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Thomas Edison Questions Arthur Kitson
From Richard Eastman
Jerry wrote:
> You're on to something with the inner and outer loop theory
> of deflation v inflation! Personally, I like it Dick...and it backs
> up the reasoning that Thomas Edison used which I have
> part of in my current signature file.
Actually, many of the ideas I put into my messages derive from a man who Edison himself consulted when seeking support for that very reasoning. Arthur Kitson, from whom my criticisms of gold largely derive, was the only person of those who received Edison's questionnaire to fully support Edison's plan to reform the monetary system of 1922 -- a period of acute deflation of an economy under the hand of Bernard Baruch -- with commodity-backed money.
Edison asked: Of the U.S. government were to build fireproof concrete sectional warehouses at desirable points, using therefore money received from taxation, and should receive, grade and store, for stated period of time (say, one year) selected necessities of life: Issue a certificate or receipt for same, and should enact a law that the U.S. District Treasury, or the Federal Reserve Bank, might issue 50% of the market value of these commodities in money, (such market value being based on the average selling price over a period of 25 years and so endorsed on the certificate), would this money, so issued, be sound money. If not sound money, give your reason.
Kitson replied: Undoubtedly such money would be sound. But, what do you mean by "sound money"? Certainly not what it is made of, but what it will procure in the nature of satisfying the wants of the holders of money. The public do not want gold, they want food, clothing, shelter and a thousand necessaries and luxuries of life.
Money should therefore be nothing more than a claim to such wealth as the holder desires to the face value of the note or coin in the country where it is issued.
Edison asked: Would the money thus issued be as sound as a dollar secured by, say 50 cents worth of gold, and the promise of the Government? I mean in the ultimate analysis and not considering the gambling chance that it is very unlikely that everyone would want their gold at once.
Kitson replied: Money so issued would be more secure than if gold were behind it. Hence money thus issued by the Government and based upon the credit of the Government has behind it not merely the gold in the country but all the wealth of that country including the gold, hence the Government bank not should be regarded as far greater security than one issued by a banker against one commodity -- whether it be gold, silver or pigiron.
Edison asked: If money is issued on selected necessities of life (held and in control of the Government) to the extent of 50% of their value, could there thus be any inflation of the currency due to this particular issue? Would farmers over-produce so as to stock up these wearhouses to get a loan of 50% of the value of their produce and thus inflate or multiply the currency?
Kitson answered: The so-called "inflation" of money means more currency in circulation than trade requires. Such inflation vary rarely occurs. The average man spends such money as he has to meet his needs. He does not rush off and throw his money promiscuously about merely because he has savings. Everyone with more money than he requires invests it either by depositing it at a bank or in buying securities. A tendency to over-produce would possibly occur under this system but such over-production would mean that everybody had a sufficiency of the necessities of life. In short we should not have the present paradox of over-production on the one hand and general poverty and starvation on the other hand at the same time.
Edison also asked: Suppose that through Government wearhouses the issue of money should far exceed, per capita, the highest amount that so far has been issued and more than is necessary to transact business, would there arise any danger similar to what has occurred with currency not backed by reasonable amount of gold?
Kitson: The present danger of an over-issue of currency is the increase in the prices of commodities. This could easily be remedied by the Government fixing prices of all commodities at a certain level which could easily be arranged by Committees appointed to adjust these prices at a certain level of costs. An over-issue of currency under such conditions could not affect prices and therefore could do no harm.
Kitson also wrote to Edison: The value of currency depends not upon what it is made of nor what it is backed by but upon the number of units in circulation . . . The presence of gold or other commodities behind the currency may affect this exchange value in foreign countries but does not affect its value or purchasing power in the country in which it circulates. This is due to the fact that money, per se, does not go abroad.
Eastman comment on variables affecting the "value of money":
The equation of exchange, used in the quantity theory of money, is
where "P" can be thought of as the price of a slice of the economic pie the country produces;
"Q" the quantity of equal slices of given weight of national pie sold in a year;
"M" the amount of dollars (checkbook or folding money) being used to do all the purchasing of pie during that year
"V" the velocity or rate at which the average dollar is spent in that year.
Under these conditions the "value of money" equals "1/P" , so that
1/P = Q/(MV) or
The value of money that year equals the quantity of pie sold in that year per the times a dollar was spent
which is, more simply, the pie a dollar bought that year.
This equation is more important than one at first might think.
It tells us that people who have dollars or have dollars owed to them, can increase the value of those dollars by either increasing Q (which is trivial) or reducing money in circulation (!) or reducing the velocity of money (!!!). And so it becomes clear why in his age of science where prediction and control of any system is so easy to bring about we are still having terrible (for the lower-loop) depressions, for depressions are caused by nothing other than reductions in the quantity of money and in the velocity of money.
The way quantity of money and velocity are brought down is by loss of "M" from the lower loop in the form of interest payments above principal payments that goes to the (upper-loop) financial sector.
This is the Arthur Kitson - Irving Fisher synthesis that I have adopted in place of C. H. Douglas's "A + B" analysis which includes the drain of interest but combines it with other things in a way I have always found difficult to understand after much study and have thus left it alone and found a substitute that I do in fact understand completely and find fully satisfactory for explaining what Douglas purports to explain. Douglas defined terms in a way so alien to the usage that I learned -- for example, the simple word, "prices," -- that I have had to give up understanding "A + B" -- and even have come to suspect that Douglas was being deliberately obscure to not stand out in the UK as "attacking interest," which would, I believe, have spelled the immediate ostracism from British society and condemnation as a dangerous extremist. Fortunately for me I live on the other side of the Northern Hemisphere in Yakima Washington and have no social standing to lose
Now back to Edison and Kitson.
Edison: Do you think that civilized countries have, from experience and knowledge of economics, reached a stage where they could drop the fiction, unreality and chaotic state of a currency based on gold, and adopt a money, back of which is real useful wealth of twice the value of the money issued? Must we always remain on a gold basis? Is it beyond the wit of man to devise any equivalent method?
Kitson: In my judgment the public are not interested in what is behind currency, all they want to know is whether it is legal tender and will satisfy creditors.
Edison: When a bank discounts the note of a merchant and charges 7% (which is called interest) isn't that a misnomer? Does not the bank perform certain duties and services for this 7% that is worth it?
Why call it interest? Why don't they enlighten the public? A person loaning money to a railway, taking bonds, gets interest but he performs no service like a bank. Yet both are called "interest."
Kitson: No banks should be allowed to charge any such percentage as 7% for its services. The ancients called this "usury", viz., payment for use . . . Every great moral teacher from the time of Moses to that of John Ruskin has condemned usury (interest) as one of the greatest evils in national economy. It has been forbidden by every religion. As Lord Bacon says: "Usury bringeth the treasure of a realm into a few hands." . . . Its existence is due entirely to laws which have given the monopoly of credit to the banking institutions.
Edison: Do the words "fiat money" mean that money, not redeemable in gold at par, is fiat money?
Kitson: There is no other money except "fiat money". No other money is allowed to circulate by any of the world's Governments. It exists and is created under the fiat of law . . . In other words the value of money is given to it by law which confers upon it the inestimable privilege of settling debts -- a privilege which no commodity ought ever to have.
Source of these quotations: David Hammes and Douglas Wills, "Thomas Edison's "except one"; The monetary views of Arthur Kitson revisited," in Journal of Economic Studies Vol. 32 No. 1, 2005, pp. 33-46 (Showing the influence of Irving Fisher on Kitson and presenting Edison's questionnaire and Kitson's contributory thoughts on a fiat monetary standard that the questionnaire stimulated.)
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