From Capital to Currency – How Central Banks Invert Economics

We describe cash holdings as capital, but they aren’t. Cash is currency, not capital. Capital is the difference between the exchange value of raw materials, and the value of those materials after human labor has been applied. Since human labor is “free” to the human providing the labor, with the exception of their time and the cost of their survival, the difference between the exchange value of the original good and the exchange value of the labor-applied good produces new economic value. Historically, this value produced by the application of labor has been referred to as “capital”. In this traditional sense, capital cannot exist unless its production is a consequence of the application of labor, and the appreciation of that labor by someone who wishes to exchange for the improved goods.

Capitalism has been defined as the private ownership of the means of production. Adam Smith defined the means of production as land, under the justification that land is the origin of all material goods, from agricultural produce, to livestock, to mining materials, lumber, and so on – all production is derived from land. This is true, but misses something essential. Marx later defined the means of production as factories – the industrial facilities that would take Smith’s raw land products and transform them into improved goods with a higher value. This is true as well, but also misses something essential. That essential error in both economists views was disregarding the element that makes production possible. From farming to husbandry to logging to mining, the means of production is always the human body performing labor. That human labor contributes value to the raw good, making it more useful for others, and in the performance of labor, creating a surplus of value to be claimed – capital.

This informs us that what creates capital is a human performing labor that improves the value of the goods upon which the labor is performed. This may be cultivating and harvesting a field, cutting and working a tree, mining and refining a material, or any other embodiment of human labor applied to a material or activity that produces an improvement in perceived value by other persons.

Let’s take an example of this primitive capital production. Johann is a peasant who lives on a freehold. He owes taxes to the local King, and works his lands to generate products that can be sold for the gold required to pay taxes. Johann takes natural land and cultivates it so that it produces food. Johann then takes that food to the market and trades it for gold. Johann has produced capital – literally, “made money” – in performing labor to improve the value of the land’s production from uncultivated land into agricultural goods.

Johann can do this in other ways beyond farming – he could raise livestock for sale alive, and produce capital from his labor that way, or butcher the livestock for meat and leather and other materials, and contribute more labor but produce more capital, since the unit value of a finished piece of meat and the consequent leather, hoof, horn, and bone is greater than the unit value of an animal “on the hoof”.

Or Johann can fell trees to sell the logs. He can work the logs into lumber. He can transform the lumber into furniture. Each step introduces more labor, but produces more value. The question for Johann is, how much time does he have, versus how much land does he have, and what produces the most capital from his labor? Does he concentrate his efforts into maximizing the capital production by taking his trade all the way to a finished product, or does he spread his effort by maximizing the volume of partially-finished goods that he can produce, and allow another trader or craftsman to then contribute their own labor and raise the incremental value of the goods along the production chain? That choice is for Johann to decide.

As Johann (like other simple laborers) was maximizing his own capital production from his labor, other categories began to emerge in support of laborers. This is the “division of labor”, where laborers become specialized into a niche. One group were merchants, whose labor value was more in procurement and distribution – their labor improved the value of goods by purchasing them where supply existed, and selling the goods where demand existed. Merchants would take a semi-finished product, for example, Johann’s wool, and pay Johann for his production. The merchant would then sell the wool to a spinner who would turn it into thread. The spinner’s thread was then sold to a weaver for cloth, which was sold to a tailor to turn it into clothing, which was then sold to the final user. Regardless of the steps involved, the investment of time and labor was typically far less than one person-year per unit of production, often on the scale of person-hours to transform a log into lumber, or lumber into a chair, and so on.

The specialization in labor, which enabled the division of labor, was greatly enhanced through the emergence of the merchant class, whose labor value was mostly in taking the risk of arbitraging supply and demand between two different locations or two different production/consumption chains. While this labor was more abstract and typically less physically risky or intense, it enabled dramatic value improvements in physically risky or intense labor, and took up the financial risks and intensity that the laborer could not typically bear.

