In our story, we have already entered the period closer to us. Humanity has already absorbed the payment of paper money for good. However, it is worth re-examining not the politicians, but the intellectuals and what they thought about this type of payment for goods and services.
The invention of the banknote gave the rulers a great chance in terms of money printing. As we also know, they will be able to enjoy the manic joy of this opportunity. In the background, only the wiser of them could hear the warnings directed at them from the more enlightened citizens.
Fat, skinny, and the economy is rolling
Let’s go back a bit to the past. In the seventeenth century, we meet William Petty. He warned against excess money in circulation in a rather vivid way. He compared too much money on the market to being overweight, and too small to lower the body. As you know, both states are unhealthy and Petty was right.
Less than a decade young John Locke is considered the creator of the quantitative theory of money. In his opinion, the price depends on the size of the money circulation on the markets. In his opinion, money itself was worthless (in the meaning of “internal value”), and only work was the only source of value.
The continuation of Locke’s thought was in the 18th century. David Hume, who was a supporter of low inflation and the technological novelty of the banknotes. He believed that the effect of a positive trade balance in international exchange would be the inflow of ores to the economy, which would translate into higher prices. Effect? Of course, this will worsen the competitiveness of a given country, increase imports (it is known, it is better to buy a cheaper product at the neighbor’s) and reduce exports (who will overpay and buy from us, if we are so dear?). Further effect? Negative trade balance! Now, again – Hime reasoned – the bullion would drift away from us, which would again improve our competitiveness and give us a positive balance again. Over and over again…
At that time Pierre Boisguillebert was thinking about the nature of money in France (probably his name only made him not as well known as Locke). He used to talk with his colleagues to say that “money should be a slave to trade, not a tyrant,” which certainly caused stormy discussions. He also said that the wealth of a given country is determined by the size of trade, not the circulation of money. He also suggested that consumption should be distributed among all social groups, and not just the richest layers (it came from thinking, according to which the poorest people spend their money faster). The economic system itself should be designed in such a way as to support production capabilities.
Print, print, keep printing
Paper money can be printed almost infinitely (if you do not look at social and economic effects). It turns out, however, that in the eighteenth century thinkers appeared who believed that this way you can warm-up the economy. After all, more money in circulation means more people who will spend it later! Someone will have to produce those goods bought in larger quantities, so he will also have to hire more people. By the way, he will earn more too! We are moving to the economic Eden! Interestingly, no one was looking at what a big reprint led in France when he began tinkering with it mentioned in one of the last parts of our cycle John Law …
The first stablecoin
James Steuart also had interesting ideas. Today, this eighteenth-century economist is considered to be the precursor of Keynesianism. He was thinking about the issue of accounting money, which was supposed to be a measure of constant value. He was supposed to be a stablecoin at the time, but better! His course was to be completely rigid, unrelated to bullion and fluctuations in their prices. Interestingly, this money was to be used only for internal transactions, while international banknotes connected with bullion would still be used for international purposes.
A brilliant freak
At the end of this part, we can not fail to mention Adam Smith. Although today he is considered a genius, for the contemporaries he was probably a bit of a weirdo. Or at least that’s how legends revolve around him. He says he spoke to himself, and this time he moved his lips silently. The urban story even says that he thoughtfully went into a nightgown for a walk and walked 20 kilometers from his home to the neighboring town. In any case, he could have been an inspiration for communist Polish intellectuals. Do not be afraid to think about what he would do in the age of social media!
Despite sinking in his mind, he managed to write the famous book “An Inquiry into the Nature and Causes of the Wealth of Nations”. He introduced the concept of an “invisible hand” to economic thought, which takes care of the market and its functioning. He assumed that people take care of their business first and that thanks to everything what is called the market, somehow it turns itself. The market rewards good decisions, rebukes for bad.
As for the banks, Smith thought they should save money. The issue of money should not exceed the resources of these real ores. Banks should also respect only promissory notes that are reflected in existing goods or those that are soon to be created. The amount of money should in his opinion be equal to the supply of goods on the market.
To be continued…