federal Reserve by chance? Or does anyone know of a particularly good article that talks about our national currency use before we had a national currency?

  2. Great start. I look forward to the rest.

  3. joe bongiovanni

    Very well done indeed.
    Any effort aimed at clarifying the true heirarchy of ‘things’ that serve as accepted earmarks of well-being is welcome, and here the clarification of what money isn’t is a welcome contribution to that part of the discussion and thus our understanding.
    Knowing that money is not wealth, but, as Soddy correctly defined it, “Virtual Wealth”, it leaves us two questions:
    1. What is money?, and
    2. What is wealth?

    Building on the money versus wealth nexus, I suggest also an understanding of the ideas advanced by Soddy in his noted publication: “Wealth, Virtual Wealth and Debt”.
    I believe its available free online.
    Certainly many scholarly reviews of this work by Soddy are available.
    Thanks for yours.

  4. See British Imperialism, 1688-2000 by P.J. Cain & A.G. Hopkins for more about the British Empire and the myths surrounding it. It’s their contention that the most powerful economic force behind Britain’s 19th century liberal imperialism wasn’t industrial capitalism, but what Cain and Hopkins call “gentlemanly capitalism” based on commerce,finance and insurance. It was a kind of enterprise that fell well within the cultural comfort zone of the landed classes which of course dominated British politics up to 1832 and played a powerful political role for some time after that.

  5. I find the placement of this essay in this blog ironic. Most of the posts in this blog argue for higher government deficits (more money) and higher net private savings (more money). If money isn’t wealth, will you address why most authors here seem to feel that a larger money supply is needed for economic growth?

    I suppose economic growth and wealth may not be the same thing, but I’m not sure since you don’t appear to define wealth. You mention austerianism’s mistaken belief that “money, and not production, is true wealth”, but I’m not sure if that means you define wealth as production or as something else. I can think of multiple definitions which fit the statement “money is not wealth”.

    A further definition of “austerianism” would help since it appears to be a term invented a couple years ago. From what I can see it argues that higher government spending does not stimulate economic growth. It isn’t obvious how this translates into a belief that “money is the true wealth”.

    You appear to believe that Adam Smith, et. al. supported austere conditions for workers. I wish you would quote primary sources (e.g. Adam Smith himself) rather than somebody else’s opinion about what they said. The quote you provided appears to be somebody’s opinion based on the result of Adam Smith’s writing, projected back to say that this was Smith’s intent. I don’t remember any argument that workers had to be kept poor in Wealth of Nations, though it’s been some years since I read it.

    • I don’t know what “Most of the posts in this blog argue for.” Furthermore, I don’t find your realist ontology and syllogistic logic very convincing, as I only, and can only, speak for myself.

      If I were to argue for higher government deficits, it would be with the recognition that there are more tools, or should be more tools, in the policymakers’ toolbox than just monetary policy. Besides monetary policy, fiscal policy and regulatory policy are also useful, and sometimes absolutely necessary, in order to achieve effective economic policy.

      When you say “higher net private savings (more money)” you seem to be articulating neoclassical loanable funds monetary theory, something which I very much take issue with.

      And if you haven’t read some of the sources I used, I recommend that you do, as they cite the primary sources which you are requesting. Your demand that I do all original research is unreasonable, to say the least.

  6. charles fasola

    Simply put, a growing economy requires a growing monetary supply, period. The growing money supply occurs through increased government spending. Unless net exports or private investment and/or consumption are great enough that they off-set diminished or a stable money supply. It is never the quantity of money that is of primary importance. What is of primary importance is what is done with it.

    Thomas, I may be making an incorrect assumption and if so I apologize, but it appears you do not understand the simple equation that equals growth or the difference between a monetary sovereign and a non-monetary sovereign?

    • I understand MMT and have been reading this blog for quite a while. My initial comment is because the general tenor of this blog is that increased government debt (money supply) is required for growth, and things like “net private savings” measure how well off the private sector is. Then this essay appears which says money is not true wealth. However, it appears from Mr. Stehle’s response to me that he isn’t familiar with MMT, or at least is not familiar with the term “net private savings” as used in MMT.

      I also understand monetary sovereigns, though I’m not sure what that has to do with the original essay or my comment. I also admit I’ve never been convinced by the “economic growth cannot happen without government deficits” arguments. Those I’ve seen rely on assumptions which I don’t always agree with.

      I am confused by one of your statements. You say that the quantity of money is not of primary importance, it is what is done with it. I agree with that statement, but find that in reading this blog the emphasis is generally not on what is done with money. The one consistent message I’ve seen here is that government spending must be increased with a host of proposals of ways to cause this to happen from quit caring about the deficit to declare a piece of metal to be $60 trillion dollars, stick it in a vault someplace, and spend money with abandon. Other than saying “the US government cannot go bankrupt” and “there is plenty of money for XXX government program” the only consistent use of money I’ve seen proposed is the employer of last resort.