At this point in history, essentially all capital production was from the performance of physical labor on raw materials. Even with the emergence of the merchant class, the primality of physical labor remained, as the capital production from the merchant’s labor was absolutely dependent on the capital production by physical laborers on both sides of the trade. Even when the merchant was selling a finished good in the last step of the supply chain to someone who would own, use, or consume it (not improve it further, or sell it onwards), the funds for the purchase of that finished good were almost entirely derived from someone’s performance of physical labor to obtain the trading denomination (e.g. whatever it is they used to pay for stuff).

During the merchant revolution of the Italian renaissance period (and independently at other times and places, but this narrative is focused mostly on the Western/European tradition, since the author is inadequately familiar with non-Western tradition to comment intelligently), this recognition of capital production by laborers became explicit. As the sophistication of trading and craftsmanship increased, capital production increased to the extent that possession of excess capital started to become common among the merchant class, and some more successful laborers whose skills at production or negotiation were especially good.

Thus emerged the need to store value effectively, and transfer that value safely. This is where bankers come in. The deposits bankers receive are liabilities, as they have to repay those funds upon demand. The banker needs assets to balance these liabilities. Typically, the banker will take the deposited liabilities – the currency, at this point still traditional capital produced by labor – and use the currency to purchase assets. The assets are intended to increase in value over time, and be liquidated on demand so that the banker can meet their liabilities to depositors. Because a banker cannot both keep all of its deposit liabilities on hand and make investments to secure (or attempt to secure) those liabilities while generating a margin that the banker and his operation can live on, the banker can only keep a fraction of the deposits on hand at a time – fractional reserve banking.

By this point, it was becoming clear that producing more value from labor required greater organization and greater investment in using labor to transform materials. Whereas Johann may have been able to produce a chair from a pile of wood using simple hand tools, producing simple hand tools from raw materials was more involved. Grieg, for example, owned a piece of land that had significant iron deposits. Grieg knew that he couldn’t mine the iron effectively by himself, so he had to hire more laborers to perform the mining, and pay those laborers from the proceeds of the ore sold. Grieg takes a portion of the proceeds for himself, being the person who provided the asset being extracted for improvement (the land the mine was on), and organizing and managing the work force who performed the extraction.

But now Grieg was selling the ore for raw ore prices, which wasn’t very lucrative. If only Grieg could afford to build a smelter on the property, he could be selling finished pig iron, which was much more valuable. But to do so, Grieg needed to invest in a foundry, and hire people to run the foundry, which was beyond his financial reach. This investment isn’t on the scale of person-hours per unit of production, but on the scale of person-years to get the asset prepared to produce. And while the production volume and operational life predicted a dramatic profit for the investment, it would require person-years of up-front investment to reach production status. There’s no way Grieg, or even Grieg, his friends, his family, and his labor pool, could organize enough capital to enable the investment.

Grieg had heard about a banker in the nearest big city who took risks of this sort to enable the further development of materials from raw to finished. Grieg struck a deal with the banker for an investment of person-years worth of capital production so that Grieg could afford the up-front investment costs to build the foundry. In exchange, the banker takes a risk on Grieg’s success, and provides the capital that Grieg needs, in exchange for Grieg paying the bank more than the bank invested with Grieg. The banker notes in their capital account that they invested 1 unit into Grieg’s foundry, and Grieg will repay them 2 units in the future. The banker, using double-entry-bookkeeping, records their investment as so.

Thus the banker’s investment has produced one new unit of capital prior to any labor being performed. In exchange, the banker takes rights to the asset Grieg is developing with the bank’s capital, such that if Grieg does not pay back his loan, the bank can recover their capital by liquidating whatever Grieg has built – Grieg’s investment creates an asset, and that asset is collateral to the investment that underlies it. This is a very simple method of asset collateral, and not primarily used anymore as it has been deprecated for more modern and improved techniques, but represents one of the first steps in collateralization. A more modern method of collateralization is insisting the collateral be provided by an asset that already exists, not the asset that will be developed from the investment. This reduces risk for the banker, but increases preemptory capital requirements by the debtor.

