"National debt ... whether (the national government was) despotic, constitutional or republican -- marked with its stamp the capitalist era. ...As with the stroke of an enchanter's wand, (the public debt) endows barren money with the power of breeding, and thus turns it into capital, without the necessity of exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state-creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which can go on functioning in their hands as so much hard cash would."
{***In the next article, Where Does Money Come From in the First Place?, we will see that US Treasury debt (bonds, bills, notes) is the fundamental "risk-free asset" underpinning our bank-debt money system. The central bank (the Fed) issues bank reserves (equivalent to cash money, as the Fed also issues the cash) to purchase Treasury debt from commercial banks, who had previously issued bank deposit money to purchase that debt from the government, and bank-issued bank deposits provide the economy's and the government's spendable money supply, so that Treasury debt underpins the present US bank-debt money system. Treasuries indeed are so negotiable (both within the commercial bank money-issuing system and within the shadow bank capital markets money-issuing system) that they function virtually as a form of interest-bearing cash money. The commercial banking system's monopoly of (spendable) money issuance enables bankers to issue money out of nothing, and use that money to buy the economy's and the government's interest-bearing debts, and thus extract permanent interest/economic rent off of "everybody" simply for the 'privilege' of having money to use. Monetary system reformers like Irving Fisher argue that money issuance is the most fundamental power of a sovereign government, and should never be handed over to private interests. Unfortunately capitalists, not elected governments, are the real rulers of modern capitalist states, so monetary reform has been systematically stymied by the powers that be whose power, wealth and privilege would be diminished by "democratically rational" reforms. Us monetary reformers have our reasons, capitalists have their own competing reasons, and they have power so their reasons become state policy.}
The power base of feudal agricultural aristocracies was their ownership of all the land, morally and ideologically supported by their collusion with religious authorities who filled the people's minds with a worldview that justified the rule of a king (and his aristocratic allies) who ruled by Divine Right of Kings.
By gaining a monopoly over the issuance of credit-money (which is our spendable money supply), a phenomenon that most people to this day do not understand (and refuse to believe when they do see it), the early banker class was able to indebt monarchs whose ambitions, egos and security interests motivated them to borrow credit to finance aggressive and defensive wars. War finance is the principal means by which banking empires such as the Rothschilds arose and gained power over heavily indebted national governments, and ultimately enabled capitalists to replace feudal monarchies as the rulers of nations.
Debt matters. In the hands of capitalists, money and money issuance are instruments of political power.
The power base of capitalist oligarchies is their ownership of the money-issuing system and the industrial-commercial infrastructure, morally and ideologically supported by their collusion with a modern priesthood of political economists (though they religiously pretend there is no "political" in economics) who fill the people's minds with a worldview that justifies the rule of the capitalist rulers who rule by the Divine Right of Property.
When you hear a capitalist or a neoliberal singing the virtues of national governments acting under "the rule of law", they do not mean that we are all equal under the law. What they mean is that the national government exercises its legislative, executive, police and military power to preserve and enhance the divine right of property owners. The US Republic, like other emerging capitalist states of the early industrial era, was founded as a democracy of white male property owners. Today US property owners, such as the Koch boys and vulture capitalists like Paul Singer, are reasserting their original constitutional political oligarchy based on the rights of their vast ownership of property. And the mortgaged and consumer-indebted American public, who believe they do (or could) own property too, politically supports the rights of property. So the very property rights that America's ruling class uses to hegemonically and tyrannically rule over the masses, are embraced by the masses as "our American values". In the US system, property rights trump human rights, which is the constitutional/legal basis for feudal or capitalist rule-by-ownership.
In agrarian times a feudal aristocracy lived as the privileged ruling class by owning all the land. All of the people, including the nobility, were "subjects" of the king or queen, who was empowered "by God" to do whatever he/she wanted with the land and the subjects. The monarch's decisions and actions were "the law". Insofar as the nobles served the monarch's interests, the nobility co-ruled with the monarch as members of the ruling class. Everybody else was serfs, a self-perpetuating class of agricultural workers who belonged to the land and who thus belonged to the king who owned all the land. The king granted local management authority to a system of lords, dukes, etc., who ruled their estates on behalf of the monarchy.