      I admit I don’t read every post on this blog and often just skim the first part of the ones I do read, so I apologize if I’ve missed that part of MMT.

    • joe bongiovanni

      “Simply put, a growing economy requires a growing monetary supply, period.”
      Perfectly true.
      “The growing money supply occurs through increased government spending.”
      Not true at all.
      Government spending, of EVERY national government, of which ALL are sovereign, requires government revenue income to be received into the government’s spending account PRIOR to spending. That’s what keeps governments honest. : – )
      As such, it is not possible for ANY government, under the present international banking-school system of money, to create new money by spending.
      Money theorists have identified this system under the moniker of ‘endogenous’ money, in which private, commercial banks create all of the money needed to carry out national commerce.
      As long as we continue with the bankers school money model, it will not be possible for governments to create money by spending.
      It would take the reforms proposed under Kucinich’s HR 2990 to bring that about.

      • Hi Joe – I would be inclined to amend your statement to “That’s what ought to keep Governments honest” because, it certainly doesn’t.
        Maybe the “reform” you speak of should look at reversing the “Banker’s School” and have the Government sell the credit access to the private banks before they can pass it onto their customers?
        This is a short extract from a paper I wrote on “Reversing the Ponzi Scheme”
        One valid and practical idea to generate a source of income for a government is to reverse the current fractional reserve scheme and have the Government sell access to credit creation to the private, commercial, retail banking system.
        This proposed process would not apply to the investment banking system, which would have to be a totally independent system divorced from any form of Government support and denied the legislative access to fractional reserve credit creation. The reason for this distinction is that investment banking is largely a financial gambling system with the sole motive of profiteering. Its interest in productive and employment issues is strictly limited to the profit potential related to the buying and selling of organisations and/or their related physical or paper assets. Genuine productive businesses have a plentiful array of options for raising capital without being dependent on the services of investment bankers, but it must be up to that banker to carry any risk involved as its own responsibility.
        The fractional reserve system is essentially a ‘ponzi’ scheme, but if reversed and modified in a properly controlled manner, it can be made to serve the benefit of the society. Instead of allowing the private banks to create ‘new’ money as they currently do, by advancing interest bearing credit out of thin air, the Government, on behalf of the people, would create this ‘new money’ and sell it to the private banks. Obviously, the creation of this ‘new money’ would be a simple bookkeeping, or computer spreadsheet activity, exactly as it currently applies. The private retail banks would be set up in the same manner as presently in place, by obtaining capital from investors through the issuing of shares, debentures or bonds. As legitimate registered businesses, they would be eligible to apply for, and purchase, ‘new money’ from the government at a low rate of interest. The amount of ‘new money’ they request would be set as a ratio of their subscribed capital, and perhaps, any long term deposit money they hold on behalf of their customers.
        As a registered business, these banks would operate under standard corporate law and be responsible for their operations without any reliance on the government as lender of last resort. The banks would have to take out, and maintain, appropriate private insurance to cover their customer’s deposits as part of their legitimate registration responsibilities. Every application to purchase ‘new money’ from the government would be made with an appropriate set of audited accounts.

  7. You actually make a very valid point in your post ThomasW, when you equate an increase in the money supply to increased government debt. All the talk about “debt” only applies if it is related to “budgets.” And “budgets” only exist if we are considering the expenditure of a given income. As MMT often points out, a monetary sovereign government doesn’t need to collect taxes (unless they want to control the economy – or force the society to use the currency the government creates – an argument I don’t accept) and it can simply put “money’ into the economy by spending. If that is the case, and I believe it is for a monetary sovereign nation, then there is no such thing as a “Government debt” because; there is no such thing as a “Government budget”. Warren Mosler points out that we cannot compare Government spending with household, or corporate spending in the private sector. Government spending in the macroeconomic sphere is totally different to spending in the microeconomic sphere. Again, as MMT points out, the availability of goods and services for sale, along with other factors, does set a physical limit on the amount of money a “good” government should legitimately spend into the economy. Obviously, the definition of “good” is important, as is a Government’s recognition of what is “legitimate,” logical and rational, in terms of the money supply, which is not restrained by a “budget”.

  8. Pingback: Money is not true wealth (Part III – The British Empire and its demise: 1815-1945) | New Economic Perspectives

  9. Pingback: Money is not true wealth (Part IV: The United States) | New Economic Perspectives

  10. Pingback: Money is not true wealth (Part II – The Dutch Republic 1477-1806 and revolution in the Netherlands 1747-1848) | New Economic Perspectives