This step of accounting for the future value of the investment upon its repayment represents a shift in the production of capital – from capital being produced by labor that has been performed already, to capital being produced on the promise that labor would be performed later, and the value of that labor would be sufficient to repay the capital produced prior to the labor being performed. Both Grieg and the banker are taking a risk, and are rewarded differently. Grieg is taking a risk that the foundry will succeed, and that the value of the foundry’s production is sufficiently greater than the amount Grieg has to pay to the banker (the cost of capital). The banker, meanwhile, is taking a risk that the foundry will succeed, or if it does not, whatever Grieg produces with the investment can be sold to repay the banker’s capital (but not necessarily Grieg’s). Both are motivated for Grieg to be successful, but Grieg’s success is not necessarily equivalent to the bank’s success, nor is the bank’s success equivalent to Grieg’s. And while both the bank’s capital and Grieg’s capital are dependent on the performance of labor, the bank gets to realize that capital value before the labor is performed (though the bank can’t liquidate it yet, or transform it from capital into currency), while Grieg can’t realize the capital value before the labor is performed, resulting in the asset’s production becoming available for sale, and then being sold, enabling Grieg to repay the banker.

For hundreds of years (in the western/European sphere of influence), this dynamic continued even as up-front investment costs to produce useable goods increased. Both Grieg and the banker relied on labor to generate capital that could then be liquidated for currency. But only the banker could capitalize their investment before the labor was performed. In this economy, all capital production, and thus currency production, relies on labor being performed, but a fraction of the capital production (the banker’s share) can be realized prior to the labor’s performance. The banker is, in essence, reaching into the future, and pulling back the future value to spend today. In doing so they are taking a risk, in that Grieg can default, leaving the banker with the foundry to try to sell to make back their investment. And maybe Grieg doesn’t spend his investment well, and there’s no foundry to recover, so the bank takes a loss too. Both are accepting risks and performing labor, but of a different type.

And so the world turned and needs evolved as goods became more sophisticated. Johann remains concerned with harvesting trees and sheep, and Grieg with smelting iron. But those trees and sheep no longer make simple clothing or wooden furniture, instead they are sold onward to a factory to produce upholstered couches sold from a furniture store. And Grieg’s iron is now transformed into steel, and from steel into industrial components for engines and machines. The ultimate value of each enterprise is increased dramatically, but at the cost of a dramatic increase in the invested capital requirements to produce something that can be readily sold. The number of steps in the supply chain, and thus the amount of human labor invested in transforming a raw material to a finished good, has increased exponentially. Now instead of a few, or dozens, of person-years required to finance a new asset, it would cost hundreds, if not thousands, of person-years’ worth of labor productivity to finance a new asset. (As an example, if a factory costs $1m, and each person employed to build the factory costs an average of $10k per year to employ, then regardless of how many people are employed or how long it takes to build, the factory cost 100 person-years of labor productivity to build.)

Bankers could no longer independently afford the up-front capital requirements to finance these more capital-intensive endeavors, nor bear the risk of being the individual financier even if they had the capital basis. Independent banks consolidated into incorporations of banks, pooling their capital among many more locations and depositors. This enabled them to increase their capital commitments, and spread the risk among more lenders. When financing a large investment, the bank could also sell portions of their investment onwards to other banks, or trade portions of their investments for portions of the other banks’ investments, to further spread the risk. By this point in time, while both labor and banking were sources of capital production, the role of banking had increased to the extent that capital was primarily being produced by banks, on the promise that labor would be performed in the future by laborers.

This represents a shift from previously, where most capital was produced directly by labor without the involvement of a bank, to where most capital was produced as a consequence of an investment by a bank. Thus capital had shifted from entirely being produced by the prior performance of labor, to mostly being produced by the prior performance of labor with some produced on promises of future performance, to a small amount of capital being produced by the prior performance of labor and most capital produced by the promises of future performance.