As the industrial era got going, the production for trade of economic wealth like wool cloth-for-wine began to supplant the feudal economy of self-sufficient agricultural production. The new capitalist class of industrial producers gained wealth and political legitimacy by putting people to work at wage labor and increasing people's material standard of living.
It was the addition of fossil-fueled machine labor (powered by coal-fired steam engines) that made factory production so much more productive per man-hour of human work. Coal was cheap and machines do not get paid, so industry could produce and sell goods at lower cost than human-powered crafts and trades people. But buying and installing machines costs a lot of money up front, on a scale that is only affordable by people who are already rich, or who obtain banker financing, or who contribute their individual small capital to corporate collectives. Industrialization changed the scale of work from the small individual human scale to the ever-larger corporate collective scale. Today corporate capitalism operates industry at the global scale.
Eventually capitalist 'democracies' replaced monarchies as the hegemonic political institutions. Capitalism makes the people richer in goods by adding fixed capital in the form of machines and by making the people work longer and harder at producing goods, even if the capitalist money system simultaneously indebts the people and their governments {which is why Scotland, after nearly 300 years of industrial development and production and consumption, gets, like all other nations, another day older and deeper in debt; and owes its soul to the money-issuing bankers and the capitalist plutocrats}. So people, relatively blind to the long term consequences of debt, but highly aware of immediate consumer comforts, politically supported the emerging capitalist states.
Today the capitalist ruling class owns banking, industrial, and commercial corporations. Corporate managers, and management hierarchies, employees, and contract service providers, resource and input suppliers, politicians and bureaucracies, police forces and armies, and other purveyors to the capitalist state, serve as co-rulers (and share in the spoils) by serving the power and profit interests of the owners. But the power that sits atop all other powers in the capitalist power hierarchy is the power to issue money, and that power has for pretty much uninterrupted centuries been firmly grasped in the hands of bankers.
A worldview is a culture's full set of beliefs and values about the world we live in. The Western worldview since Adam Smith has believed and perceived that we live in a free market economy. Within this deluded worldview, capitalists are perceived as the most successful competitors in the free market. Capitalists earned their billions "fair and square", by being millions of times more productive than poor people. Jill the poor baker is poor because she only bakes and sells 40 loaves of bread per day in her shop. Luigi the rich baker is rich because he bakes 40 million loaves of bread per day in his shop. Luigi works a million times harder and smarter than Jill, which is why he is a million times more productive in bread and richer in money than she is. Ho...kay. Does anybody else feel that we have exited the realm of reality and entered the outer limits of irrational belief?
In his 2001 book (expanded and updated in 2011), Debunking Economics, Steve Keen chronicles the many and various absurd assumptions upon which the 'logic' of neoclassical economic theory is built. For the past 80 years, neoclassical theory has been the "economic facts" that are taught to all economics students in universities.
Neoclassical economics describes an economy that has no money-issuing banks and no capitalists, where money is simply assumed to exist, where money merely "represents" tradable economic value. And there is no market power exercised by a ruling class of capitalist owners. There is just Jill's Bakery competing in a free market with Luigi's Yummy Emporium down the street. Insofar as neoclassical theory teaches money and banking, the logic is built from the assumption that money has always existed and becomes "loanable funds" when savers deposit their savings in banks. So banks are economically neutral financial intermediaries who take deposits from savers and lend money to investors. Neoclassical economics, like Adam Smith's classical economics, teaches how a utopian free market economy works. Neoclassical economics almost completely ignores how the real world political economy actually works.
Adam Smith did not understand money, so he did not understand how a money economy differs from a barter economy. While he praised the Scotch banks for their issuance of credit-money, which greatly increased production and trade in the Scottish cities blessed (at least until the time came to pay interest and to repay the loans, when the blessing becomes a curse) with bank money issuance, Smith believed the only "real" money is gold. Gold, like iron, is an economic commodity that is produced by economic effort. Smith believed money is essentially commodity-money, and that the trade-value of gold was conditioned by the relative cost of production (supply cost) of gold vs the cost of production of other trade goods, and the relative demand for gold vs the demand for other trade goods. Gold-money, like bread and bacon, was simply another trade good in Smith's barter economy. In Smith's free market utopia there was no actual money, just commodities.
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