From the Middle Ages to the late 17th-century, the so-called “philosopher’s stone” was the most sought-after goal in the world of alchemy, the medieval ancestor of chemistry. According to legend, the philosopher’s stone was a substance that could turn ordinary metals such as iron, tin, lead, zinc, nickel or copper into precious metals like gold and silver. It also acted as an elixir of life, with the power to cure illness, renew the properties of youth and even grant immortality to those who possessed it.
The Bank of England was created in 1694 by a Scotsman William Paterson who famously said: “The bank has benefit of interest on all moneys which it creates out of nothing.” Today, our banks are enjoying the philosopher’s stone which they have created. Money out of nothing but paper! It is said that at the incorporation of the bank of England that it was promised, “We will provide unlimited financial means – in return, we will keep the absolute privilege to create money.” (To be precise: false money – or what the banks call fiat money!) Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning “let it be done.“ (Wikipedia) Fiat money is the opposite of honest money. Fiat money is money that is declared to have value even if it does not.
Faust and Mephistopheles
About a hundred years later. The influential German author Goethe, tells the story of a young scholar, Faust, who enters into a pact with the devil, Mephistopheles. In return for Mephistopheles’ services to help him realize his ambitions, Faust wagers the devil his soul.
The the Second Part of Faust, Faust attends the court of a ruler whose empire is facing financial ruin because of government overspending. (Sounds familiar?) Rather than urging the emperor to be more financially responsible, Mephistopheles—disguised as a court jester—suggests a different approach, one with disturbing parallels to our own age.
Noting that the empire’s currency is gold, Mephistopheles maintains there is surely plenty of undiscovered gold underneath the earth belonging to the emperor. Thus, he argues, the emperor can issue promissory notes for the value of this yet-to-be-found gold, thereby generating fresh monetary resources for the government and solving its debt problems.
The emperor and his treasurer are delighted with this idea. It means the monarch can avoid making hard economic choices while simultaneously providing the empire with desperately needed currency. Mephistopheles subsequently deluges the court with paper money, and Faust is praised by emperor and commoner alike.
The results, however, are not what are expected. First, the issuance of paper money does not solve the emperor’s spending problems. Instead the ruler and his court become even more extravagant, knowing they can always print more paper money to cover their ever-growing expenses. Second, the devil through his ally Mephistopheles, has subtly but fundamentally changed the basis of the empire’s currency. Instead of being rooted in the solidity offered by a tangible and valued asset, the currency is now based on flimsy paper promises. Thus long-term monetary stability and powerful restraints on extravagant government spending are sacrificed for short-term gain.
Goethe finished writing the second part of Faust in 1832, yet Goethe’s insights go to the heart of some of our most intractable long-term economic problems.
This has led to the creation of free money, Governments printing vast amounts of paper money. Money has never been so cheap. From an economic perspective, the printing press is not necessary, as the creation of money primarily shows up electronically on the central bank’s balance sheet, on its accounts.
If central banks can potentially create an unlimited amount of money out of thin air, how can we ensure that money remains sufficiently scarce to preserve its value? Does this ability to create money more or less at will not create the temptation to take advantage of this instrument to create additional leeway short term, even at the risk of highly probable long-term damage?
Yes, this temptation certainly does exist, and many in monetary history have succumbed to it. Taking a look back in time, this was often the reason for establishing a central bank: to provide those in power with free access to seemingly unlimited financial resources.
It is vital to understand that the world’s economic situation is made up by Real Economy and Financial Economy. The Real Economy is the world’s combined GDP. GDP being the value of all private and public production and services globally represents a meager 7 % of the total , while the Financial Economy represents 93 % of the total. (Currency exchange not included)
Our economic system is a house of cards. Debt, both household and national is still increasing rapidly. A house based on paper is a crisis waiting to happen.
So, what is the solution? A strong economy in which money plays its part as a medium of exchange, can only be built on what God has created – human, natural and relational capital. That is, land, agriculture, real resources such as precious metals and the honest, industrial application of human talent and ingenuity to create value.
Jesus unmasked the real power behind money when he said “You cannot serve both God and mammon.” Goethre adequately described the work of mammon in our economy through his character Mephistopehels. This caused overspending, loss of trust and financial chaos leading to human suffering.