Even so, the banks were unable to make investments beyond certain sizes due to how far into the presumptive future the capital requirements would extend. The banks lobbied the government to change the nature of currency and capital. The banks requested that the government instead produce currency from the promise of future taxation, then assess those taxes on labor performed (including mercantilism). The fiat currency is issued against the promise of the government to tax the productivity of its citizens. The fiat currency is thus government indebtedness to banks, where the banks and government get to spend the future-labor-value immediately, while the citizens have to perform labor on behalf of an employer to produce excess value (historically the source of capital). That excess value is then taxed by the government, and those taxes are used to repay the bankers, which is then eventually, presumptively used to settle the debt and relieve the taxpayers.

Thus the final turn from capital to currency, where instead of capital being produced by labor, currency is produced by a government by fiat, against the promises that the government will tax those who produce capital from labor, and use those taxes to repay the bankers for their lending. That the bankers are not actually lending anything rarely enters into the discussion. In fact, the reversal of value from capital produced by labor, to debt produced by government fiat, and the transmutation of capital to debt-currency, is rarely discussed at all. And yet despite the sleight-of-hand, nearly all “capital” in modern economies is produced by obligating future labor.

And since those labor obligations are “repaid” in the same currency that is actually a representation of debt, and the debt carries interest, which means that the principal plus interest is always greater than the principal, and the only way to obtain the increased amount of currency to repay the interest is to obligate onself to new debt to obtain that interest payment currency, and that new debt is also principal plus interest, and can only be repaid by issuing new debt in the currency that it’s denominated in (we could go on this way indefinitely, but you get the point), it’s impossible for the debt to actually be repaid, no matter how much labor is performed, or how much capital is produced.

In the first step, the direct performance of labor, all capital was produced consequent to labor’s performance. In the second step, the voluntary individual obligation of labor to be performed, most capital was produced consequent of someone’s labor, while the difference in value between the loan and the loan repayment (principal vs principal plus interest) was a minority contributor to capital production. However, by the time that our economies have reached the third step, that of the presumptive issuance of currency by fiat against debt obligations under threats of violence, not only is the labor involuntary, and its value production not captured by the laborer, or the one employing the laborer; but further, the presumption of future labor production overwhelms the actual performance of labor as a contributor to “capital” (here in the third step, not actually capital, as it does not meet any of the defining characteristics of capital, but instead a new thing called “currency”, which supposedly represents capital but is not actually capital, nor shares any features of capital), this counterfeit inversion of capital becomes the majority of the production of “capital” in a society.

In this third step, because everyone is obliged to use a currency whose production is monopolized by the central bank, and all labor or exchange is denominated in that currency, while the currency may be heavily in demand, it does not represent any actual capital formation through the performance of valuable labor. This counterfeit “capital” overwhelms the actual performance of labor and drives out the creation of value. Instead, the production of value is replaced by controls over who is permitted to access the currency that’s required to organize and operate endeavors, whether private lives, or corporations, or any other activity that consumes human capacity.

Increases in sophistication of human endeavors naturally require more up-front investment before they can begin producing returns. As the up-front investment requirements increased, and the number of parties that would be required to contribute capital and labor increased, this drove a centralization over the control and distribution of currency, now called the “finance industry”. The finance industry produces no goods, performs no labor, and improves no value. The only “goods” produced by the finance industry is the distribution of investments to other organizations, and the consumption of a portion of that currency for the finance companies’ own operations. This overhead cost of the organization means that more currency must be consumed to produce the same returns, increasing the minimum size of investments. Because these firms are limited by human capacity, and a human can only personally manage so much, the larger the firm, the larger the investment sizes. These investments flow down to subordinate investments, which then distribute and make smaller investments elsewhere, each maximizing the capacity of their firm to manage the money, and each consuming a portion of the money themselves for their own operations.

This produces an outcome where the least productive members of society have the most access to capital, and the greatest capacity to consume capital (again, actually currency, not capital, since no labor is performed to produce it). This also means that the closer that capital gets to actual useful consumption for the performance of labor in order to pay taxes, the greater the rate of production that’s required by the laborer to repay its own capital costs, as well as all of the capital costs of all of the finance organizations that sit above it and act as nothing more than gatekeepers for access to capital for investment and operations. This means that while the least productive members of society have the most currency, the most productive members of society have the least! And the requirements for the production of value is lowest where capital is most available, while the requirements for the production of value is highest where capital is least available! The more money someone has, the less work they have to do, and the less money someone has, the more work they have to do.

This monopolistic restructuring of the cash flows of society to reverse the stream benefits only the government and finance industry, at the expense of the common laborer, while the entire system is predicated on the assumption that the laborer will work to produce something of value so that the government and finance industry are paid, despite their producing nothing of value, and instead only threatening violence if the labor is not performed on their behalf, and to their exclusive benefit.

This economic system is not capitalism, wherein capital is produced by the ownership of the means of production, and using that production capacity to performing labor. This economic system is monetarism, where the money has no fundamental value other than the promise that someone else will perform labor, later. And that labor is not even performed voluntarily or for one’s own benefit, as such capital production is, that labor is performed under compulsion using threats of violence for anyone who does not comply.

Notably the ones who perform the obligate labor to improve the value of goods and services are never the banks, who capture all the value of the currency being issued, or the government, who makes promises on behalf of the public then compels the public to make good on the government’s promises by threatening to do violence to anyone who disobeys.

The insidious shift from capitalism to monetarism is the enslavement of humanity by the banks and government, the capture of all labor’s value before the labor is performed, and the assignment of all labor performance’s value away from the laborer performing it, to the banks and government that claim the value and compel the labor. This separation of cost and benefit, where the banks and government receive the benefits without any risks or obligations, while the laborer pays the costs without receiving any of the benefits or having say in their obligations, is identical to slavery.

Many will argue “but capital is still produced from labor!” and that much is true, but nearly all of that value is not captured by the laborer, but by the employer. The reason this happens is because the ability of the laborer to capitalize their labor has been removed through the implementation of fiat currency to denominate that labor’s value. The only way the laborer can actually “make money” is by trading his work for payment in the fiat currency. This means that while the production of capital through labor technically continues to exist, it’s subsumed into a system of fiat capital that destroys the laborer’s ability to actually obtain the value they create.

While the organization of labor into larger structures, corporations, may be necessitated by the increased complexity of the methods of production that result in a finished good, the domination of those corporate structures by fiat currencies is not obligated, but imposed by the government to the governments’ and banks’ benefit, and the detriment of the laborer and non-finance-industry corporations.

Banks also continue to produce capital through the act of lending to persons and corporations, and the balance sheet activities that capitalize those debts.

Despite the ongoing existence of actual capital production from labor and lending against future labor, the ease, scope, volume, speed, and seigniorage of fiat currency overwhelms the capital production by traditional means. When a laborer can produce a few dozen or hundred dollars per hour for the efforts of their body, and a bank can produce a few thousand dollars per hour from their lending, a central bank and money printer can produce billions of dollars per hour from their printing presses.

The overwhelming scale of constant theft that occurs from the central banks printing currency backed not by the performance of labor, but by the commitment of the government to impose violence against anyone who does not perform labor to another party’s benefit to obtain currency with which to pay taxes. The government uses that selfsame currency to pay a debt that is denominated in the same currency, which makes it literally, mathematically impossible to repay. This trick of government and accounting means that the actual contributions of labor and voluntary lending to the economy is negligible when compared to the amount of human obligation that is produced from monetarism. Because this system of obligation is controlled by a small number of people, but burdens the entire population, it results in the enrichment of a small number of persons who directly benefit from that division of benefit from obligation and the transfer of wealth from the many to the few that monetarism produces.

Monetarism – the issuance of fiat currency by obligating third parties to perform labor under the threat of violence, and whose labor provides benefit exclusively to bankers and government, while eliminating any labor or risk on the part of the banker and government – is not an economic system, it’s a nearly-invisible modern reimplementation of human bondage. And it’s beyond time that we end it, for the good of all humanity, and those who will come after us.